Monday, 10 November 2008

Housing, An Old Story...

Yesterday, while cleaning up some boxes and looking for my "Santa Claus" tree , I found my old snow crystal ball.

This crystal ball has a strange story as it was not offered by relatives but instead by an old woman with very strange clothings...That brought me back straith 20 years ago... That day, the night was unusually bright and the moon was showing a perfect crescent... in the middle of the street, I was stopped by this old woman that looked so different to any women I have seen...

She told me, "take this little present," - the snow crystal ball - "when the day is right, shake it and ask it a question"..."you will get two answers, one you want to hear and the other you don't want..."

Then suddently, a big sound, behind me, make me was just a cat...turning back...I was amazed: the old woman vanished. That night, I went back home, I was tired...I just dropped the crytal ball in that old box, and never thought about it for the past 20 years, until today...

I decided, to shake it and play the "game"...asking "what do you see for the housing market and the economy?"

First Answer: "this message is only to home owners or people that think the sky is the limit"

Click the image for Zooming

The chart describe housing price, inflation adjusted, in Finland for the past 40 years or so. The red curve is the forecast while the red blocks represent past recession. The blue one being forecasted recession. The blue arrow is the trend...

The sky being the limit, price will grow and are insensitive to economical disturbance. Credit will carry on flowing and more and more first time buyers will come to the market. This will be even stronger as interest rates keep on falling.

Housing is not seen as an ordinary investment but instead as a place to live as well as the most valuable investment. People are reconforted to invest in housing as stock markets around the world, plunge to level not seen since the 70's.

Unemployement stay stable allowing homeowner to meet their requirements. Nordic Banks show an exemplary behaviour, lending and at the same time replenishing their capital base.

By the way, you could hear in the background, the song "What a wonderful life" from Ray Charles...

Second Answer: "This is the answer?"

Warning 1: If you are a home owner, it is preferable that you switch off your computer and have a some great and wonderfull program such "Bold and Beautifull" or just press CTRL-ALT-DEL if you are a happy user of Windows Operating systems....

Warning 2: If you do not exercise enough and think that some heart malfunction has been detected in the past few years, please read Warning 1 (Ps: if you end up in infinite loop, just quit after 10 loops)

For the past 30 years, the Finnish housing market has shown clear signs of cyclical movements -Boom and Bust behaviours. One could conclude, by simple observation, that, somehow, it exists some kind of tunnel (in grey in the chart) that represents a sustainable trend.

Each time the tunnel is broken, on the upside, We enter in a period of Euphoria mainly driven by credits hysteria and extreme optimism. In the reverse side, when the tunnel is broken in the downside we have a period of extreme pessimism and credits contract...

Banks in the Nordic Region are under tremendous pressure, and will be tested in 2009 with the dramatic slowdown of the baltics, as well as Europe, USA and Emerging markets. Most Baltics countries will see unsustainable budget deficits, currency under extreme pressure/attacks and unemployment rising to double digits. Subsequently, massive loan defaults will push most of the Nordic bank to reverse their lending behaviour deteriorating futher the housing market.

The sudden Export collapse is not fully compensated by the internal consumption as households heavy debt burden, combined with the sense of wealth loss due to massive decline in stock market and housing values, slow dramatically their spending and increase saving...Economical growth is showing, for the first time in two decades, a first contraction, a sudden decline that put politicians and economist in "a once in lifetime" challenge.

The Government will enter into massive deficit and unemployement will be rising to level not seen since 1995.

Price correct to level compatible with this new environment. A 40% correction cools, for another generation, the idea that housing is a safe investment...

... that's what the old snow ball had to say...

In the meantime, I will come back pretty soon regarding the rents and the news that the media has been disseminating throught out last week in TV, newspapers etc...

Disclaimer: Investments or strategies mentioned on this website may not be suitable for you. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned on this website. Before acting on information on this website , you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser. All opinions expressed by this website do not reflect real opinions. Past performance is not indicative of future results. Anything missing in this disclaimer can be added unilaterally at any time ...


Andrew said...

Housing Finland

Do you have a source for the graphs? One thing I would question is the inflation adjustment factor.

Governments have systematically distorted the inflation figures for decades now. So using the governments own figures to adjust for inflation will always make these graphs look more dramatic.

I think we also need to look at cost of housing per metre square rather than average cost of housing. People are living in bigger houses today i would say.

None of this means that existing housing is affordable for the average person but i just wonder if the figures can be reworked to offer different valid points of view?

I note too that in for example the USA and in the UK and Australasia we have the case of banks who can borrow quite cheaply from central banks but who are not passing on interest rate reductions dispite the cheaper CB money. As you know i have maintained we will see higher rates with no simple way to get around that.

HousingFinland said...

Hi Andrew,

The information is extracted from Statistics Finland Web site.

Here is the source page:

The image source:

The data shows you an average. As everybody knows, location is the most important factor in pricing a house. So some prices will fall more than others...

It's true that Banks will not pass easely the rate cuts as they need to recapitalize themselves.

I have already talked about the prime rate trap...that in fact is in total control of banks. The other strategy they will use, is to increase their margin. From a low of 0.4% seen in the past years, it could go as high as 1% or 1.5%...thus offseting the effort made by the European Central Bank.

One article, from HS was highlighting this fact :

Let's be clear, bank are not going to lend as in the past, especially in an environment of falling asset price. The lack of credit will then pressurize futher the decline in housing prices.

Rui said...

Margin will not change for older customer. Once it is signed it is valid forever.

Typical margin if you sign before summer 2008.

Nordea 0.25
Sampo 0.20
OP 0.3 with bonus system, real margin is almost 0, that is why I changed bank from Nordea to OP.

It is true if you take loan now, the margin will be higher. But still if you have a stable job, it is no problem to get a loan, and price is housing is falling.

HousingFinland said...

For banks, margin can make a big difference since they have volume...

For household, in fact, it's irrelevant.

When they offer low margin, usually interest rates are on the rise. So they can give away 0.5% as within weeks, the euribor was then rising by the same amount.

Todays, in less than a month the Euribor has fallen by 1%, and will fall for another 2% by next there is no point in trying to worry at the margin...

What I will look more carefully is to what extend the house price are overvalued, and if there is still a buyoant housing we know, the answer is NO...

In fact, The housing "market" has collapsed in September 2008, almost a year after the crisis started in 2007...

Now, it's wise - for people that were thinking to buy a house - to have a 'wait and see' approach...

Andrew said...

Housing Finland

Your data is for old blocks of flats rather than houses and i note too the data is supplied by agents and building constructors:-)

Andrew said...


>>Margin will not change for older customer. Once it is signed it is valid forever.

This is no longer true. As of July 2008 Nordea altered new mortgages to reserve the right to change mortgage conditions to protect its own survival 3 years after the loan term begins once it has given a 3 month warning it intends to do that. You can imagine that other banks have now added similar clauses to contracts. Anybody remortgaging will get a new wording and these days the average life of a mortgage is fairly short.

Anyway margin is not what it seems to be. Banks loan out 'bank money' which generally does not leave their banking systems computerised accounts written into the memory as numbers. Only when it leaves their system are they required to back that loan with an equal amount of reserves which is the equivalent of cash or is actual cash.

So a bank capitalised at 12% can legitimately and safely issue loans many times the deposits it receives while the money supply is expanding. However when the money supply begins to contract these levered banks are then required to compete for "excess reserves" above their smaller "required reserves" at the same levered rate relative to the large size of their loan book, in such a manner that the most inprudent, and therefore now the most desparate banks, are seeking deposits to survive.

Therefore banks that operate at 'low margin' are revealing more than simply needing more deposits to match their existing loans. If a deflationary cycle were to set in these banks would be required to get rid of loans or find many many times there existing deposit base in order to survive - all at a time when every other bank was caught in the same liquidity trap. At such times banks would have to accumulate cash and would be unable to lend to other banks and would fear other banks were in a worse situation than they were. And at such a time even if the central bank provided every possible means of enabling the banks to borrow from the central bank the banks would still have to accumulate cash as "excess reserves" in order to ensure their new loans were funded by their own real wealth and equity or depositors money as "excess reserves"

Does this sound like familiar news?

The entire banking model has been founded on the computerised ability of being able to lend out so called "excess reserves" to other banks as interbank loans for a profit on the assumption that these "excess reserves" are not required and because house prices will steadily go up that they never ever will be required and if they are required it can be managed somehow by some method.

Bit of an "if" to all of those assumptions at this point in time!

HousingFinland said...

".. the data is supplied by agents and building constructors:-)"

I agree, it's a little bit like the inflation data...Everybody knows that inflation is higher than the official figures...but then that's the only data we have...

I understand as well that data can be quite easely manipulated inthe construction sector especially by unscrupulous realtors...Conlict of interest, political bias and general misleading behaviour of our elite has been the marks of the past two decades. Todays correction is a natural effect that is effectively pushing the system to a more classical and sustainable direction...

Another point, it's pretty clear on the ground that people cannot handle those house prices thus the rush lately toward renting.

The perception that employment and housing price level will rise feorever has been broken up in Mid September in a very violent way...It will certainly let some marks for years to come.

At the end, It was a pity to see those first time buyers, young couple to borrow and give 30 years of their lives to banks (effectively renting at a higher than average level)...and in that direction lowering their contribution to the real economy through lower consumption...

Andrew said...

>>At the end, It was a pity to see those first time buyers, young couple to borrow and give 30 years of their lives to banks (effectively renting at a higher than average level)...and in that direction lowering their contribution to the real economy through lower consumption...

Unless we can be sure that we are looking at some kind of end of world situation these young couples who pay their mortgages will be owning properties many times the price of their current mortgages by the time that 30 years will be passed.

Food inflation in Finland in July was officially 8% per year. We could in fact be looking at some kind of hyperinflationary event before we are looking at 30 years of renting to own at the bank:-)

But we just dont know which way it will work out, but for sure Mr Trichet is going to do his best to ensure there is no significant deflation. Even if food inflation is officially at 10% i doubt he is going to relax his vigilance on ensuring there is no deflation:-)

HousingFinland said...

"these young couples who pay their mortgages will be owning properties many times the price of their current mortgages by the time that 30 years will be passed."

Demography doesn't support that.
The 70's and the 80's successive boom were related to post second world war baby boom.

Today we have an ageing population in a country that will see massive retirement flow in the years to come.

My guess is that we will see a situation approaching Japan or Germany...No growth or slow decline in housing...unless there was an immigration boom..even that will not support higher price in the future.

Would Finland be the next Japan? at least there are lots of similarities in term of ageing, immigration policy and place to live ...

I have the feeling that we are going to see at least for a decade or two of stagnating stock market and housing prices..until the next generation wave comes in...20-30 years from now ;->...I suppose we will be observing down from the cloud... ;-> and for some, up from the burning soil ...

Anonymous said...

"Ilkka Salonen to Depart Pohjola Bank plc
Ilkka Salonen, Pohjola Bank plc's (Pohjola Bank) CFO and Deputy CEO, will depart Pohjola Bank by 31 January 2009 to join another company."

It just show you that hard time are ahead..."the mice are leaving the boat" so to say


HousingFinland said...

I'd like to be clear in one point.

I think it's obvious that price will correct, in the sense that new flat/house price will have to come back inline with reality.

Price have doubled, if not tripled in the past 15 years. Thus a 20% drop should not make people in distress, but instead remove the false sense of wealth that the artificial rise was creating.

Last, I think the government should put in place a program that could help household that bought late in the cycle and are forced to sell now (i.e loss of job, location).
This fund could help them, suspend interest payment by a year or two (the state taking the relay)...

My point here, is that buyer should not be penalysed by a sudden slump in the economy...and stop "voucher" investment company buying at distressed level as they did in early 90's.

Andrew said...

Judging by my own observations of advertised price falls Finland could easily be at 20% advertised price falls by the end of next year or even by the spring.

A 500K Euro house in November 2007 is already down to 420K say. Your excessively over priced Konala house from April? 2008 at 520? is now at 344 and is probably due for another reduction in price since it has been this price now for about 3 months. I saw an espoo house priced at 530 a month ago with swimming pool and looking great inside but apparently needing work now at offers over 385.

Meanwhile i am having a baby in February and the Russians are coming! But maybe they will also sell up first:-)

In the short term Finland is going thru a bad phase undeniably but i think it will be shorter term rather than dragging out for decades before it comes back again.

Japan and Germany were on their own but today there is unprecidented coordinated action to reset certain imbalances. In a certain sense it will not solve anything at all but it does provide a base for confidance that when prices fall back it will be some kind of safe time to buy. Just like the 70's were if you were brave. I bought in the early 1980's in London and it seemed sort of idiotic not to buy but there were not many buying back then. My house doubled in value in 1 year:-) Much later I sold another house on this same road for 10 times what i paid for it:-)

At some point doom and gloom turns into unrestrained joy and delight at the rediculousness of the prices:-)

It will be coming to a place near you sooner or later.

Rui said...

One question I always wonder?

On average, an investor who has for example 10K Euro capitial started to invest in stock martket 4 years agao, instead of buying house.

How much money he has now? I means average. 15K? 5K? According to the level of inflation, I think 12K is break even point.

HousingFinland said...

"Just like the 70's were if you were brave. I bought in the early 1980's in London ... Much later I sold another house on this same road for 10 times what i paid for it:-)"

The 70's sticky high inflation, will not occur for a simple and fundamental reason: "The retiree and the pension system"

In the next decade or so, you are going to have massive amount of people that needs to have their purchasing power preserved...should inflation pick up, it will be a disastrous scenario...

So I'm confident, we will not see that. The period you refer are basically inflationnary...I think now what central banks are fighting is deflation..they will lower rates to level not seen in generations: i.e The Federal reserve in the U.S. could lower to 0.5% their interest rates. UK could lower it to 2 or 1.5%, same with the ECB...we are talking about war time type of interest rates...

I think people are underestimating the impact of demography and mass retirement...

* "Russians are coming! But maybe they will also sell up first:-)"

Don't worry, with the current economical issues and the possible devaluation of their currency, the rubble, you will not see them in the property market for very long...same for the tourism segment (whatever the media are saying, remember they are backward looking...).

* "Your excessively over priced Konala house from April? 2008 at 520? is now at 344 and is probably due for another reduction in price since it has been this price now for about 3 months."

ok that's a 30%..but to be franck the valuation in the first place is wrong...that's why, I took it as an example. I think another 25% and you might see trend price...but usually on the downside it always overshoot ;->

*"At some point doom and gloom turns"

There is always a time to see doom and gloom , and then to switch to a bull long as we have Boom and Bust cycles... But today we are in bust period, so no time to waste to be a bull, and neither money to waste (i.e into listen to economists that have been preaching that everything is ok, the economy is sound etc.. (if you had listen to them you would have lost half or third of whatever wealth you had (housing, Stocks))...sometime it's worth to be bear at the right time and the right time was about 12-18 month ago...

HousingFinland said...

"On average, an investor who has for example 10K Euro capitial started to invest in stock martket 4 years agao, instead of buying house."

I guess it depends on the timing.

If you had bought in 1992 and sold in 2000, you would have multiply by 10 or 100 your investment.

If you had invested in 2003 and sold in 2007, you would have multiply by 4, again depending on the asset type you had invested.

On the contrary if you had invested each time at the top (2000 or 2007), you would have lost 40% or more depending on your allocation.

The same apply in housing.
Inflation adjusted if you invested in 1990, but sold in 1994 you would have lost 40%-50%

Today the loss could be greater since the leverage higher. In todays term a drop of 20% on a 200.000 or 300.000 euro is quite massive, you are talking about 40.000 to 60.000 euro loss...something that you will surely not lose in the stock market ;->..if you have a balance portfolio (I have recommended in this blog many time to put money in fix term account linked to Euribor that were giving 5% or higher, as I was sure that inflation won't be a problem in 2009-2010)

Anonymous said...

Hi all,

I think you forget the sense of house owner.

Average owner first worry is that can I keep my job. If yes I can pay loan back and keep my house even the value of investment is decreasing.

If no Can I negotiate with Bank about the pay back schedule.

If no When Do I have to sell my house and give for 'free' to greedy bank.

I think Banks who have given too big loans for individuals should pay this 'bad' investment.

I don't think avarage people even understand how much is 200k loan and what is difference between 200 k and 300 k loan.

Are we so stupid?

I don't think so but many of us seem to believe all become good one day, 'maybe'

HousingFinland said...

"I think you forget the sense of house owner.

Average owner first worry is that can I keep my job. If yes I can pay loan back and keep my house even the value of investment is decreasing."

As long you as you pay, you are fine regardless of the value of your property.

Housing should be seen as a long term investment (15-30 years) not a 3-5 years investment, as it appear to be in any bubble/boom run up...

Foremost, you should see housing as a place to live not as an investment...for many, it could be seen as a saving instrument, especially for the one that are unable to save (its kind of saving for retirement). In that sense, the money you give to the bank should be reallocated to strategic investment and ultimately benefit the economy...alas, in the past few years, corrupt bankers have but helpthemselves through heavy and unjustified bonuses.

Today there are risks...
I recently read a report regarding the impact of ageing on GDP:

"Due to the shrinking work force, economic growth is estimated to remain in the future at around 1½ per cent per year, when during the 1900s it was more than 3 per cent per year. After the year 2015, GDP growth is entirely dependent on productivity growth."

link can be found at

If they were expectation of an housing and construction boom, you will not get miserable figure of 1,5% GDP average growth in the next decade or so....that's could give you some hint on growth will be... a clear turn after the millenium.

Rui said...

China 600 billion dollar package to stimulate economy, mostly goes to infrustructure.

Newly finnished fast train, from Beijing to Tianjing.

The name of the train is Concord !!!

It is normaly train on rail, but almost as fast as Shanghai meglev.

Forget about recession, start construction. New building, new infrustructure every where. At the same time, more tree, more nature reserve. At few years, country will looks much better.

Andrew said...

China though is economically linked to the USA like Mother and unborn child. Earlier theories that the world would decouple from the USA have been totally destroyed.

Andrew said...

Hopefully a more user friendly version follows?

China startled by force of crisis

World Shipping rates fall off cliff

chicago is preparing for frightening mass layoffs says the mayor

Raging Unemployment - World of liquidation - They got no money

HousingFinland said...


Stick to the subject...

"Forget about recession, start construction. New building, new infrustructure every where. At the same time, more tree, more nature reserve. At few years, country will looks much better."

Are you talking about China or Finland?

Regarding China, they don't have choice, either they spend in infrastructure and stabilyse the employement figures...or face social unrest that will lead into the fall the centralized governmnent...But I believe china will be a strong and powerfull country, maybe in 200 or 500 have to be patient, very patient...

Regarding Europe, they have built too much, due to massive ampunt of liquidity injected after the tech bubble in 2001 (interest rates too long for too long) redirected into building contructions (residential, commercial)...The excesses have come to an end. Like in the end of the 80's, you will have to wait one, or in today case, two decades to see another construction boom.

Back to China, they somehow created the global imbalance by artificially keeping their currency too low..thus distorting competition world wide and the way killing manufacturing in a global scale...

Andrew said...


"Back to China, they somehow created the global imbalance by artificially keeping their currency too low..thus distorting competition world wide and the way killing manufacturing in a global scale..."

This has little to do with China and more to do with countries like Britain and the USA seeing a way to maintain managers production control rather than workers having any influence as to the nature of their work and pay and so forth.

China was just the suitable country with the right attitude towards inwards investment.

In the USA for example there is a tremendous difference between rich and poor. And arguably firms like GM have been burdoned with high legacy costs due to much early pay and pension arrangements that no other manufacturer wanted to risk getting again.

China is not the bad guy. They have been highly compliant and more or less done as asked, and in return they have moved a few centuries closer to being in the modern world.

200 to 500 to complete the journey? I bet you another beer it will be less time than that:-)

By the way talking of beer and bets, Finnish inflation fell from 4.7 to 4.4%. I think it was more or less the same when i said Euro area inflation would not come back to target within 18 months? Jury still out on that one. No doubt M. Trichet will lower rates all the way to Zero if inflation declines, so i reckon I could still be right on that one.

HousingFinland said...

"China is not the bad guy"

Never said there was a bad guy here, but just highlighted the fact they had pegged their currency to the dollar...when the dollar was falling, it was highliting the weakness of the US economy...while China was gaining momentum and strength, at the same time having its currency weakening...which was of course, illogical and made things worse (you had massive amount of manufacturing objects from Clothes to Toys that were flooding the global market).

Obviously on the other side of the coin, you need to have buyers...and there were as the credit pipe was full open and inondating on a massive scale...The other point was that inflation was kept low due to cheap manufactured product..that allowed to keep interest rates low...

Greenspan, argued once that it was the fall the communism that allowed to have a vast amount of labor in the global workforce, exercing incredible forces in mainting wage growth in developed country thus allowing to have low interest rates... low interest rates meant cheap credit and pushed an ever increasing amount of buyers to be created...

On the other hand, it's true that clear decision was made in the 70's to shift from an industrial oriented economy toward a service economy, that could explain the migration of the manufacturing toward "developing" countries (India, China, Turkey etc...)

"200 to 500 to complete the journey? I bet you another beer it will be less time than that:-)"

Another beer to confirm China supremacy in ...2 centuries? or 20 years?

"inflation fell from 4.7 to 4.4%."

The main reason inflation is still holding is food and rent price ...this is something of the past...Companies such as Valio, took advantage of commodities rise to increase prices...Next year they can't justify that as commodities are on free fall (oil, wheat,..., cows? ;-> )...

I still maintain that you will have very low inflation, if not deflation in the year to come, maybe even, sometime next year, in June, somehting around 0% or -1% inflation...

In 5 years time, it's another story, we will see how the global economy recovers from the credit and financial damages that were and are inflicted to the real economy...

But another beer, in any case, will be a good idea...

Andrew said...

I must admit that my understanding of economics has evolved quite a bit in the last few months. Even so the situation of china and the usa is an unusual one dont you think?

China does not tend to spend the dollars it receives for what it makes, instead it just accumulates them and earns interest from them. In some ways by doing that it is not getting wealthier in reality but on paper alone so there is no need for its own currency to become more valueable but it has anyway become more valueable recently. That is a pretty unusual situation for a developing country. Up to a point it is working for nothing or at least for much less than it directly earns in a given year? We know that if China was to spend its dollars it would be difficult for the USA and also devalue the dollars that china holds. And it seems the two are cooperating quite a bit together?

Globalisation seems to be a way for the west to carry on spending when otherwise they would have had to cut back on spending. And they achieved that by exporting their jobs and devaluing currency to developing countries who are prepared to work harder and cheaper in return for an opportunity to develope their own countries towards the standards of the west while curiously being able to finance the west from the currency they accumulate. Even so this mechanism depended on the west being more in debt and depended on the east saving the money it earnt from the west. In fact the interest earnt on the dollars accumulated was probably insufficient to maintain the spending power of the dollars being accumulated. In some ways China was getting nothing for its labour? It just got paper which it new could never be used to make a claim on the USA.

Maybe this is what Greenspand meant by the conunundrum? It is perplexing that it works for as long as it does. I suppose what we are finding out now is 'that it is just something that works' *until* 'it does not work' and then the new conunundrum is 'what on earth is going to now drive the world economy?'

If it is now true that the chinese citizen also has too much debt and he has too much house, then he is no longer willing to work for nothing to get more that he cannot afford. And if the miracle comes unstuck then he goes back to a subsistance farming existance and whatever China has accumulated has to be spent to maintain social order. That would be more catastrophic than it is puzzling. The inflation in the west would be exstreme surely? China would begin buying from us but the money we got would not be real money and yet it had a claim to our wealth. It would not be real money because in the past we had low inflation because our created money was accumulated some place else and not spent here directly. We spent their savings and they accumulated more of our created money. They worked and we consumed.

How does this end now? Deflation would be a catastrophe for the west so we can reason the west will do all they can to avoid that and we are witnessing exstraordinary ongoing very desparate measures already. Just how does it end?