Monday, 1 March 2010

The Housing Market, a Population Perspective : Part 1

The outlook for the housing market ( and indirectly for the Finnish economy as a whole) in the longer term are pretty grim, due particularly to its demography and population characteristics.

I will try to highligh few areas that are of interest in this domain. Let's first project ourself in the future to understand how the population will evolve (Part 1) and then extract the causes of why it is that way (part 2) and its implication on the housing market (part 1 & 2).

This is a quick analysis, if you have some information or any interpretation you are welcome to enrich the discussion.

First let's look at the population as projected by the European Statistic Agency (View Source).

The projecton scenarios are based on assumptions for fertility, mortality and migration. The method used for population projections is the "cohort-component" method as stated in their web site.

Based on that raw data, here is a graph where I added important facts:

Based on the projection, one could clearly see that the need to build in greater amount new dwellings has no ground. Obvioulsy, some Finnish economists or politicians have been lately voicing the contrary - maybe to add oil to the fire to the current housing bubble?

So I want to highlight here, it is the fact that intuitively we would think that there is a need to build more and more housing since wrongly we think that the population will be greater in the future than now...we just extrapolate in a linear manner - (in)fortunately the human way of thinking is linear - we think in a very simple manner (it is even more true for politicians).

Moreover, this analysis takes the most optimistic perspective (not taking into account household formation which obvioulsy will drastically reduce the need of housing starts).

So what are the implications? are we building too much? would the supply excess the demand?

Let's have a look at the housing permit that were given for 2009 as found in Statistics Finland web site (view source) :

So no there is no excess supply and the contruction builder have understood it and have ramped down the number of construction. Most probably, they are looking abroad for keeping their shareholders happy or changing their business model into for example building railways or metro (guess who will win most of the contracts and who is going to pay for it?)...

Obviously at the end it all lies on one particular parameter : Immigration as we will see in part 2 the fertility rate in Finland can barely keep the population at the same stop reading, act :->

Additionaly , immigration may also imply lower affordability level which could obvioulsy impact prices over time...


Anonymous said...

Population in Finland is actually set to grow according to Statistics Finland, which would affect the basis of your analysis:

HousingFinland said...

This analysis is based on the data provided by the European statistical agency.

With regard to Statistics Finland, they clearly mention the following:

"According to the projection, the annual number of deaths will exceed births in 2034, but net immigration is forecast to sustain population growth even after this. The volume of net immigration is assumed to be 15,000 persons"

The scenario I gave (Eurostat) compare to the one that they (Stat Finland) put is of a divergence of about 500 000 for 2030 which is a about 25 000 per year during the first 20 years... which is a massive difference... which I think It's utopique :-> (I think they have mathematical or modelling issues...see their GDP prediction in 2007-2008...)

Immigration boomed up to 2009 because of job creation during unsustainable world growth fueled by world wide ill monetary policies, world wide massive credit growth and world wide unregulated financial system, on top you had a (relativly speaking) local major baby boom and have not yet felt the impact of the local baby boomer of 1945-50...

However as they (Statistics Finland) honestly put it, it is only a prediction... :

"The calculations mainly indicate the outcome from the present development under the assumption that it continues unchanged. Thus, they should not be interpreted as descriptions of the inevitable."

"Present development continue unchanged"... I think this is were they are making a gross mistake or have a misunderstanding ... Current data shows te contrary, the situation is changing very rapidly and we are emerging into an era that will be different than the past 2-3 decades... (see the fall in GDP, record fall in tax revenue, record fall in the export trade)

Anyway I will try to clarify the detail with regard to the population as I think one or the other is misleading (Eurostat or statistic finland)