Sunday, 29 March 2009

Deep Impact: Demography and Housing Permit

Population by Age (Click for bigger picture)

This week has come with its lot of pretty exceptional news and data flow. One has to decipher them in order to understand its true impact.

Let's start with the population report.

1- Demography, toward an "inverted pyramid": More babies needed, please!

"Year 2008 was a historic one for Finnish population statistics.

For the first time ever the share of the population aged 65 and over exceeded that of the population aged under 15.

At the end of 2008, the number of persons under the age of 15 in the Finnish population was 891,162, which was the lowest since 1896.

The number of persons aged 65 and over in the population was 892,068 at the end of the year.

The largest age cohort in Finland’s population was persons born in 1948.

At the end of 2008, they numbered 83,361. Persons over 100 years of age numbered 514, of whom 77 were men and 437 women.

In the course of 2008 Finland’s population grew by 25,830 persons and the increase in the population was the largest since 1992.

For the second successive year and at the same time for the first time during Finland’s independent history migration gain from abroad contributed more to the increase of population than natural growth."
You could see that the tsunami of the baby-boomers, the one born just after the second world war, will cause a radical changes on government policy and economical landscape.

At the same time it appears that there won't be enough active people to support the retirees which will put massive pressure on the social security framework. Already there is a shortage of nurses while the need will be probably few folds in the years to come. A worrying situation that seem develop amid the incapacity of the government to take the right actions.

Associated to that, is the massive losses encountered by state pension fund especially due to losses in stock market and most probably in real estate. Added to that the clear incompetence of municipalities budget handling that will put even more pressure on the social front.

This is clearly very challenging and will require bold action from the government in many fronts, as it needs to attract more people in Finland while juggling with nationalist feelings.

Unfortunately, the current crisis could not have invited itself at the worst time. So after all, it is not in the hand of the government since a necessary condition to handle such process is to have a good and sound economy base which it has, honestly, no control. It finally depends on how the US, Russia, China, Europe handle this global economical crisis.

Now regarding the population increase, this is interesting to note that it is coming from two major groups : Russians and Estonian as the chart below highlights (Contrary to what YLE or HS seems to promote):

For the first few groups, it is clearly for economical reason: Russia and Estonian job market is deteriorating at record pace. Unfortunately from now on, the Finnish market will follow suit hence social tension that could arise against those communities, especially on the eastern and northern side of Finland (where you really have an economical depression ongoing).

let's go back to the housing market after all, some new data came this week.

2- Housing Permit: Do not buy until the trend resume upward... unless you have no choice.

Permit for building residential, commercial are clearly on a free fall. Construction builders have clearly understood since 2007, that the nature of the market has changed. So less people are buying structurally and fundamentally. This is certainly not because banks do not want to lend or have change their credit standard (which has been lose since 2003)... but simply either people cannot afford the current market prices or because the demand in the past few years was just phenomenal...

It's important to note that commercial building permit are slumping too. As I said few time they build far to many commercial buildings, that will clearly be another source of stress for the banking sector in the months to come.

And of course, the visible hand of the state in action, the only growth in permit has to be stamped on the public side. That's a kind of bail out with fresh tax payer money. Well, let's not be too bad, there is clearly a need for public building hospital, paivakoti (kindergarten) etc...

This can clearly be seen in the housing loan growth of the past few years as shown in this graph:

Since the last quarter the demand for housing purchase has sharply decreased to reach the 2005 level (it is in Billions of Euro, so it means far less draw down). I expect that trend to continue declining since unemployment and a psychologic change will be the main forces ahead amid deteriorating economical and political climate.

It's worth to note as well that the population in Uusima has increased by 15.000 in real term (removing count from merger such as sipoo or partial merger such as Vantaa), which in term of family (2 couple and 1 child) means at least about 3 000 housing need to at most 10.000 for 2008. I think here as well the supply far exceed the need especially as the job growth reverse trend and more supply is coming.

How about a quick technical analysis...

3- Technical Analysis, A Forecast : would it be 2012, the year of a possible housing market recovery?

Housing Permit Perspective:

Housing Permit versus Housing Price

One should take the Unemployment perspective and analyse its impact on the housing market.
It will be fool to think that housing price will hold or rise when unemployment rate is rising.

Here is the unemployment rate since 1990:

Unemployment Perspective:

A basic analysis will show you that housing price will fall until unemployment has peaked. According to the Bank of Finland and Finance ministry it will peak sometime in 2010 hence you can confidently bet it will peak in 2012.

Unemployment Rate versus Housing Price


This are just interpretation and need to be reviewed as soon as new data emerges. The situation is changing very fast in both direction thus one has to readjust to any new realities and be pragmatic : not sticking to one view but be adaptable.

One thing is sure, should the crisis last longer than estimated, the consequence could be pretty dire as this government has embarked into taking a massive debt in the next few years.
Should the recovery come later than expected, the risks will materialise and the country will be plunged into a very difficult period.

Let's just hope that the recovery happens in 2010 as Bank of Finland, The European Central Bank and the US Federal reserve have been projecting.

In the meantime, you should be ready for both scenario.

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Isa said...

Thanks for the analysis, you keep me from going out there and buying a place right now... I decided I'll but some furniture instead... just to quiet my shopping urge. :)

As to the babies: How about the Finnish government start incentivising by giving parents tax deductions!!! Finland is one of the most expensive countries to have children (despite what Finns say).

Ha ha, sorry, off topic, once again.

HousingFinland said...

I think it will be wise to wait at least a year to have a clear view on the situation as most probably housing price peaked in 2007-8 and we will never see those prices for a very long time as far as our generation is concerned.

It might look surprising to say such thing but in the past bubbles (1970, 1990) the housing resumed because the demography allowed it.

Today it is different, demography this time is not coming at the 2008 was most probably a historical peak ...

To my opinion, Now it's far too risky to buy as no one has any clue about how the economical situation will develop in the next one to two years.

Regarding the babies, it will be a good idea that the coming income tax reduction should not be a percentage of the income (as it will give more money to the already wealthiest and very little to the poorest)...but it should be proportional to the number of children in the family least it will support people to have children and could create bigger size family.

A small note, 2 children is just enough to maintain the same level of population. 1 child per family effectively, divide the population by two within a generation (immigrant excluded).

But at the end, family and babies are not about statistics and money ;->, as long children , be it one or two, are raised by a loving mother and father, a stable and happy family, then it's all perfect (be it in a rented house or not, with big or small income).

Anonymous said...

Thank for the on-going valuable analysis. Have you got any specific calculation on the impact of the housing price by the the demographic side?

HousingFinland said...

The point I tried to make with regard to demography is that the idea that long term investment is always rewarding is WRONG.

Japan has demonstrated that and has had the same similarities in term of ageing population.

And remember that Japan is an island that has limited land supply yet land price has been sliding downward for the past 24 years.

That's my point it. Housing should not be seen as an investment and should be valued to the effort required to build a house.

If one want to speculate, housing is not the right instrument. Housing doesn't give you dividend except a negative one (maintenance, cost etc..).

Now, I still feel that the housing mindset has not cooled yet, what do you expect since the younger generations (under 40 ;->), has only known rising price from the time they join the active life...

But you will notice that the media has started to understand the housing is not the golden chicken (call it what you want)...already on TV housing related program are disappearing to be replaced by fitness or "lose-100Lbs-in-24hours".

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