Interest rates vs housing cycle (click on the picture)
By looking at the evolution of the base rate set by the bank of finland and the housing cycle (click on the picture to zoom-in), we could make few observations:
1-this housing cycle is over extended
2-the bust in 1990 was not necessarly created by the level of interest rates as it moved from 7% to 9.5%, a mere 25% compared to todays situation where rates moved from 2.25% to 4.75% so about 100%.
3- The downturn in 1990 was mainly due to a lax credit standard from banks and an overly too optimistic view on the economy. Similar remarks could be made since 2003. Banks around Europe or around the world have lended to consumers with little deposit, very weak collateral and quite often just some kind of time limited insurance (5 years)...
4- In the late 90's , a global downturn started with UK economy falling into recession and the U.S. recovering mainly due to its export. The situation is almost similar if not worse as this time the U.S. has massive problem with its banking system, a similar situation Finland had in 1991.
5- Housing price falls when interest rates fall and starts recovering just before interest rates rise. That could play the same in Europe. This situation seem to be hapenning now in the U.S. . They will start raising rates after housing price fall has bottomed and is showing signs of recovery.
So now what about Finland housing price? they will fall. By how much? god knows! but a guess , based on a technical analysis based on historical value, calls for a minimum of 30% on average for the country. For how long? let me check my cristal ball...4 -5 years? maybe...
Could housing price stabilize? I think demography, immigration and mass retirements is against that ..just look at Japan...even interest rates at around 0% dowesn't help a 20 years housing deflation...
Indeed the Euribor will go down, it will just signal that a downturn has started, the end of overextended business cycle and inflation won't be any more a threat. Housing deflation will start ...
Note : The base rate data has been kindly copied from Bank of Finland and the boom and bust housing cycle is based on Statistics Finland data.
6 comments:
Lower rates = lower borrowing costs = greater demand for loans. Sensibly, this will lead to higher prices as demand for houses increases...
Lower rates = Economic downturn = higher unemployement = Bank affraid to lend = housing price to fall
-Anton
1- Another interesting point to make is that this market has been pushed up indirectly by banks that lend and own real estate agencies (Sampo/Habita, Nordea/Huoneistokeskus, OP/OPKK etc...). To me, there is a clear conflict of interest...
2- As new housing price soar, the seller has no choice to increase the price of his old house in order to purchase a new one. This could spiral up to the moment where the entry point, the first time buyer is out of the equation. A top is then found...as long as first time buyer are around and bank willing to lend...I think this game of pushing price higher and higher has finished.
-Anton
Anton,
What you are forgetting in your equation is that the lower rates are a consequence of economic troubles in the major centers - Franfurt, Paris. Finland is in much better shape and indeed needs to fight inflation rather than stimulate the economy with lower rates.
Lower rates = lower borrowing costs = greater demand for loans = higher inflation...
"Finland is in much better shape and indeed needs to fight inflation rather than stimulate the economy with lower rates."
Finns i am told "are survivors!"
In true spirit they are doing their bit to survive by drinking 4.5% less beer, and selling houses they do not need, as they fight food inflation pressures of almost 9% (stats Finland).
Meanwhile they have almost no ability to alter influence European money market interest rates.
The government recognising Finns are struggling and fighting the high inflation has said it will help Finns by lowering taxes.
The prime minister said he is worried inflation wont come down and the finance minister has said he thinks it will come down.
Meanwhile the European central bank continues its efforts to save parts of the banking system and revive credit markets and continues to ignore the high inflation that Europeans are fighting with every day of their lives while saying that they are worried inflation is about to "explode".
The government does not know what is going to happen, the ECB does not know what is going to happen.
So dont bank on believing rates are going to come down to save maxed out borrowers who are doing their bit to survive in Finland by even ****gasp**** drinking less beer!
"What you are forgetting in your equation is that the lower rates are a consequence of economic troubles in the major centers - Franfurt, Paris. Finland is in much better shape"
I think you are missing the point. Most of the economy you are describing are weakening because of a deteroration or slowdown in some major export country and a slump in consumer consumption.
Finland is no exception to that. Finland GDP has halved in a matter of a year. I think if the global economy continue to slow and if the Baltics economy knows a hard landing...then Finland will have a very hard time...
Regarding Inflation...What we have is an importation of inflation from emerging market through oil, food and higher salaries. This has reach a peak.
Consumers in Finland are lowering their consumptions drastically. Just see how people are worried about what vegetable or meat they buy in the store, an anecdote that tells all.
Lower rates (because of)= Finnish GDP down = deflation = housing slump = higher unemployment
-Anton
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