"According to preliminary data, the fall in the prices of dwellings in old blocks of flats and in terraced houses accelerated in the last quarter of 2008.
Compared to the previous quarter, dwelling prices fell by 3.8 per cent in the whole country, by 3.5 per cent in Greater Helsinki and by 4.0 per cent elsewhere in the country. The number of dwelling transactions diminished clearly toward the end of the year.
Compared to the corresponding period of the year before, the number of transactions fell by 40 per cent in the whole country and by some 50 per cent in Greater Helsinki.", Statistics Finland, 30 January 2009.
Price downturn has accelerated which should not be a surprise. My baseline scenario is still valid, see this link HousinK.
Housing deterioration has always been during an economical deterioration and rising unemployment.
I will just want to highlight the fact that psychology will play a big role at some point. We haven't yet reach this level.
Some Empirical Analysis
Prices have build some premium during the past 10 years amid ever rising prices which I will call Euphoria premium which range from 5%-10%, then price should reflect the current and forward economical and demographic environment which is about 15% to 20% lower and can be tagged as economical premium, finally the psychological premium which will add a downward pressure of about 5%-10%.
Overall, a correction due to the following empirical formula :
Euphoria premium+Economical Impact+Psychological Premium = (min=25%, max=40%)
This will bring us from Top to Down in the "Housing Statistic Finland" chart from Top=180 to DownMin=145 , DownMax= 110.
The lower minimum will bring us to level of 2000, but there is a risk that housing price could go to 1997 level which is as well the level reach in 1987.
One has to remember that we are witnessing an global economic deterioration that is worse than the two recent recession of 2001 and 1990.
When housing prices correction starts, it does so in a very slow motion. Usually it takes between 3-5 years to end the correction (based in past correction, and which is somehow what is observed in the U.S.), but in some cases, mainly Japan and Germany, it can take more than 15 years. So 25% in period of 4 years means about 6% per year which is 1.5% per quarter. Of course at the beginning of the correction, the downward correction is fast, which is what we observe in the past quarter - a 4% correction.
This correction can be accelerated if price fall and inflation surge, which is not my scenario. House price falling has been associated with deflation or disenflation.
Buyer are in a stronger position than in the past decade. They have time to choose and strenght to negotiate good prices.
Buyer will have to buy with in mind that inflation in the next decade could quite easely be over 8%, so debt should take that into account as well as trying to reduce the length of the loan to around 15 years.
Buyer should wait, if possible, and enter in the market from 2011. There is a rational behind this date. First, in 2 years time we will know clearly if government and policy actions have succeeded. Second house price will approach their bottom.
Buyer situation has to be taken into account. If you have a good financial position, then today is already a good time for finding good opportunity and negotiate good prices.
Seller will change their attitude slowly, an almost two decade growth have anchored so strongly expectation of growth. So change of attitude will be slow but will happen. This will mean that the downward correction won't be linear as some resistance will be expected.