Monday, 15 March 2010

"Red light" for the Housing Market

"IN 1625, Pieter Fransz built a house in Amsterdam’s new Herengracht neighborhood. As the Dutch Republic rose to global power in the 1620s—with Amsterdam developing the world’s first major stock market as well as commodities and futures markets—the price of the house doubled in less than a decade.

Over the succeeding three centuries, the price of Fransz’s house was knocked down by wars, recessions, and financial crises and rose again in their aftermaths (Shorto, 2006).

When the house changed hands in the 1980s, its real value, that is after inflation, had only doubled over the course of 350 years––offering a very modest rate of return on the investment."

"From a historical perspective, it is not the trend but the volatility in housing prices that is distinctive"

"Starting in the late 1990s, prices of houses in Herengracht, and more generally in Amsterdam, doubled in value in 10 years, only to begin another sharp decline. This recent run-up and correction in prices in Amsterdam was part of a global boom and bust in house prices.", loungani, March 2010

A good lesson can be draw out of this article - After all it's all about equilibrium, what goes above or below its long term average tend to correct toward it. Somehow this what I have been suggesting all along in this blog see this post.

1- The ostrich effect

I think humans somehow behave like ostrich, they derive a strategy based on a very limited amount of information and tend to extrapolate it: like the ostrich that put its head in a hole and thinks it's safe...

Instead, this blog try to give you a eye bird view, a 10 000 mile view that allow you to see the whole picture... at least not to become an ostrich.

2- The FeedBack Effect
"One reason house prices go up so rapidly is that the supply of housing cannot be adjusted quickly.

Another reason lies in the interaction of housing and financial markets. Because houses serve as collateral, an increase in house prices can have a feedback effect: once collateral values increase, banks are willing to lend even more to households, which feeds the house price boom.

This feedback effect can arise regardless of what caused house prices to go up in the first place—demand momentum, government policies such as low interest rates, or institutional changes that increase the availability of mortgage credit."
We are spot on with regard to the causes and the effect it created. Clearly the mortgage market grew faster than the supply of housing , then the wealth effect took hold pushing price higher and higher in a similar fashion as in the musical chair game; when the music ends, one is set to lose and lose big in this case.

3- The conclusion
"First, house prices in most countries still remain well above the levels observed at the beginning of the upturn in the early 2000s. Second, house prices remain above rents and incomes, which, as discussed above, often serve as long-run anchors for prices. (...)

"That leads to an uncomfortable conclusion: house prices in many countries still have room to fall."

I think it is clear that from this point any rise in housing price is only strenghtening the case for the current housing bubble, but more worryingly bigger it grows, more damage will be inflicted to the economy.


Eric said...

Great article! Thanks for the Highlight and link.


Anonymous said...

Excellent article again
Have a look to these statictics

also try to figure out the ratio between Finland’s public debt to its exports ...

Billpete002 said...

I also noticed in Helsinki a lot of advertisement boards are empty again. This only happened during the fist downturn - so I think the companies are figuring out what we've known all along - this growth is fake and unsustainable.

HousingFinland said...

Thanks Eric!

regarding Finnish current account, it doesn't forecast anything good forward.

You may have a rebound in Finland but this is mainly due to various national and international just temporary in nature as Billpete point out.

So I'm not a buyer with the king of uncertainty in front of us especially with regard to the housing market that is grossely overvalued.

Andrew said...

record low interest rates are not a temporary stimulus. It is something that will continue while there are problems. Our mortgage is 1.96%

Rates will not rise until inflation breaks higher and other government interventions have already been withdrawn.

the more you guys tell me about economic problems the more i will know rates will stay low.

I see Switzerland have or are about to raise rates though and a very small number of countries have raised rates.

Anonymous said...

The problem to Andrew's observation would be:

This round of bubble-refilling can be done more with printing money or simply adding zeros to the end of the number. There is no lender of real wealth anymore. All understand the cheating game now. So, if the counties do so longer, their inflation will come up quick and big. We will see more Greeces and Piigs. Then, some may go bankruptcy and refuse to pay back the debt like what did by Icy-lands... How smart and creative our world is! If everyone opt to and benefit form cheating, who is going to do real work?

HousingFinland said...

"record low interest rates are not a temporary stimulus."

You are right we could clearly have a Japan type scenario...low interest rates for an extended period , an ageing population and an economy that relies solely on export....while housing prices keep on falling for 2-3 decades...that is my worry , that is housing as an investment.

Anonymous said...

Japan? Oh, yes, you would be scared to know how much debt they have now. The time bamb is ticking in second... How could such as "har-working" nation ends up into the current situation?!

Andrew said...

People who think that inflation is going to suddenly come up nowhere quick and big and be uncontrollable dont understand economics. Money is not printed into existance. It is created from debt where the debt is borrowed from the future to be repaid as inflation rises by destroying the money collected in taxes or it is borrowed from some other entity.

The fact remains there is infinite power to create massive deflation whenever a government wants when we have a fractional reserve system. Creating inflation in such a system once it is strongly levered is harder.

At the moment the governments want the correct amount of inflation to suit their own objectives.

Anonymous said...

Yes, yes, there are such casino-mics and its cheating theory.

Oh, yes, the icy-lands created a lot of money, more than they could take, by borrowing. Unfortunately, those supper wealthy icy people have been a delared bankrupted country and, now, a rogue nation. Let's see if the Piigs, US... will go the same way.

Let's all borrow to create money and consume...

HousingFinland said...

"At the moment the governments want the correct amount of inflation to suit their own objectives."

They cannot control very much except in the very short term- making the problem worse each time...after all it all started in the late 1990's (if not in the late 80's) a snowwbal being rolled it get bigger and heavier to push...there will be a breakpoint (6 month - 2 years? but not much more otherwise the consequence will be even more disastrous)

The economical engine in Europe and US has been broken however it has been supported by the emerging market engine that is now showing an overheating situation - the engine can blow now the emerging market have to normailize the condition not because the economy is better but simply that their own engine doesn't break (hence raising interest rate if it is not too late for them see Japan in the late 80's)

So to be franck the economy will relapse, the issue if not is "if" but "when"

Andrew said...

Obviously a government can create inflation any time they want. Just ask Robert Mugabe. What they cannot do so easily is create economic value. Meanwhile steady inflation is easily possible in a recession.

Local lending policies in China are surprisingly tight. Far far tighter than in the west. And bit by bit the US engine is getting closer to running without support.

But problems will persist for a long time

HousingFinland said...


I agree with You, one has to be carefull on what central bankers and politician say on the one hand and what they ultimately do on the other...mainly in a way to keep alive a system that is clearly not sound and based on unsustainable asumption and foundation.

So yes one has to have both scenario in mind in order to readjust its strategy... In the worse case moving to where the growth will be i.e Asia if politicians and Central bankers decide to go away from some vital principles (that is not to use the inflation poison pill to erase the debt that they are currently accumulating and its growth accelerating)

So far, I trust the European central bank, the alternative would be disastrous and would be marked as a black chapter in the European history from a monetary, social and economical perspective.

:-> hope I sound gloomy enough - I can do better :->

Andrew said...

We can trust the ECB to keep to their devaluation mandate but what we cannot trust is that the measure of devaluation will be accurate. On the other hand you can buy nice tasting one liter of German UHT milk from Lidl for 66 cents.

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