Sunday, 5 April 2009

How long?


There was an interesting article in Bloomberg regarding the state of the Finnish construction industry:
Finland’s economic stimulus package may fail to prevent mass unemployment and cushion the collapse of the construction industry, said Tarmo Pipatti, managing director of Confederation of Finnish Construction Industries.

“We’re heading for mass unemployment in the building industry,” Pipatti said in a telephone interview out of Helsinki today. “Government demand can alleviate it, but it cannot stop the plunge, unfortunately.

“The government stimulus is probably not enough in view of how much private demand has fallen,” said Timo Vesala, an economist at Espoo-based Tapiola Asset Management Ltd. said.

“Recessions are for cutting the excess capacity that was built up during the boom,” Vesala said. “Even though construction was the first industry to start declining, it may not be the first to start recovering again. Its slump is going to be a long one.”

It does not mean as I said that the demand for housing and hunger for bigger loan is disappearing overnight. Finnish Banks, Real estate agents, government are relying on people taking more and more debt, thus they will push this system as much as they can.

The whole system is based on such foundation. At some point the system cannot take more debt and you have some sharp reversal. It clearly happenned in the U.S. , in Sweden, in the U.K. , in Eastern Europe and as usual the Fins are the last in the line.

There are clear warnings, the same condition as 1990 are being reproduced:

-Finland is running now a trade deficit, the highest since 1991.
-high indebtedness of public and private sector have sky rocketed in the past 5 years.
-unemployment is reversing the trend, from a low of 6.2% it is now steadily rising.
-unaffordable housing price calling for more and more debt especially in the younger generation.

So on the one hand you have deflationary threat where asset price are losing ground, and on the other hand so much stimulus are in the pipeline that it will undoubtedly generate a sudden "death of kiss" inflation that will instantaneously achieve what is left of the big housing debt owner (Why is that? well 98% of Finnish mortgage are based on variable rate...).

7 comments:

Krösus said...

Thanks for your analysis!

Anton said...

"Siberian Services Co., the oil- drilling company whose clients include OAO Rosneft, defaulted on $100 million of bonds, the first Russian borrower to fail to repay its foreign debt this year, according to three investors."

Let's hope Finnish Banks were not involved...

Amit said...

Are you predicting that housing interest rates are going to go up a lot in the next 5 years?

Should I be locking in the current rate? ;)

HousingFinland said...

Hi Amit,

Welcome to the blog!

You are raising very interesting questions regarding interest rates strategies to take for housing loan.

I write a special article enumerating the different options and the pros and cons on each one.

This will follow soon...

In the meantime, happy Easter to all!

Seb said...

Hi,

have computed a graph of finnish real estate prices with friggit tunnel ?

Isa said...

we are locking in interest rates in the summer when they should be at 1 %.

HousingFinland said...

Just back from Holiday...so didn't really have much time to answer or publish some new articles...