Wednesday, 30 July 2008
House Prices Stagnating, What Next? Who Is Buying?
As during the technology bubble, people were buying stocks that were clearly overvalued. Why was it? psychology and banks. Too many years of rising price and massive profit that led some to fall in euphoria and created a belief of a sure investment, an investment that will grow double digit for many years to come...In fact the reality was different, the Helsinki stock hexchange index never recovered from it's high after 10 years and it won't for at least another decade.
Today the same has happened for housing, people are currently buying an overvalued asset, why is that? same arguments as any bubble: psychology and banks. It seems today that the same idea of sure investment is clearly anchored in people belief, they cannot imagine prices going down even unthinkable that prices could head lower for another half, decade or two to come.
Nevertheless today chart, kindly copied from Statistics Finland Web Site, clearly show the start of a downturn. When housing correct, it is a slow and long process. It doesn't correct overnight as do stocks. On the other hand it's not that easy to sale as stocks : not as liquid.
Technically it will take about 6 years of decline to reach a stable ground to either plunge further or start rising, all depending on the competitiveness of the country and its ability to attract more foreigners. If one parameter is against rising housing price in the long term is the ageing of the population. As Katainen, "Uusimaa" Finance Minister, said after 2010, Finland's GDP will grow to 1-2% as opposed to an average of 3% in the past 100 years (I'm wondering how they did come with those figures, maybe the wars were compensated by phenomenal growth).
I like to depict the Finnish economy or housing price momentum as a heavy train that has been propulsed by lower interest rates and a good global economy. But beginning of January 2008, the Engine was cut... the train seems, for now, moving at a good rate, mainly due to it's past acquired velocity..but slowly it's losing power until it finally stop...restarting it needs lot of energy and time and might never regain the same performance as in the past...
That said, who is buying? I suppose, if you dig further you will notice that small flats are the one that have pushed price the highest, something last to fall in a faltering market. There was as well unusual transactions, such as the one Bank of Finland did in the second quarter, selling a vast amount of flat to a rental company. Indeed rental companies had still the capability to borrow to buy housing stocks from building company, I wonder which bank/mutual fund was dumd to lend, as it will surely byte them back.
Anyway I'm more enclined to think that prices will be in between Low1 and low2, the timing is the most difficult part here, it could be reach fast as seen in Ireland, U.S. , U.K., Spain or could be a slow process as in Japan so another 20 years (it's worth to note that Japan had the same ageing problem as do Germany).