Tuesday, 21 April 2009

Housing Market : The Bank Of Finland Viewpoint

House price in selected cities

A- On the Housing Market:

I think it is clear for all that the housing market peaked in 2008 and started its long and slow correction since then. Statistically based on the data provided by Statistics Finland and on the two previous downturn, it takes about four years for the adjustment to end. This time won't be an exception amid the fact that we are witnessing the worst slump since the second world war.

But let's look at what Bank of Finland has to say:

"Housing and property prices started to decline in 2008. Growth in the stock of housing loans has slowed. Office property prices will also probably decline. Real estate investment trusts’ share prices fell in the second half of 2008."

"According to preliminary data from Statistics Finland, nominal prices of old flats and row houses peaked in the second quarter of 2008, after which they fell by nearly 5% by the fourth quarter of 2008."

Nominal and real housing price since 1988

"The decline in prices has so far been modest, compared to the persistent price rises of previous years. If nominal housing prices are converted to real prices, using Statistics Finland’s cost-of-living index, housing prices are approximately as high as in the housing market upswing of the late 1980s."

B- On the Rent:

"Developments in rents are mixed. According to a recent survey by the Finnish Association of Building Owners and Construction Clients, the rents on small dwellings are expected to rise further, whereas in many cities, the supply of large rented dwellings exceeds demand."

So rent for large dwelling might decrease since there is a supply glut and it could be historical... A troubling sign of the deflation at work.

In Helsinki region the supply of small dwelling are shooting up as well, as many unsold flat are coming later in 2009, and in 2010.

At the same time, the number of student in Helsinki region is declining and should the trend be confirmed next year it will certainly put further pressure on rent.

In addition, unemployment especially for the young will deteriorate further thus the internal migration toward the Helsinki region from different region should slow drastically (this point could be checked later on based on data from Statistics Finland)

On the Magical Visible Hand of the Government:

"The supplementary budget presented by the Government to Parliament includes measures that will stimulate construction.

In 2009 and 2010, loans granted for the construction of rental flats will be supported with an interest subsidy and a deficiency guarantee.

In addition, subsidies will be granted for redevelopment projects on residential buildings initiated between the start of February and end of December 2009"

On the one hand the government want to put a cap on unemployment figures by stimulating construction on the rental market but on the other hand the risk to put even more pressure on the rental market (since the supply will increase) will increase further.

C- A Technical Analysis: The tennis ball and the dolphin

I cannot produce an article about statistics without providing my own infamous technical analysis.

So let's try to figure out what is the equilibrium of the market but first let's imagine a tennis ball falling in the middle of one the millions lake in Finland. What would happen?

1-First the tennis ball cannot stay up in the air...'cause law of gravitation.
2-So the ball fall and hit the surface of the lake. The Kinetic energy or the energy of motion will push it through the surface.
3-Once inside the lake the ball will emerge up...the Archimedes law will be in action.
4-the ball will finally stabilise at the surface until another force push it up (a pike or a dolphin from the lake?)

Click to Zoom


Anonymous said...

Could you explain the difference between nominal and real prices (for the uneducated) - I would have expected the two to be the opposite way around, so its clear that I don't follow what they really mean. And what is the significance of the small gap in nominal/real in 1988-1990 compared to the large difference between nominal and real in 2008.

HousingFinland said...

Well in blue in the chart, the nominal price, represent the housing price as-is without being adjusted for inflation.

Let's say that you bought a house in 2007 and that price you paid was 150.000 euro.

Let's assume that inflation was 4% from 2007 to 2008 per year (8%=4%*2).

So in 2008, you decide to sell it at 150.000 euro.

In nominal term, you are not losing any money since you sell at the same price...

In real term, since there was inflation you have lost at least 8% (since the overall cost of living increased) so your real price is 138.000 euro (adjusted to inflation).

If someone has a better explanantion, you are welcome.

Nevertheless housing prices have shown exactly the same pattern in all the European countries and are all without exceptions readjusting as in 1990. Some have started the readjustment much earlier and some are lagging (which is the case,to my opinion, for Finland).

Crisis or not crisis, the readjustment would have happened one way or another..the housing market is simply a cyclical market.

Interestingly enough, today's statistics about demography show that the population is shrinking (fertility rate at 1.84) if it was not sustained by immigration. The growth going forward will be historically sluggish thus do not expect a housing boom in our current generation...

Now I have to say that price are completely irrational, especially the one from new buildings (which indirectly drive the pricing of old dwellings)

I will try to write something about that, something that looks almost like a house price cartel, or price fixing as all the real estate agency and builders have like by magic the same pricing levels like competition didn't really exist especially in such environment..it's quite puzzling and strange.

One has to figure out if the fact that real estate agencies are linked to banks that have links to construction company ...to that you had media that rely on outcome indirectly coming from housing...
So it makes the perfect ground for creating an imperfect market.

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Oz said...

Thanks for the explanation on the nominal/real prices. Kind of makes sense. But that doesn't explain why the gap between nominal/real has grown so wide over the decade. If I understand the graph correctly, the real price is at levels seen around 1990 - does that mean that housing in Finland has not kept up with inflation? But then why are the nominal prices so high?

Anonymous said...

No suprise that profits fell, but they just avoided a loss:

"YIT's Jan-Mar pretax down 97 pct yr/yr

24.4.2009 at 9:11

Finnish builder YIT on Friday posted a first-quarter pretax profit of 2.2 million euros, down by 97 per cent from the year-ago quarter, with sales falling by 11 per cent year-on-year to about 824 million euros.

The company added in a statement it expected to report a full-year pretax profit, albeit clearly lower than last year's.


© Copyright STT 2009"


Anonymous said...


It looks like the graphs (real and nominal prices) are set both equal to 1.0 in 1988, i.e. 1988 is a reference point.

I think that explains why the difference is smaller in earlier years - it takes time for them to drift apart after being arbitrarily set as equal in 1988.