Tuesday, 9 December 2008

U.K. Home Sales On Free Fall, Finland Next?

"Prices are continuing to fall fairly sharply"

"U.K. home sales declined to the lowest level since at least 1978 as Britain plunged deeper into a recession, the Royal Institution of Chartered Surveyors said."

Real-estate agents and surveyors sold an average of 10.6 homes in the quarter through November, the least since the series began three decades ago, RICS said today. A separate report showed retail sales fell in two consecutive months for the first time since at least 1995.

The Bank of England last week reduced the benchmark interest rate to 2 percent, the lowest in a half-century, as policy makers sought to prevent deflation from taking hold in the economy. With homebuyers shunning the housing market and a squeeze on bank lending, central bank Governor Mervyn King has refused to rule out cutting the rate to zero.

“The problem is partly mortgage finance, but the other thing is the state of the economy,” Simon Rubinsohn, chief economist at RICS, said in an interview on Bloomberg Television. “Prices are continuing to fall fairly sharply.”

After the U.S., Spain and Ireland, U.K. is now meeting with the reality: Housing Boom and Bust.

Like Dominos, other European countries will know the same faith..with a time lag as history has shown.


Andrew said...

I have been following the UK for a while. There is a similar problem there as the USA. Banks are so damaged financially that they are keeping a higher margin than normal over the central bank rate.

Here in NZ we are paying about 2% margin. Similar i believe to Finland. Our CB rates will likely fall from 8.25 to 3.5% by April 2009 and are already at 5%. We might even have inflation rising again if world food demand stabilises.

But without these other economies we are in the same boat as they are.

China/asia seems a key also. Companies like Wartsila are still reporting very good order books for their massive ship engines. If that changes then watch out below.

HousingFinland said...

I understand that if one wants to make a case for inflation, you need to have pressure on all commodities including food.

Proponents have rised the fact that this energy are scarce and the population is growing.

I don't entirely agree on that scenario. It could be true in 30 years, but is far from being realistic today.

The population will drastically slow its growth (ref. babyboomers of 1945), oil finding has never been so high (pushing reserve at historical high(?)).

To that, history told us that in the 70's, similar scenario was put forward. 40 years later they have proved wrong.

I think they will prove wrong again.

Andrew said...

I sometimes get the impression that you absolutely want to deny that inflation is a monetary event/thing. Even if the population falls and demand falls we can still get inflation.

One problem NZ has at the moment is that it has quite high inflation and is lowering interest rates to keep banks lending to support house prices and the economy generally as commodity prices fall so a lower NZD acts to buffer the commodity price falls. It is all fairly inflationary. And because we had very high rates it looks like house price affordability will be twice as good by around june next year. In the Euro area because the economy was so weak and low rates were used to stimulate the economy there is not much room to cut rates. Even so the absolute value of rates is not so important. What is important is the amount of stimulation that is applied to the economy.

HousingFinland said...

"inflation is a monetary event/thing"

I'm just confident that they- polivy makers ex-Emerging Market - will not make gross mistakes as in the past.

You are not going to see rising inflation and low interest rates.

What you will see is lower interest rates in a falling inflation (disenflation) at first then deflation.

Now, no one can fight "gravitational forces", an equilibrium will always be brought back. By that I mean no government, or policy makers can or is able to maintain artificial prices (housing, stock etc..).

All, they can do is to put cushion on the fall, so to mitigate the impact.

Obviously, many market participants have interest in talking up the economy either to influence the psychology or being driven by self interests.

Last year and this year, I was warning that Bank of Finland and Finance minister attitude in praising the economy as sound and strong...was a non sense. I highlighted the fact that today the interdependance of economy has never been so high (hence the referal to "Dominos").

Now, the risk that is incredibly massive for Nordic countries, is their implication in the Baltics and Russia. They (Banks, Insurance and many companie) will go through very heavy losses that will question their survival. They were fool that expanded in an irrational ("this time it's different", "it's the new economy", "we live in a very low risk environment and we believe it" etc...).

Nevertheless, in this type of environment, investing in housing is a risky one (even if some argue the contray for whatever motives they have). The wait and see approach is wiser and preferable. And that is the approach I recommand.

Andrew said...

You might be wrong about the banks in the baltics. Nordea for example has a fairly small exposure there compared to its overall loan book. Also it is lending in local currency and raising money in local currency. It has no foreign currency exposures either in Denmark or the baltics i believe from the press conference a few weeks ago now. It said that some loans are not peforming well but overall the loan book is performing well and they are there for the long haul and can expect to make money. They were also able to borrow in October at near libor rates at a time when this market was said to be very stressed.

Why do you think the banks will do so badly in the baltics? Any banks in particular?

Rui said...

Finnish bank is doing very well right now. Swedish bank is even better.

The problem facing here is not banking problem but lack of demand. The way to stimulate consumption is simple,
1) low interest
2) high inflation
3) low tax (already happened)

All at the same time, and if economy keep on going down, very soon next spring we will see it happenning.

The result is house owner will have more extra money in the pocket, and start shopping ...

HousingFinland said...

The same idea as when banks said they had no exposure to the US sub prime market or housing market.

Each time to the press they rise the direct effect and play down the indirect effect.

The indirect effect, is that they lent to compagnies that have been involved in the Baltic as it has been see as a very fast growth market due to their European membership accession.

Those country will see contraction, not witnessed historically. Most will fall into depression.

Particularly Estonia, is a country where Fins have been invoved in many businesses.

Sweds banks have been involved, i believe quite heavely (one indirect sign is the record profit made in 2007).

Dans have one of the biggest housing bubble in Europe (due to policies that have allowed to deduct almost all interest paid on housing loan). Now it will have implication with Banks.

Now, I making asumption that most probably are disccussed at high level and will probably appear once the sign are evident on the public side.

A little bit of what has happenned with regard to recession. The signs were clear already from last year, but policy makers and politicians were contrarian on the public side while taking adequate measures on the private side.

Should I follow their public advise, I would surely put myself in very diificult financial situation.

Now, finally Liikanen is saying what i have been repeating all the way long in this blog:
From Helsinbgin sanomat of today:
“On the other hand, it is still milder than the situation of the early 1990s.”
“The recession can be softened through economic policy, but it cannot be prevented.”

But in fact, now I start think that the recession could even be worse than the 1990, in the sense that the recovery will not come as fast as in the early 90's. It could be that it won't be so deep but most probably longer.

Next year we will see if banks can handle the shock. Now it's more speculation from both Bank of Finland and other economists.

Andrew said...

But are you saying that the banks are not telling the truth in their financial and press statements? It is one thing to have optimistic forcasts which dont work but it is another thing if the banks are crooks.

The banks so far seem guilty of being overly optimistic and from what i can see the exposure of Nordea is not high. It must have got a pretty good deal when it got the Zeeland branches for example and almost certainly the Danish government were involved with that in some manner. When these banks indicate they are about to make losses then we can worry.

We also know that when the banks get into trouble they are going to change those mortgage conditions. We are nowhere at all near that now. They will have to have years of losses before that can justifably happen.

Recessions are normal events. The Nordea chief economist seems to have been very anxious for a long time now. Meanwhile they are not themselves expecting difficulties. They are the ones with all of the money dont forget:-) And they are getting more money as other higher interest investments are being unwound.

Andrew said...

"Finland's trade surplus rose to about 640 million euros in October from some 359 million euros in the year-ago period,"

"The value of exports was almost flat year-on-year at about 5.8 billion euros while imports fell by about five per cent to some 5.2 billion euros."

Gives some context to all of these job announcements recently. Finland remains so far in good shape. I wonder what it will be like by March now that things have taken a worse turn or we are told they are?

HousingFinland said...

Andrew, you are using, maybe without noticing it, the same tool as the politicians and some economist are using to communicate with the broad public.

The trade surplus is reflecting past action,contracts and state of the economy. We know that it is "sticky". In fact in November, everything fell off a cliff.

One component of it is the import. This has litterally collapsed after the summer as people have almost put a break into comsumption -this is clearly reflected in the consumer confidence - a record fall.

You don't stop the export engine just overnight. Past Contract, and current project have to fulfilled. But once closed you will be in unchartered teritory. This morning Outokumpu has clearly highlighted this fact. They are cutting production and said that they have no visibility whatsoever about 2009.

So From next quarter onward, data will be quite "ugly" but should not come as a surprise.

I'm trying to be too pessimistic, i think I try to be forward looking and past data has no meaning in current environment.

When inflation was still rising until june, I said clearly that it was because of the past boom of the economy- I put the allusion of a train that had is motor cut but still give the impression that it's running "as usual". That waht the data velocity will tell you...but if you look deeper and check the motor, the engine, you will notice that it has been damaged and need quick reparation before further damages. That's what we are witnessing.

Now coming to banks. I never said that bank don't say the truth. I think they underestimate the risk which is understandable. Communicating the risk to the market could be a risk in itself. Rumors could make fall already weaken companies too - see Lehman, Bear sterns, nothern Rock.

Now Nordea, Sampo will go through intense, not seen pressure since 1992. Would they survive? most probably yes since governments and Central banks are there that.

Regarding the Nordea chief economist, I think, she is as good as information googled from some business web site. The Chief economist in Finland has resigned from its position to take another position within the same bank in the saving unit. As a matter of Fact, the chief economist of the European central bank has resigned too about 3-4 month ago. I'm not even telling the number of CFO that have resigned from prestigious company here in Finland. - I understand their action: they completely underestimated the risks or enjoyed a bonus system that pushed them to take bigger risks for bigger reward, damaging the stability of the company on the way.

Now, I'm just taking information from different sources, and synthetising them to obtain a possible direction.

Again as I said some economist or people will advise to buy or invest always at the wrong timing- I'm not sure what is their interest ("less pain if other have pain" strategy? I's a silly one I have to say, but through out my experience, I have seen such cases).

Now what i'm saying is that today you are walking in land mine field. Every step should be taken with caution, there is no hurry even if some say that you should run or not worry about it. What I say is observe what is in front not in the back (that's the past, and useless information for the current issue). At some point clearly you will be out of the mine field, how would you know it? there will be signs...

Today is like being in 1990. You can decide to take a risk or to wait and see the damage of the current financial on the economy (in the US, UK, it started in 1987-88). But yet people were heavely investing, here, to only see their wealth being decimated a few years after. On the other hand some made a fortune out of it - see Wahlroos, Pension Fund etc...

But if you feel that we are in 1992now, feel free to invest. But i haven't seen clear sign of it as Finland as yet to enter into the recession which as announced in this blog a year ago, will be in 2009-2010.

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