Friday, 30 October 2009

Finnish Housing Bubble

Statistic Finland has published the latest dwelling price for the third quarter. It is worth to understand that those prices just reflect a trend not necessarly the reality as experienced and observed on the ground since Prices are overly underestimated by Statistics Finland (even if this institution is transparent on its methodology and how it gets the data).

As expected, it shows higher prices compared to the previous quarter however still lower than the peak reached in 2007. I

The following picture shows the forecasted trend before statistics Finland published its data and provided some analysis see post "Housing Price : Warming Up Exercise".

Now what can explain the latest rise?

You must understand that the last leg up is not due to fundamentals and it is not coming from an healthy market. Distortion are hapenning at many levels and are pushing prices into a very dangerous and worrying path that could destabilize the economy as a whole and in particular the banking sector.

Now the facts:

1- Interest rates for housing purchase

As you can see in the figure above, interest rates are historically low. This is giving temporarly some oxygene to people who heavely borrowed at variable interest rates in the past few years. Lower interest rates is as well distorting the market as it is bringing into the market buyers that would otherwise not be elligible to borrow large sums for housing purchase, especially the young buyers.

Now, I would say that if Finland had its own currency and interest rates setting, I would then say that interest rates could stay low for a prolonged period but it is not the case. It is the European Central Bank that control Finland monetary faith. Indeed, the ECB will have to raise interest rates even before inflation shows its head and that could then be highly inadequate for Finland economical situation. It could be earlier than people would think.

2- State Sponsored Speculation

The government has still maintained interest rates subsidies even after IMF recommendation to phase them out. This has contributed over other elements, to an overheating of the housing market in the past few years.

In addition, the state in conjonction with banks is "lurring" the young to acquire price inflated flat, here is what YLE reported (full article here):
"Special bank accounts intended to help young adults get home loans are growing in popularity. Since July, customers of these so-called ASP accounts are eligible for a 3,000 euro bonus from the state.

OP Bank Group, Sampo Bank and Nordea Bank have all reported an increase in ASP account holders."
and from the Nordea site :
"If you start saving right away, you can have the necessary 8 deposit lots saved and buy a home before the payment period of the state home saving bonus of 3,000 euros ends on 31 December 2011."
3- Finland Economical Situation

It is pretty disastrous , just have a look the latest GDP figures, it is even worse than the 1990 recession. In 1990 we had the beginning of globalization and the birth of a giant Nokia. Today we have curretnly emerging markets overheating by ill designed stimulus that are putting at risk their economical stability - those stimulus and interest cuts were put in place due to economical distress. Moreover the Finnish giant industry are all but struggling.

Finland cannot devalue its currency which was the ultimate solution to bring back competitiveness and boost the export market. The Euro is too strong for an economy that mainly rely on export.

4- Finland DebtNow there was some talk that Finland will borrow huge amount next year (around 10 billion euro). I'm just wondering if it is a way for the country to lose its credit rating .

One explanation would be that it's better to borrow before it gets too expensive. Finland need to borrow is massive since it need to fund projects in order to limit unemployement from reaching scary figures. There are as well massive needs to fund a growing and worrying amount of retiree.

Of course, it is hapenning at a time of political elections hence no risk to see tax rise around this time hence the need to borrow...

Indeed there is nothing as a free lunch what is borrowed today will have to be repaid so expect higher tax down the line. It is sad that money being used today will mainly go to banks and builders, one that enjoyed an easy ride over the decade.

Let's see what "Bank of finland" had to say about that debt:
"As in other countries, the accumulation of debt by the public sector in Finland is justified. It has made it possible to soften the impact of the recession. Fortunately, the financial position of general government in Finland at the beginning of the recession was strong, at least relative to many other countries.

A continuing trend of increasing indebtedness is, however, not sustainable. Before long it will be necessary to reach a level at which the debt ratio can be stabilised. The higher the debt ratio, the larger the primary surplus will need to be in the future. The primary surplus is the difference between public income and expenditure, excluding interest expenditure. Rising interest expenditure must then be financed by tax increases or by cutting other expenditure."

legal note: whatever it is said in this article is not of the responsability of the author , any reference to any entities may be accidental. Anything said above may not be true and may be removed at any stage, at anytime (you like it or not).

And again I warn people by the media (lobby driven) that distort or try influence people mind - as an example see YLE (which is one the cheerleaders) and refer to the post : "...get some fresh air"

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