Friday, 21 May 2010

What Has Really Happened?

Strangely enough - more I talk to people about the housing market and more I get statement such as "the market is behaving normally", "I told you so, price are going higher". Of course, for not a moment, they think that price could stop from going higher or claim that if price were to adjust lower (be it, a single or half digit drop - they can only assume that as a temporary phenomenon, since price will, undoubtedly, resume higher -as they have always done). In addition, the most sceptical of all, will think that housing could correct, however deep downtheir heart (maybe brain too), they do not believe in that scenario for a second.

Now - Without being the one trying to ruin the party - it's time to remind that we are really in unchartered territory with regard to the economy as a whole and to the housing market in particular. A bit like when water reach the boiling point, any solid argument in favor of a sound economy and robust markets (stock and housing) can be pulverized into nothing... actually as a sign, all the digits of 100 degres celsius appear in the yeat 2010 (at this moment you should hear in the background a soft and delicate music to make it a bit like melodramatic)

Right - Let's go to the point - by having a fresh look at the chart above, the housing market chart as produced by statistics Finland, you suddenly notice a very strange phenomenon. a V shape (in some culture it's pretty vulgar, in some it's a sign of victory... for me it's the sucker smile ...)

So- How can price could go down and up so fast? after all, unemployement didn't shoot up in a matter of a quarter, in the same line employement didn't resume upward in the meantime. On top of that, there was not - yet- a massive wave of selloff and banks were and are still lending.

I have some idea, but I ask you what could explain this sudden drop and rise? this could be the key on when the trigger that will lead to double digit historical correction that will dwarf any other housing crashes.


Anonymous said...

It is the free money pumped into the market since early last year.

The "always-up" will be true if the value of the FIAT cash goes down towards zero.

Eric said...

The explanations I hear from most of the recent buyer I've talk to are:

1) Improved property selection,
2) Low borrowing rates that are current on offer (even though they are getting into floating loans); and
3) A rather strong confidence in the recovery narrative.

Not my opinion though...


HousingFinland said...


Price started to go down at about the same time that interest rates were lowered and about the same time that Euribor rates headed south:

Interest rates:

Housing Price:

One could argue that the interest rates, takes time to propagate (its effect) into the real economy (about 6 months-12 months).

One could say price at the time combined with an interest at 5% was the breaking point for the Finnish housing market.

In the meantime, price have gone up - much more than what Statistics Finland publishes - I'm not sure where the fraud is coming (either from the source, the one that provided the raw data to the Statistical agency, or is it the way they calculate the prices or both).

We are in a dilemna, that the current situation cannot be solved the way it was in the 70's (different demography, dominance of the western world, an explosion of the price of raw materials due to their mis pricing during the previous period, a serie of grave monetary mistakes in some key countries such as France, Italy, Spain etc...).

Even if interest has had a stabilising effec, it would only contribute to slow price deterioration or at best engineer a stabilization.

I think there is more to that.

HousingFinland said...


I'm not sure what you mean by improved property selection - As far as I remember, Andrew were highlighting scarcity of property (Andrew, correct me if I'm wrong, :-), something I never fully agree since builders will never stop building from a profit perspective or political one).

or are you referring to Price/Quality improving?

Regarding interest rates, I gave my view on the previous comment - it could only partially explain what is hapenning - of course, Finland is the "subprime" of the northern hemisphere with 98% of loan provided by mostly non-Finnish bank (Sampo, Nordea it will be good to have a view on their market share on the mortgage market) that are based on variable rates .

Another important element, is the fact that the housing market recovered at about the same time as the stock market.

Billpete002 said...

Don't forget government incentives like the account for first time house buyers (or people who have not owned a house in 6 or 9 months [can't remember the time period])

This account (that is an investment vehicle) provides 3k for first time buyers but is running out soon due to its sunset clause.

I am sure that the government has also propped up the construction companies with building projects to keep then in business (why do we have a debt in Finland otherwise?)

Also, I think you said this earlier HousingFinland, but just to make sure your graph is inflation adjusted. Otherwise that would be a glaring error - as real housing prices typically do not increase all that much - if your graph is adjusted for inflation than the price rise is without a doubt (as I believe and many on this site) that Finland does indeed have a housing bubble.

I think with the bond actions and the austerity plans (that are even hitting Germany and France!) will come home to roost in Finland - we cannot afford the socialized welfare plans with a declining population (and real wages - last I checked were either frozen or headed south).

I know we have disagreed on here whether inflation or deflation is going to occur - but I think in the short term in Finland it will be deflation then followed by a bout of stagflation (inflation with high unemployment). At worst the bubble will pop when interest rates go up - similar to the US - when rates went up to a certain point people with adjustable rates defaulted (and now there is proof that even non-subprime is defaulting in the US) - with 98% of Finland's housing market in adjustable rates it will mean 98% of those people will be facing higher costs on their house(s) and those who lose their job or did not plan on increased rates will default (no different than the US.).

Anonymous said...

Hey H.F.,

Yeap, people saying that places with better qualitative factors (Kitchens, bathrooms, views, etc) came on the market since the 2H09. Nothing to do with my own opinion, just sharing...


HousingFinland said...


In fact, the graph on the post is inflation adjusted - of course if inflation is not taken into account then the graph is much more drastic:

Here is one view of that:

I'm not even sure, how they took into account the currency could even be more dramatic..but then again in the past 30 years we broke all the record of "dumb" financial innovation driven mainly by greed supported by bank recklessness and the very invisible hand of the regulators...all this allowed a system to develop into a monster...maybe this is the way turning point happens or decline are triggered in developped society over time ...

Anonymous said...

Where will the price go? Is € really weaker than $? Who are the most irresponsible in the casino contest...?

Maybe, you get some answers from the video at

Andrew said...

housing Finland

In my price range there was very little property i was interested in and inventory fell all thru 2009 while prices of harder to sell property were noticeably reduced. As an example Architect Selim linquist's museum protected house in Pitajanmaki came on the market in 2008 at around 520 was last listed at 430 and sold for 370. It was bought in 2005 for 425.

Total detached house inventory in Helsinki is still quite low for the time of year

Andrew said...

I had better revise my comment on helsinki detached housing inventory via

At 138 houses that would be normal for the time of year. The most i have ever seen was around 152/4 in July in the few years i have been looking at that site. The figures on Etuovi were similar but i dont check them now.

If house prices are going to go lower then i would expect to see much more than 160 detached houses advertised

Anonymous said...

"If house prices are going to go lower then i would expect to see much more than 160 detached houses advertised"

I would think that if house price are disconnected from reality, I would surely see less detached house in the market as there is no market for them (no one can afford them - the builder stop building them instead will start to build very small flat/non-detached 2 floor houses as this is the only possible purchase when affordability collapse - 90 000 euro for a 20 m2 for some might look affordable - surely if I was a rabbit I would buy that, eyes and ear closed).

Andrew said...

Just because many people cannot afford a Fiat Uno does not mean that a few people cannot afford a Ferrari.

Anonymous said...

Andrew, the housing market is really driven by the mass not by the few... the few will only distort the market during time sales volume are low.

If the mass cannot buy a fiat Uno, the market will propose a Lada, or start delocalizing the production in order to meet the demand i.e lower the cost , lower the price.

Andrew said...

My point was also that the critical mass can afford a fiat uno even if many cannot.

Obviously people can afford to buy the houses being sold each week in helsinki.

And obviously what some people think is affordable is therefore irrelevant

Andrew said...

In case anybody is interested the increase in activity from the Katla volcano under the Mýrdalsjökull glacier can be found here

Anonymous said...

I do not believe one second that the prices are going up thanks to a better selection ... (Eric, I have clearly understood that you do not share this opinion)
Now, there is a sort of mistery ... I would have thought in the first place that the relatively cheap money is an explanation ...
An interesting discussion could be an behaviour aspects ...
On the supply side: say people had been used for sharp increase of prices plus they believe that the current price reflect the real value of their home (a dream ...) therefore they do not accept to sell at a discount their home (as long as they are not forced to do so ...)
On the buy side: behaviour again ... brainwashed people who do not think and believed what the media (I mean the lack of independent media) tell them for the price ...
In the middle, the banks who do not want to have to write off too much bad debt/loans ...

The results ... the banks encourage the brainwashed buyer to buy at a high price ... plus some insurance in the middle to cover the risk of job losses for the buyers ...

Anyway ... I am waiting to see the bubble bursting ...

Billpete002 said...

"Obviously people can afford to buy the houses being sold each week in helsinki."

No different than in the US during that bubble. People were buying homes like crazy. 'if you weren't in housing you were an idiot' - 'you couldn't lose!' - 'the sky is the limit!'.

Just because people can buy a house with a loan doesn't magically dispel the notion of a bubble - in fact it highlights it - that people are buying into homes they can only afford as long as the rates stay low. Once those rates go back up (and they will be very high to offset the dumping of euros to failing states) - people will not afford their homes and have a choice - default and restructure or leave the country in an attempt to avoid payment.

Andrew said...

If rates rise to the point people default it will have a massive deflationary influence and therefore they will never be required unless inflation is already present.

Prices are always in a bubble in our money system.

Andrew said...

so doom and gloom is back and it is game on! FFS :-)

HousingFinland said...

I think most the answer have been well highlighted in the comments.

I would add that of course pension fund (i.e VARMA, ILMARINEN) played a vital role since it seems that they are indirectly the buyer of last resorts (in term of volume) - the same apply for agencies that "buy-ToRent" (i.e VUOKRATURVA) associated with Government policies that exarcebate the conditions (stimulus in place, municipality zoning, etc...).

I think the market has recently wake up and would not be as nice as in the past decades - inconsistencies and incompetence will be punished.

So to my opinion, we are not out of the wood for at least 2-3 years at least.