Monday, 1 February 2010

Finnish Housing Market - Biggest Bubble EVER?

THE Biggest bubble EVER, you have been warned... Of course, nobody knows in the next century there won't be one on such scale...regulators and investors never learn and greed seem to transcend time...

The last uprise was expected as discussed in the last blog article on the previous housing price release see link , so it was clearly expected to have such a rise and was in fact necessary to remove any doubt on the fact that we are clearly experiencing a bubble.

You don't have to be a genius to understand that the Finnish housing market is at a very critical level.

Heuu, about genius, is there one in the room?
“It appears that consumer faith and confidence in the economy has been channelled into the housing market”, says Anssi Rantala, head economist of the OP-Pohjola Group.

Rantala does not believe that the prices will continue to rise this year as sharply as at the end of 2009, especially in a situation in which unemployment is expected to continue to grow.

“Housing construction will start to recover gradually, and interest rates will rise. Another reason why the increase cannot continue at such a high rate is that people’s ability, and desire, to pay are limited”, Rantala says.
Had they not put his title, I would have guessed he would be working for the banking industry.

I need to chat with him...let me take my mobile phone .... "tut tut tut..."
"Mr Rantala?"
"This is HousingFinland on the phone, from the Housing bubble Blog"
"Coming back to your latest media comment, I would like to remind that historically speaking, when interest rates rise so do housing price... and instrumentally the economy"
"Don't you think that your arguments, the one you put forward in HS are flawed?"
"I beg your pardon?"
"bip bip bip..."
Apparently, it didn't like to debate... back to interest rates, when they rise, it simply mean that inflation become a threat (i.e salary rise, price pressure increase, and the economy is back to growth, etc...). I don't believe a second that such event will occur end of this year...on the contrary.

Now it doesn't mean that there are not cause that explain why the Finnish housing market is distorted...As I said earlier see link , the Finnish housing mortgage market is based on variable interest rates for an astonishing 90% of it.

Moreover Interest rates will stay low simply because the economy will resume shrinking, maybe end of this year and next year (maybe the next and the next). Current growth is based on borrowing future wealth...obviously there is a limit to that (see Spain, Greece). So stimulus and monetary effect will fade and the economy will resume its downward spiral as its foundation and its banking system is not sound.

Indeed, there is a price to pay for having allowed an economy to grow for about 20 years on ever increasing and ballooning debt level, failing regulation and greed- at some point, you reach the breaking point, and we have reached it.

For sure, interest rates will rise but not yet maybe in 4 (10?) years? when the deflation threat become smaller than the inflationnary/hyper inflationnary threat.

In addition, historically speaking, a massive correction should occur from both stock market and housing market (strangely, every 20 years, the economy transform itself for good or worse).

If one is hesitating whether or not to buy, it should ask itself: "is it safe to buy at an historical peak, a level even greater than the one witnessed during the 1990 bubble (inflation ajusted)?"

Maybe it will be worth to make a comparison between the Nasdaq bubble when euphoria took over all common senses and where banks advised private customers to invest in the stock market , even pushing them to borrow for buying stock... let's see the chart:

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 is not true and may be removed at any stage, at anytime (you like it or not) - the article above is meant for entertainment purpose and only targetted to trigger a smile or two...


Anonymous said...

So, those who did not panic and invested in the Helsinki area made about 10% (
So much for your pessimistic forecasts :-)

HousingFinland said...

Did not panic ... made 10% ...are you talking about housing or stock market?

The horizon for housing is for about 20-25 years while speculating in the stock market can be 1 day to 1 year.

10% has to be taken with care as it is on a very thin market (very low amount of transaction compared to previous years) and in addition concerns mostly very small flat (10m2 to 50m2) where a bunch of investors have flooded to try to cash in on the back on the younger generation or the poor (on the renting market)...

So the fundamentals are indeed very poor...hence the reason of this article to warn (maybe the last warning according to my analysis) about a very high probability of a severe or historical correction.

Now you may be free to buy or advise others to buy...we will check the outcome in 1-3 years time.

Andrew said...

Nouriel Roubini telling us that he believes things are going to be difficult in Euroland

HousingFinland said...

So Mr Roubini aka "Mr Realism" seem to be again amongst the few that dare to say to the public the reality as it is without fearing the consequences totall opposition with politicians and media.

The other explanation to this "irrational exuberance" that seem to be hitting the Finnish housing market is the lack of honesty from politicians, bankers, economist and media on the Finnish landscape.

So be it, more you keep people in the dark (current absurd pricing, as actually happenned in 1990) about the current situation and more the correction will substantial...

At least this is my view and doesn't engage anybody...just sharing my thought...

HousingFinland said... example of the current disconnect:

Andrew said...

Well there is plenty of media stories of doom and gloom. This has been relentless for over a year now.

If you add in the worries about country collapse and bank collapse and incredibly low interest rates from the ECB people are driven to protect themselves by getting out of cash.

For the deflationary scenario to work people have to be happy leaving money in the banks

Maybe you need to emphasise how robust strong and incredible the the banks are? :-)

Billpete002 said...

People will leave money in the bank if it's invested in TIPS or other inflation protected products.

Or if they believe their investments will be higher than inflation (or they are going long).

But as for normal savings - which is a waste of money, generally speaking, yeah these people will lose out if they leave their money in the banks. I suppose the only hope they have by leaving their money in increasingly insolvent banks is the government will repay them 200k (unless this figure has changed?)

- on a more economical note, if the government didn't guarantee bank accounts of x amount it would decrease the moral hazard banks have towards investing our money - because we would be much more privy to take our money out if the bank was investing foolishly, but I suppose the general consensus is that the average Pekka on the street doesn't know a thing about money/banking/finance/or anything and is expected to just hand over his money like a sheep each month...

Andrew said...

The european gaurantee limits were raised from 20k to 50k per bank account in october 2008.

Andrew said...

More of the usual media commentary on the economy

Konecranes Q4 pretax [b]dives 75 pct yr/yr[/b]

"According to the Confederation of Finnish Industries´ January business tendency survey, the very weak business cycle continued to weigh down Finnish companies," the EK added.

"Significant recovery has not yet taken place, even though the business outlook did gradually stabilise towards the end of last year."

Billpete002 said...

Thanks for the correction Andrew - I believe I was still thinking in terms of dollars ;I

Andrew said...

BillPete, Quite a week for gold. And deflationary news is from time to time really worrying me so i see a relationship there. Oil also looks like it will go back to the 50's.

Billpete002 said...

gold is will be volatile for the near future with Greece, Spain, Ireland, etc. and the US.

To be frank I think Greece is a side show compared to Spain and the US.

Spain is in much worse shape - especially the banking and housing sectors than Greece.

While the US is facing a currency crisis - I just loved Obama's address stating he wants to curb the deficit - yet, wants to spend more by increasing the debt ceiling, even though a debt is not a bad thing it is when it immediately adds to the deficit...

I'm expecting a rally in materials and commodities. The price of oil may slip down further, but I doubt OPEC will be keeping it that way - I recently read an article about how they are considering dropping supply because there's too much oil sitting on the market.

HousingFinland said...

Thanks Andrew and Billpete, for your constructive comments.

Concerning Gold, I still think we will be heading for record high in the months to come, over 1200 or higher...reflecting the potential disastrous situation that could unfold within a year or two.

The idea could be supported by the fact that the worse in front of us (contrary to what high profile economists and politicians which have been repeating that the worse was behind and of course that was largely supported and echoed by the could partly explain why the consumer confidence is at pre-crisis level and are blindly continuing leveraging themselves (debt) to absurd levels).

So at the beginning you had a banking crisis, the government and central bankers came to the the same banks (that were rescued indirectly by the citizens) are speculating and betting against states and currencies ready to make them fall driven by greed and quick and easy gain (see Greece, Spain, Portugal,... UK? China? Russia? (US?-maybe not), etc...)...

So it looks like we have a "financial system" that cannot be controled and has no remorse and neither memory...

I'm just wondering how all this will state are now putting tax payer money in the frontline for a system that is clearly not sound and that is architecturally weak(based on keynesian model that has reached its limit) with wrong governance processes (regulation keeps on failing even as today, power concentrated in too few players).

To my view 1990 crisis looks like a drop in the ocean compared to the current global crisis as we have now almost all the players that are very highly leveraged, burden by debt (consumers, Banks, States) and contrary to previous episode, the emerging markets that are overheating with unsound monetary policies.

Contrary to what Billpete said, I think we could still see a period where raw material and petrol could collapse (30$?) due to the fact that the economy has the potential to relapse to similar level or worse to that of end of 2008 (this time without possible fiscal stimulus and monetary actions)...

Obviously nobody has a crystal ball and the event has unfloding so fast and the situation has never been so hard to predict.

To finish I would like to highlight a sentence fron Trichet last press conference Q&A, regarding the banks:

"First of all, obviously I prefer that the banks are making money. Because when they were losing money it created a catastrophe. We have to be consistent: we ourselves have been in a very difficult situation, because we had a terrible crisis of the financial sector. Second, profits, in our opinion, should serve not to distribute enormous amounts of dividends to shareholders; not to distribute enormous amounts of bonuses, packages, remunerations to the members of these institutions;"

I start to think that Trichet is slowly but surely losing its control on banks and that banks will look at their own interest...Trichet the last "Don Quixotte"?

Billpete002 said...

I agree with the fall in commodity prices in the short-term, i.e. within the next several months. That just means it's an even better time to buy - silver going to $10 an ounce? great I'll buy up even more! - in the long-term, i.e. later this year or next year those prices will rise.

After that rise - as proven in a bet by two economists - the real price in the long run (over years) for commodities will always go lower - because of new technology and substitution for different material.

So in short - hold gold, oil, silver, etc. for the next 2-3 years then sell off, unless of course these (though unlikely) become backed by some currency (or a basket of currencies)

Andrew said...

Viking line cancelling a spanish Ferry cant be good news for spain or for the Nordic tourist and trade outlook. Nokia sheds hundreds more jobs. Tax increases? Plenty of strikes.

Anonymous said...

You put all my thinking with the right words ... just wait and see ... I had predicted a double dip recession and we are getting there slowly though ... no recovery before 2012 is my guess ... but only a painfull correction ...
Would be great to have further discussion with you ...
I will follow your post with deep interest ...