Thursday, 2 July 2009

Is 1% key interest rate too high for Finland?

"Sweden’s Central Bank Cuts Key Rate to Record 0.25%

Sweden’s Riksbank unexpectedly cut the benchmark interest rate to a record low 0.25 percent, predicting the rate will hold at that level until autumn next year, and said it will offer a financial package to banks." - July 2 - Bloomberg

In Finland, last inflation reading was 0% in May, amid strong downward pressure on almost all prices (ranging from food price, real estate, rents, car to various type of services).

If it is not deflation, it feels like it.

Arguably in 2004-2006, European interest rates were to low for Finland and resulted in a massive credit expansion - a double digits figure that fueled almost all asset prices.

Nethertheless, congratulation Sweden...devaluating your currency has allowed you to become competitive against Finnish companies...that is the price to pay for Finland to have adopted the Euro.


Anonymous said...

This question is off topic, but do you know whether many people are yet getting into negative equity in Finland?

Already in the UK many are now in negative equity with many more to come.

I suppose in Finland those who took on large mortgages in the last 4 years or so will go into negative equity. But perhaps it will take some more time in Finland. Am I right in thinking that the Finnish housing bust is running around 6 months behind the UK?


HousingFinland said...

Thanks novus

I think the negative equity time bomb is still building up since banks are still lending astronomical amount to the last fools.

with regard to the Finnish market it can be 12 to 18 month lag.

In 1990's, while most country were well in their housing correction Finland was still building it up, until it collapsed under its own weight in 1991.

Construction builders are still sticking to their guns and sellers are still keeping their price even if they can't sell: the full panic has not yet started...the Finnish psychology might be a bit different to the one in the anglo-saxon world where they are more pragmatic.

Here is what I mean with a discussion with a Finnish Home owner:

"It's a bad time for seller but a good time for buyer", an average home owner, July 2009

By that he meant, people have the most difficult time to sell if they can i.e at the inflated price

But then they think it's a good time to buy since interest rates are at historical, astronomically low levels...yet the seller forget that price are as well at generational record level.

Anonymous said...

"But then they think it's a good time to buy since interest rates are at historical, astronomically low levels...yet the seller forget that price are as well at generational record level."

Yes, I've noticed from Finnish media reports that they are pushing the "interest rates are low" selling line.

However, as we know prices are still crazy and if interest rates are near historical lows which direction are they likely to go in 3 or 4 years time? Well, up seems the most likely direction.

Some people seem to think only of the short-term monthly cost but it is a long-term debt.

In the UK most mortgages are for 25 years. How is it in Finland? Are 15-year mortgages more common here?


HousingFinland said...

Here most mortgage are for a period of 20-25 years. While most mortgage rate are on variable rates, the length get extended toward 30 years dynamically since the loan payment is often stable (in most popular mortgages)...

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