Wednesday, 17 June 2009

The Truth About Current Finnish Housing Market State

Yesterday, randomly I was head to head with huoneistokeskus and various real estate high representatives talking UP the housing market...Well when I say head to head, there was separation between us : my TV screen...indeed they were parading in the YLE channel - as usual.

So for them it's back to normal..."ouch" I thought - when I heard that (well after a real time translation, as I asked total freeze in the room and requested a detailed transcription from Finnish to any other easy-to-learn language i.e English, Sami)

So after this "ouch", the few neurones I have still left hinted me (quite few were hit badly by the changing weather in Finland - from +30 degres celcius to +2 in about 2 days) that I should show the lastest hard data about what's going on in the Finnish real estate market.

So here we are...and as a hard fact, you can see, on top, this table that shows you clearly the downward trend on the loan growth. (here is the source if you are willing to dig into the details : BOF)

So loan stock growth is plummeting following sharp drop on interest rates (from a high during the peak of the bubble in 2005-2007 to now, the growth rate has been divided by 2). Less and less people are willing to buy since the music has stopped playing and house price has started their downward trend. What is important is the dynamic or the trend since it tells about what could happen in the medium term...

Conclusion, the market is not recovering and as I said do not expect it to recover until :
1- the unemployment situation stabilizes - so until at least later in 2010
2- well after the economy recovers which is far from being the case - maybe after 2011 - I say maybe because there are worse alternatives.
3- Housing permits grow again, which is currently not the case and actually has corrected quite sharply.
4- After a further price depreciation of at least 20-40% in the next 2-4 years

This table show another interesting point, the relation between interest rates and housing loan growth (and price) - usually it's pretty uncorrelated. In fact House price grows when the economy has well recovered and is growing but it usually drops when interest rates are falling or are very low levels (the reason being that interest rates stays depressed as long as the economy is).

Now do not be fooled by those kind of media circus - people will always advise wrongly at market top - the same happen in the stock market where the target is the public and the beneficiaries are the institutionals and banks. Unfortunately people keep on falling in those kind of traps - maybe people have short memory but in todays internet capabilities it's unforgiveable.


HousingFinland said...

That is this kind of article from HS and yesterday from YLE (look like there is a coordinated effort to misled the public)

"The sale of new dwellings has clearly picked up in the capital area. During the spring the pace returned nearly to the same level as a year ago.
If this trend continues, the supply of unsold small dwellings will be reduced quickly, and by the autumn there may already be a shortage of available apartments"

Which is untrue based on data provided by Statistic Finland as well as observation on the ground (number of new dwelling build unsold something not seen since 1996-1999(?) )

The reality is that 2010 could mark a sharp deterioration of the housing market as unemployment will soar and banks will clearly tighten their lending due to higher losses on loans and involvement in Baltics.

Andrew said...

I have had my eye on some houses in the helsinki region since last spring and all have either sold or are no longer on the market.

Prices might be lower but inventory is shrinking all over Finland.

Last Autumn there was a noticable uptick in reduced asking prices of already advertised houses but since then things seem steadier. They just come on the market at maybe lower prices and stay until sold or withdrawn.

In Tuusula nearby there were 20 unsold new Rivitalo connected houses last year. They seem to be all sold now.

For sure the impression is that stuff is selling.

HousingFinland said...

Hi Andrew,

The main point I was trying to highlight is the fact of a sharp deceleration on sales and loan growth...I'm looking at the velocity and it's clearly showing me a change in market trend and ignoring I think is a mistake.

Of course officials will always provide good news ...Just look at the economical forecast they made from Bank of Finland to the ministry of Finance they got wrong so either they were misleading or highly incompetent or worse they don't understand the situation which then they should not give any forecast (for reminder in September they predicted growth of +0.5% to 1% for 2009, a deceleration as they put it, then they downgraded it to -1% then -3% then -4% and today -6%...this is ridiculous and slightly scary...)

So now regarding real estate agent, banks forecast with regard to housing price... I totally ignore it since it's driven by self interest (for reminder in 2008, the bank of Finland governor was saying that price will grow at a slow pace at around +3%...well we got a -10% on average).

But I do agree that this sharp drop in interest rates will only slow the correction for few months maybe until next autumn to resume sharply as the market build up inventories and first time buyers or buyer at large disappear (which is what the data shows)

We may be back to the level that is "return to normal" as in all bubbles, please have a look to the following:


As I said quite many people do not believe that, let's say, that prices could revisit their 2000 or 1996 levels ...

And the story of builders shrinking their inventory...fine, at the end they can just stop building and how about going out business? you get the point builders will always build but not as the crazy pace they did during this current bubble.

There is as well the fact that what they build will go to the renting market is another strong point with regard to rent deflation.

It is absolutely absurd to observe prices in the city center of flat on sales for 400.000 - 800.000 euro while you can rent them for 1200 - 1500 ... make the calculation (the rental return should be around 7-8%) here we are more in the level of 3% or less ... non sense unless you see inflation under 2% for the next 20-30 years which is even more absurd.

I think we agree that we are going to have a deflationnary period for the next 2-3 years to be followed by a very inflationnary period due to current mistakes from central banks (letting rate too low,etc..) and governments (pursuing deficits) trying to fight this interest rates will rise since inflation will be above 5%...

If I highlight the interest/inflation rates it's simply because investors will require better investment return on real estate (over 8%) so either rent shoot up tremendously or price decline sharply...My guess is that second will happen...hence my advise to wait 1 year or two but buying within 3-4 years when inflation data is worsening (highlighting the failures of central banks to maintain price stability)...

Anonymous said...

I heard in the states, only 20% or so houses taken back by the banks are put to the market for sell. You could guess why they keep the rest.

The similar could be played in Finland. Many could be "bought" by the institutions with the "gov" money (actually tax payer's money). This is a kind of manipulation, isn't it? Though,it cannot solve the problem, but make someone alone rich.

Andrew said...

I think we need the news on the ground to be worse before such low interest rates are not effective.

When the shops and roads begin to be emptier and perhaps when mortgage rates shockingly double to 3.4% it might become more interesting. At the moment not much is happening very fast.

HousingFinland said...


I agree you need a catalyst but at the monent it's a house of card, the system is holding since more debt is being thrown at (government stimulus - guaranty, banks lending to "sound" businesses or it seems)...but the limit is slowly being reach...

2009 is coming as surprise that the economy is stabilising since during all 2008 interest rates have been lowered to "crazy" levels and banks had started to throw stimulus and entered into high deficits...

How about 2010? I think it will be a wait and see game. A little bit like when the car battery is flat and you try to kick start it...maybe it will maybe it won' worse you got to change the battery (i.e the current financial system)...and start using your ressources in a better way (not based on "unsustainable" debt).

Interest rates will still be low, very low next might evenb be possible that the ECB will cut interest rates to 0.5% if the baseline scenario which is anemic growth doesn't materialize (which I think it won't based on the current economical state of the global economy and the high debt leverage to almost all market participants).

As I said people have short memories...

in 2001 we had a very mild recession that lasted well into 2003 (infact the correction started in late 1999)

in 1990 we had a severe recession that lasted well into 1995

in 2008 we had a very severe recession that will end in 2010???-- at least common sense and historical data will tell us that it will end if it was a normal recession in 2011-12...

The other point is that the current state of any economy cannot handle increasing interest rates i.e even 3% which will be 3 time the current level which put the economy to its knee...


Regarding the US, I think they allowed their housing market to Europe most of the country have had a "socialist" approach in the past years by providing interest subsidies, tax incentives which is just tax payer money thrown by the window and just delaying the unavoidable.

Andrew said...

In some ways the USA approach is more socialist. Easy loans and if you get into trouble you just hand the keys back with no major downside.

HousingFinland said...

A correction to my previous comment ...I meant

"2009 stabilization should not come as a surprise since during all 2008..."

instead of

"2009 is coming as surprise that the economy is stabilizing since during all 2008..."


Easy loan was somehow due to the greed of some players...but it's all due to the mistakes made (intentionnaly or unintentionally) by the central bank - the FED - to fight the IT bubble and the corporate scandals...

Now regarding the household liabilities i.e they can send their key to the bank and run away from the mortgage obligation ... is totally absurd system, it's hard to understand why they have had such system in place?