Monday, 26 October 2009

Finnish Housing Indebtdness (Updated)

By looking at the data provided by "Statistic Finland" (see reference) , one will not be surprised to learn that Finnish exponential indebtdness growth is behind the phenomenal surge in housing witnessed since 2000.

The following charts will try to demonstrate that we are currently walking on thin ice... It underlines the country's politicians and/or economists inability to oversee a situation that went out of control in the past 10 years.

Since the data has been gathered by "Statistics Finland", income has always been greater than credit, however since 2008 the situation dramatically changed...

In order to compensate for the difference between the income growth (linear) and asset price growth (asset inflation : housing, food, land, rent, etc...), credit was used to fill the gap hence the exponential growth witnessed.

Now Nordic banks are extremely nervous to see the unemployment growing since the amount of debt hold by private household is worryingly large. Should the deleveraging of the household happen, the consequence in the economy will be felt for many years to come, in particular the housing market will be greatly impacted.

Now, let's go back in the past and try to underdstand the root cause of this housing bubble. So, in order to have a housing bubble, you need to have more demand than supply. In order to have more demand, bank only need to provide more credit in order to boost the amount of transactions, and indeed this is what they have done, reckless lending, non regulated financial market that went "nuts"...Where investors were purely driven by greed and where consumers were viewed as a possible channel for reaching quick profits or high bonuses.

This is what the following chart demonstrates. The number of transactions for housing purchase have been multiplied by more than 3 in ten years (1998-2008). The same phenomenon was observed during the previous reported and well publicized bubble (1981-1991).

It is true that since 2009 the situation has reversed (unfortunately the data is not available from statistics finland database). The number of transaction has collapsed and the interest rates on housing loan has fallen markedly. The latter will probably affect/distort temporarly the indebtdness level and allow a "temporary" window of transaction growth. I insist this is temporary, and it is a side effect of the central bankers to deal with very severe economical conditions.

In addition, the Loans for house purchasing growth (year-on-year % change) shows clearly a continous weakness since the peak reached in 2006 (Reference :

Builders have understood that the market has turned and have drastically slowed their contruction ambition, as demonstrated by the evolution of the number of building permit granted. So on the one hand the professional have understood that the market has turned while on the other hand the media is pushing into believing that the housing price (in nominal or real term) will continue to grow and that it is sustainable.

See below the evolution of the number of building permit granted (reference : :
To conclude, I will say that we have had a credit bubble that fueled the housing and stock market. In the past 12 month, the economical situation went to an abrupt change and pushed central bankers to take incredible measure to stop the global economy from falling a cliff and overall sustain social stability more than wealth preservation.

I'm still convinced that the housing correction is overdue and a low will be reach in between 2010-2014 which was my baseline scenario since end of 2007 before the financial crisis was starting to be the main headline... however we are in a very unusual situation where past economical and political model have been damaged, and to that extend we will see the emergence of a new economical paradigm and see the emergence of new leaders. It will take time and the impact will be unknown, hence the need to adapt one's view with regard to possible economical development in general and to the housing and stock market in general.


Anonymous said...

HousingFinland, I guess the only available way for all the governments and central banks to go is inflation. This has been the effective way for "re-distributing" or, actually, for robbing people.

They have found that, if you kill the numb mass slowly, they would never notice that. As a result, the purchase power of all the currencies has been going down continuously and much more quickly than the sperm count, since early last century. Obviously, we have dilute our sperm with extra water because we have been shooting them more than we could produce. In the currency side, the situation is much, much worse, every so-called financial institution can actually issue the currency note through loans, shares, add digits to the end of some numbers... In brief, if the robbing is so effective and cost-free, why not inflation??

HousingFinland said...

"I guess the only available way for all the governments and central banks to go is inflation."

True but they have no control on inflation on the medium to short term.

So far interest rates are at historically low levels (can't go much further down) the end it's up to the consumers (the majority) and the way they behave (credit)...

Finland has clearly no control no leverage but can only navigate as best it can during this financial/economical crisis and mitigate risk to a smeltdown of consumer confidence and consumption of its small open economy.

Inflation, in the manner of the 70's is impossible. During that time it was normal to have its salary being increase by 10%-15% inline with inflation.

Today, salary could at best stay around the same level. some are more worried to keep a job more than trying to see its salary sky rocket....

So no worries about inflation in the medium will come but not yet ...we are only starting the deflationnary trend (and central bankers know it since they push the key interest rates near zero for an extended period, in vain to figh deflation...)

Anonymous said...

"Finnish builder YIT on Wednesday reported its pretax profit falling by 47 per cent year-on-year to about 30 million euros on sales of 815 million, down by 16 per cent from the year-ago stint."


The downward trend would not surprise you I guess.

"Island Crow"