Friday, 30 January 2009

Housing Home Price Situation Update

"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.

Updated Analysis

(Click To Zoom)

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.


Rui said...

Housing Finland should rename him self to be homeless Finland.

HousingFinland said...

Thanks Rui.

So let's go to your point: what is not be not homeless?

1- Not have liabilities to Banks for the next 25 years i.e quarter of your life? I do not think it's worth to spend a quarter of your life worrying that you must meet some engagement (like a fiancee, one you don't want to marry: bank on it!)

2-Not to see your lifetime saving eroded because you bought at the highgest, dumbest point or time?

3- and finally, ask yourself, the most important questions:
why, how and what do you need to fulfill your life?
is it to be stack between 4 walls? or seek to be free like winds that goes where it feels like it...

Personnally, I do not think that materialism is key to fullfillment, far from it.

Mr Rui, maybe we should go for a beer and I could give you some highlightment ;->: maybe after all make you rediscover the value that once confucious taught in a earlier time...

To be frank, I do not really care if my baseline scenario is right or wrong (which I think will be almost right). all I wanted to warn people to be carefull no to be the wrong time, wrong moment.

But again, Mr Rui you look for yourself, and instead I decided to share my worries and my understanding of the situation. Wrong or right, at least raising doubt push people to investigate: that's the minimum goal I have set...

Anonymous said...

Thanks for the good write-up


Rui said...

Yes, beer is good idea.

I have tested your deflation theory, it prove to be totally wrong. I was shopping for a car. The price of second hand car is not really dropping as much as people think. I made one offer for a 2007 volvo S40, dealer ask 19K, I offered, 15K, and did not get it.

House whatever, it is done. Too late too regret.

But I do hope, car price will drop, this will at least do something good for me.

The price of Finland is really stupid, income is average, but price very high, put living stardard lowest in EU.

It is a big mistake to come here, but now too late.... My parent is coming to visit Finland this summer, I am sure they will be very disapointted with the standard of live here.

Julian said...

So - house prices are dropping...

Are they really? In order to value an asset - any asset - a level of liquidity is necessary. A steady supply meeting demand with prices set at an equilibrium point.

Sure this sounds theoretical but let me give you a practical application. I bought a house in Matinkyla in March 2008 - nearly the height of the supposed bubble.

I have heard that prices are supposed to be down 5 - 10% since that time. However, I have been actively following the market and interestingly, the supply has dried up. People are not selling homes in the area of the size of 90-95 odd meters. So, how do you price this?

For the first time in a long time, one house came on the market this week. Coincidentally, my neighbor. Rather than price it, the agents used the auctioning system. The latest offer made by a prospective buyer is equal to the price I paid for my house - and they only had their first showing today!

So, how to price a house without liquidity due to supply? You let the prospective buyers bid for it. And what I have seen, this housing market deteriorating really influences very particular types of homes - the undesirable locations and the excessively expensive ones...

HousingFinland said...

Thanks Julian,


"The latest offer made by a prospective buyer is equal to the price I paid for my house - and they only had their first showing today!"

During Inflation

I think you are highlighting the concept of Nominal vs Real prices.

In the past year we had an inflation of about 4% (year on year). So if your home price stays the same (Nominal) while inflation is 4%, it would mean that in real term, your price has lost 4%.

So adjusted to inflation, it mean that effectively price have fallen by the inflation rate.

During Deflation

From now on until June, we will see a very fast falling inflation (disenflation), it could even be negative in june.

This effect combined with stable house price, means that house price decline will not be as steep as witnessed in 4Q 2008.

However, I expect from mid 2009, nominal price to start declining pretty fast.

So if the decline in price is faster then the decline of inflation then the steepness of house price decline could be witnessed again because:

-Stock accumulating and increasing at the fastest rate in the past two decade.
-Time to sell increase
-Unemployement rising
-Change in Psychology

There is plenty of myth around which most probably were around during the past two bubbles:

-Demand is strong...which is absurd knowing that banks have had record profit meaning that most probably future demand was shifted in the expect a deficit in demand in the next few years.

-Rent will stay at those level and go higher...again when economical situation deteriorate, expect to see rent to plummet at some point...due to excess inventory coming to market as well as a no growth in employement in cities. I'm not even talking about demography here...

Government Action
A political note ...

The government will try to limit the steepness of the rise of unemployment by starting spending in infrastructure and maintenance work (Bridge, highway construction etc...) BUT one have to understand that the government cannot take the place of the private sector or as an alternate to the falling external demand. So its effect will be limited and only temporary.

Any stimulus acted today, will take away a piece of the future growth...That should be understood.

So stimulus should only be a one time exercise and not a permanent type of strategy (i.e year after year borrowing is expected) as Kokomus somehow let us feel...

Now, the government will take debt and pay interest on it. Someone has to pay for that and it is the taxpayer one way or another.

In the case of a permanent type of strategy, it will mean higher tax down the road... Most probably from 2011 when SDP will come to power and Kokomus will lose the election due to rising miscontentment from the population in term of the economical situation (higher unemployement), social (protectionism requested and pushed by SDP).

It mean as well higher interest rates at some point, maybe starting in 2011 or 2015 (8%?). One has to pay for the vast amount of borrowing as well as paying for the retiree that will outweight the employed people...

Shineah said...

Thanks, this was a great analysis. We've been tracking the downturn for personal reasons (first-time home-buyers), and the burst is definitely happening.

Thanks, I'll be following this blog.

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