Friday, 30 April 2010

Finnish Housing Bubble - April 2010

"Compared with the corresponding period of the year before, prices went up by 11.3 per cent in the whole country. In Greater Helsinki the growth amounted to 15.7 per cent and in the rest of the country to 7.7 per cent."Statistic Finland, 30 April 2010

The words of the eighteenth-century Anglo-Irish philosopher, Edmund Burke, set the context and put a parallel between 1990 and 2010:

Those who don't know history are destined to repeat it.”

Let's try to evaluate the arguments that could support 1- the existence of an housing bubble or 2- on the contrary, arguments in favor of a correctly priced housing market.

1- Arguments for the Finnish Housing Bubble

First of all there are many compelling reason that we are currently witnessing a bubble of the same of bigger size that the one in the 1990's.

From an economical perspective

The reality was that in 1990, the economical prospect for the world economy was more brighter than it is today. The globalization was at its enfancy and the prospect were huge - it was the propeller for the "rich" country.

Today, the emerging markets - mainly China, India and Brasil are overheating and the risk of their economy to encounter a substantial recession is very high (see the following article demonstrating the irrational exuberance of the Chinese housing market that could hit substantially their financial system or internal consumption: Chinese Bubble about To Burst). India monetary policy has also been far to loose combine with massive capital inflow threaten to destabilize their economy (see article : India Capital Control) .

In the previous recession, Finland managed to get rapidly from its recession thanks to the vigour of the world economy as well as its tremendous positionning on the technology front. It was most probably not politically/policy driven but due to the know-how supported by strong enterprenorship that developped during the 80's.

Today, the same miracle try to be re engineeered by the state supported by policies toward the energy sector - the clean energy bet. In fact, it is mainly driven to rescue a dying forest industry that is shedding jobs at speed light. In any case, it is an overcrowded market where only few players will rip most of the benefits - it is no clear as of today, the outcome of those policies.

From a monetary perspective
Interests rates have been falling in the past 20 years, to record 1%, an all time low.
This has pushed asset price higher and higher as there was little incentive to save.

However, it is without doubt that we have at hand an historical low for the European interest rates and it is not hard to forecast that in the next few years, the probability to have higher interest rates is very high - one would not be surprised to see at least 8% at some point especially if the Euro weakens due to the current European crisis that has just started and that will most probably let long lasting scares from a monetary and economical view point.
The amount of drawdown for housing loan is far below the record reach in 2008 which coincidate with the first high before a correction took place. While the trend in price resumed higher, following an exponential growth similar to the one in the year 1990, it is not marked by a new high in loan drawdown- to me it looks like a speculative move, hence I urge to be very cautious as we may have reached an historical high (a muilti generation high?).

Other reasons could explain this sudden rise in housing price:
-fear of the banking system, investors with capital that exceed the guarantee feel safer to invest in housing than trusting the banking sector.
-fear of very high inflation due to an exceptionally accomodative monetary policy
-shift from pensionner toward small accomodation (1 room flat) - those quite easely push price per meter square very high. There are evidence that construction builders have been focusing on building very small dwellings.

From a population perspective

We are dealing with a completely different population characteristics that will be marked by huge amount of retiree that will in the years to come flood the market with housing whilst the population size is merely stabilizing (the birth rate being under 2).

In addition, rising unemployment and reduced immigration due to economical prospects can only worsen the situation.

From a consumer sentiment perspective

The consumer confidence is at level similar to the pre financial crisis - that is to say that confidence is again at almost record high for this decade.

From this point, it is easy to imagine that a reversal will happen - which obviously will be an indication of weakness either in the economy or housing market.


We have had unprecedented fiscal and monetary stimulus in the past year which objective was to stabilize an economy that was contracting at a very rapide pace.

This resulted into distorting many asset markets (stock market , housing market). While in many advance economy the previous peak of 2008 has not been reached, Finland on the contrary has gone even higher - this is could be partly explained by the fact that 98% of Finnish mortgage rate are linked to variable rates.

2- Arguments in favor for the rational in the current price increase and level

One of the neighbourg, namely Russia, has tremendous economical potential that could boost the export industry and allow to keep employement in check. (however, demography is an issue in Russia, also the country is mainly energy dependent - if a shock were to happen in the global economy, then the Russian economy could do particularly badly as witnessed in 2008)

Wage have been growing steadly with the Union having negotiated high wage in the past 3 years (however, current negotiation clearly highlight a weakening position with very low wage growth for the next few years. In addition, due to the acceleratio of wage growth, the country has become uncompetitive, pushing further delocaliation in key sectors (IT, Forest, Shipping Industries etc..))

Interest rates could stay low for a longer period sutaining the current price.

Inflation could show is head especially in Finland if the European Central Bank focus its monetary policy tuned for the country in the South (Greece, Spain, Portugal) or the biggest economy such as Germany, French and Italy. (This will further hurt the Finnish competitiveness and could also result in higher than usual strikes combined with social tensions)


Billpete002 said...

So here I am already surprised by this morning's article about housing rising 13-18% year on year this month and then this article comes out:

with the original here:

So basically the banks are pushing mortgages like crazy trying to get the last minute suckers in.

I fear that when the ECB raises those rates it will spell the doom of many who placed their one way bets on their house.

I also find it hard to believe that so many people are still buying houses (i.e. high demand) in the worst world recession since the Great Depression and on top of that with rising unemployment in Finland, tons of strikes because wages cannot keep up with housing or standards of living, and talk of more taxes (fat tax etc.)

I think by late summer early fall we will know whether Finland has really set itself up for auto-destruct or not.

Andrew said...


Ordinary folk dont want to hold gold that can be stolen and instead protect themselves with property.

Can you really not understand what is happening??

Billpete002 said...

It's not just gold that could be held but just holding money. Or investing it into AAA bonds.

I am sure there are more things than buying a house, hell buying some woodlands in Finland is a better choice than a house - at least with the woods you can sell the trees or other resources on the property (mahla? sand?) etc.

Housing is an awful usage of money especially if you are overbidding for something in a period of rising unemployment, strikes, and fiscal/monetary insecurity.

Billpete002 said...

Also, I keep hearing about gold being stolen (you aren't the first person to say that to me) I don't know of a single person who has had their gold stolen..

Maybe if you're carrying around a sack of the stuff in a back alleyway in some poor section in Helsinki with a sign saying "I got gold in my bag so mug me!"


Gunnar said...

I think it is you Andrew, that doesn't know what is happening. It's the same ol song, like with the United States and the subprime. If you cannot see it, I feel sorry for you. Dumping money to a objective of subjective value, like a house, is not a great investment during a world economic crisis.

Andrew said...

Come on guys. Do you really think buying government bonds is a good idea when the coupon is so low and inflation is almost certain to come?

How many people have half a million euros in gold in their back garden?

Today counter party risk is a real worry.

Since my counter party was a bank I decided it was better I owe them a devaluing currency rather than them owing me the devaluing currency.

You cant have it all ways to your advantage. Either the banks are safe or they are not safe. This board said they were not safe. I formed my own view.

Andrew said...

More or less the Greek situation played out as i anticipated, though i am a bit surprised i will be paying for it. Presumably we can rely on Greece to not pay us back and for the ECB to swallow the losses with a few instant digits which should cover my taxes quite nicely i suppose once the same thing happens a few more times with a few more countries.

And i suppose a bit of welfare here and there should cover everybody else.

Andrew said...

From Calculatedrisk blog:

"If there are any violations, payments will be stopped. Then Athens will once again be threatened with bankruptcy," Schäuble told the Rheinische Post newspaper

Can you imagine the germans saying to Greece that we warned you and now you are going to have to default on your debt so that German banks will have massive losses?

And all the greeks have to do is increase the retirement age and taxes and have a recession, and make Greeks unemployed.

Nobody can be serious that Greece is expected to repay this money.

HousingFinland said...

humm the root problem is greed, Fraud and the expectation that one can earn a lot with really producing anything.

Greece has had those characteristics so is the finnish housing market, the stock markets...

Anonymous said...

The interest on housing loans should start to rise soon according to some economists:

"Finland's top economists predict a gradual rise over the next year in the Euribor benchmark interest rate......

The Euribor is currently just under one percent, and according to the poll averages is expected to rise to 1.2 percent by October and 1.6 percent by April 2011. "

The expected rise is not a lot, but it might add a break on the rise of housing prices in Finland.

"island Crow"

Anonymous said...


"The Finnish banking sector’s claims as of 31 March 2010 on Greece, Ireland, Italy, Portugal and Spain, ie on the ‘GIIPS countries’, totalled about EUR 4.5 billion. The banking sector’s exposure to the countries concerned can be considered as being moderate relative to the sector’s risk-bearing capacity.

The information is based on country risk reports collected by the Bank of Finland from banks operating in Finland.

Claims as of 31 March 2010:

Greece 448
Ireland 694
Italy 1,494
Portugal 400
Spain 1,494
Total 4,530

"Island Crow"

Anonymous said...

HousingFinland, There may be another usually hidden but dramatic force that lifts the housing price for the time. It is the Finnish industry. The companies making non-housing products find their profit is nearly zeros if not negative and, on the other hand, one could make a lot of profit through housing speculation easily. You could guess what would happen: Those companies would invest their capital into the housing market. The housing market in Finland is small, but basically monopolized by the organized interest group. A little amount of water can fill the baby cup, you know. In this sense, there will be no housing bubble as long as they would like to make money through shooting the housing price up.

I see the real economy of Finland is quickly shrinking. It is getting virtual rapidly. Euro zone seems to be the same. I worry on this -- The Euro zone has no enough military power and Euro-denominated natural resources to support its getting virtual anyway. So, this way will be the road of suicide for Finland and the bigger, Euro zone.

Eric said...

There is nothing wrong with debt, and its application in the purchase of an asset, as long as:

1) Your future cash flows will be high enough to service the borrowings. I.e. it's interest over the tenure of the borrowing and principle in a "timely" manner.

2) The lender is offering an amount that is at a level inline with (likely below) the underlying asset's intrinsic/fair value. As lending very close to or beyond this value exposes the lender to what is essentially "equity" risk, or beyond, on the collateral asset itself or the borrowers present value of their future cash flows. A more volatile level risk that I personally don't feel properly priced into the loan.

Much like our Host, I'd argue that both of these are still problems in the Finnish/HKI real estate market which have been recently hidden, and actually exacerbated, by the unsustainably low base rates in the EUR area.

With regards to the first I've talk to people in their early 30's that have taken out loans which they likely require 40 years to repay. So they expect to own their homes in their 70's. In these cases the lender faces a great deal of risk with respect to time and what will occur to their borrower's income a cash flow over that time. The worst case scenario for the banks being the extreme negative events in the early stages of the loan when the outstanding principle is close to or beyond the collateral's intrinsic value. Too bad for the banks, one could call today's economic environment rife with significant downside risks which I personal don't feel will allow borrowers the time to make significant headway in their principle repayments prior to some material risk being realized.

This leaves the second point and the question of intrinsic/fair value. If you are mad enough to think that today's prevailing interest rates are long-term sustainable then, I have to admit, you could can justify the relative values of borrowing to own over renting. However, if I model anything closer to historical interest norms, and just forgot the doomsday story of 8-10% base rates, the relative value of owning quickly disappears. I am not sure how pro-buyers are doing the math to justify today's market valuation, but I know from people that I talk to that they are not doing any math and just following the heard over the proverbial cliff even after seeing their fellow American, British, Spanish, Irish etc. Lemmings splat at the base of that same cliff.

Interestingly, they seem to think that if increase the height of the the cliff by having the Government and ECB build a massive ramp at the edge, as they have with near zero base rates and liquidity measures, they might be saved from the same impact.

Oh well, I'll just let the devil take the "easy" speculative hindmost. :-)

Andrew said...


Lemmings leaping from a cliff in suicide is from a Walt Disney story with no basis in truth. For the film the animals were placed on a turntable to throw them over the cliff in enormous numbers.

And also in reality you cannot have 8% rates destroying exposed debtors unless you have out of control inflation requiring those rates.

So from where do you see the price pressures coming to create this high inflation?

Eric said...


It's a metaphor, get over it. Not referring to getting over the edge of cliff of course, because I assume you've already stepped out and are just waiting for 9.8m/s2 to kick-in. I mean given the locked-in denialest comments. ;-)

Yes, yes, I know it's actually 9.81m/s2. Just in case you feel like more "comma buggering".

And, no real need to comment on the potential drivers of eight percent, because my point was you can forget the requirement of even going close to those levels. You can be well short of them and still get close to expected break-even if you model even a 30 percent probability of a 10 to 15 percent fall in asset prices in the next two years and its impact on ones equity investment assuming leverage (i.e. D/A) in the 60 to 80 percent range.

Andrew said...


If house prices fall 15% i will be back to the price i paid and the house will have had a lick of paint and be worth more anyway.

As for the banks, bailouts is the name of the game today. How that works out i dont know and neither do you. But i think it is fair to say that whatever scenario you come up with you need to have bailouts in their somewhere. Otherwise it is not me who is in denial.

Eric said...


You seriously make me smile!!!

Thanks for that,

Andrew said...


Glad to hear that. One upside of the Greek situation is that Finnish industry that exports outside the Euro area looks likely to be bailed out by that. Euro at USD 1.0 by September? Then we get a chunk of import inflation and higher rates and the drama continues.......

HousingFinland said...

ok, I agree with Eric and also Andrew (yeah..went to extensive Finnish political camp training, smiling and agreeing with everybody :-))

In fact,I agree with Eric in the sense that deflation will be first however one should not be fool and think it will last foreever and the following could be more inline with what andrew suggest.

So there will be an opportunity to buy, but it has yet to open. My feeling is that the market is far too much optimist and price are historically 20-40% overvalued from their peak of 2008 (now it's just a thin market where big players are running the show i.e renting company VVO, Vuokraturva and pension funds diversifying from stock market where they have seen as fast their solvability be put into question, of course the state still funding the housing market for a political and employement reason).

So ... I prepared a small chart (sorry Andrew) here is a link

Billpete002 said...

Hello all,

It seems Helsinki is just waking up to less and less revenues:

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