Monday, 28 June 2010

Finnish Beauty Competition

I think everyone has come recently with an housing advertisement that has a abherent pricethat is totally disconnected from reality but yet professional real estate agents and/or banks are often behind the sale. So I thought it would be good to highlight those cases for fun - A beauty prize could be given on a monthly basis . Such examples can be found easely on sites like Etuovi or oikotie

The charateristics should demonstrate the current Finnish Housing Bubble:

- Physical aspects: "kissable lips and inflated bottocks"
For example , a flat from an old buiding, cheap material or construction techniques. It could also expose the discrepancy between the asset and the proposed value. etc...

- Geospatial aspects: "walking on the sea"
For example, flats that are about 100 m or less than a rail line or highway. Some house that are build on potentially dangerous location demonstration poor health, or land conditions (noise, high traffic, mould, radiactivity in some cases, etc...)

- Financial and Marketing aspects: "in the kingdom of the blind, the one-eyed man is king"
For example, financial montage - a current and massively used technique from contruction builders/banks to attracts buyers bypassing the unfamous "vigilance" of the regulators. Or Also, how images are used to enhance the aspects of the dwelling in order to lure prospective buyers.

Here is one candidate found after only 10 sec search:

Candidate 1 (link)

Physical aspects: dirty, old, electril cables attached to the building, no architecture (chidren drawing type architecture), no parket, chicken style boxes and very small. For 21 m2, it looks more like a "jail" cell than a flat.
Geospatial aspects: No parks around - no space or trees
Financial aspects: Price 6500 euro per m2

Monday, 21 June 2010

Mr Liikanen on the Finnish Housing Bubble

The Finnish economy has been slow to come out of recession. Both GDP and exports continued to decline in the first quarter of 2010.

On the brighter side, the employment situation has stabilised during the course of the spring, and the seasonally adjusted unemployment rate has actually fallen slightly.

On the other hand, the recent rapid rise in house prices contains some risks. ‘When deciding on a loan in Finland, both households and banks should assess the borrower’s ability to service the debt beyond the current low interest rate environment,’ Governor Liikanen emphasised.

In fact, all the policy makers are "touching wood", after all they consumed almost all the possible artifacts that were in their monetary and fiscal policies toolkit (ultra low interest rates, euro falling and higher state deficits)

Since they do not clearly know where the next shock is coming, the question is would they be able to handle it.

Coming back to Mr Liikanen, indeed confidence as you outline between the lines is key - but regulation, something the central banks failed to adress seem to still operate in Finland (otherwise how would you explain the current double digits inflation in housing price?).

Wednesday, 9 June 2010

Running Out of Fuel

"June 9 (Bloomberg) -- Risks to the global economic outlook have “risen significantly” and policy makers have limited room to provide support to growth, International Monetary Fund Deputy Managing Director Naoyuki Shinohara said.

Most advanced economies are experiencing a “subdued” recovery, Shinohara said in a speech in Singapore today. “A key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted.”"
I think we all knew that the past year recovery was essentially due to historically low interest rates that gave some oxygen to debt-trapped consumers and the keynesian intervention of states that pushed futher in the red their budget deficit.

So yes, the economy recovered or let's stay stabilized but at what a cost? Today we learned in the case of the Finnish economy that it is still contracting even with the massive stimulus and guarantee that have been injected in it.

Worryingly the only thing that keep growing and steadely is the "True Fins" Party - the Finnish far right party that seems to get more and more partisans. Hope this is not the canary in the coal mine.

So what's left to policy makers and what's next?


Monday, 7 June 2010

Monetary Roundup - Eliminating "The Noise"

I thought it was good time to clarify some views on the monetary policies in Europe and around the world - as it is key to the housing market and will tell us whether or not policy makers are serious on fighting inflation.

In simple world, would policy makers allow a repeat of the 1970's period, where debt burden was somehow reduced by allowing high inflation to take place. For me the answer is "NO", I think we will head to period more like the beginning of 80's or 90's where asset price deflates to readjust to people's income as opposed to the contrary where income readjust upward to the asset level (i.e. 1970's).

In Canada, where a speculative bubble has developed in the housing market have started to tighten their rates :

"The Bank of Canada raised its key interest rate from a record low today, the first Group of Seven country to do so since last year’s global recession, and said further moves will be “weighed carefully” against future growth in Canada and elsewhere.", 01.06.2010 - Bloomberg
In the US, where the housing bubble has deflated in the past years and where usually the readjustment take place first, are starting to hint the exit strategy:

“In the medium term, like the Federal Reserve and many other central banks, the Bank of Korea will have to manage its exit from accommodative policies,” Bernanke said in pre- recorded remarks to a conference hosted by South Korea’s central bank in Seoul today. The Bank of Korea “will have to weigh the risks of a premature exit against those of leaving expansionary policies in place for too long,” 31.05.2010, Ben Bernanke
While the Fed will raise interest rates from a record low before the economy returns to “full employment,” Bernanke said officials don’t know when that process will start. The banking system isn’t fully healthy and lenders are “cautious” in providing credit, he said.
In Europe, the president of the European Central Bank, Mr Jean-Claude Trichet, is on communication campaign, making sure that the latest move by the ECB (huge guaranty for Greece and co) are not mistaken for a relax stance on inflation or misled with a Quantitave easing strategy.

Interview with Jean-Claude Trichet, President of the ECB,
conducted by Gerald Braunberger and Stefan Ruhkamp on 19 May 2010

FAZ: But by purchasing government bonds, you’ve crossed a red line. Has the credibility of the ECB suffered as a result?

Trichet: There has been no crossing of any line. Our line is price stability, and our credibility is derived from achieving this objective over the medium term. The Governing Council of the ECB observed that the effectiveness of the transmission mechanism for our monetary policy was being severely hampered. We are not increasing the money supply. By contrast with what other major central banks have done, we are not purchasing government bonds in order to inject liquidity into the markets. What we are doing is fundamentally different: we sterilise. We ensure an unchanged stance of monetary policy. This is why the liquidity supplied is immediately being absorbed again in its entirety. We have to do whatever we consider appropriate in order to ensure price stability. If we always listened to the criticism directed at us by politicians, social partners and financial pressure groups, we would be unable to fulfil our mandate.

FAZ: The crisis stems from excessive debts. We are now fighting the crisis with even more credit and even more money. How do we get out of this spiral?

Trichet: We have a number of ways of providing the banks with additional liquidity support, which will automatically be discontinued when the situation improves. Owing to the serious tensions observed very recently in the markets, we have now reintroduced some of these support measures. But you can be sure that we will exit those measures in a timely fashion in line with improvements in the functioning of the markets. We will never lose sight of our primary mandate of ensuring price stability over the medium term, with the right monetary policy stance. There is a clear separation here. By the way, note that the growth of the monetary aggregate “M3” is currently negative. I have been committed to price stability all my life. For me, inflation is a tax that would mainly hit the poorest and weakest in our society.
Another interesting interview:
Interview with Der Spiegel
Interview with Jean-Claude Trichet, President of the ECB,
conducted by Thomas Tuma and Christoph Pauly on 13 May 2010

SPIEGEL: In a talk he gave to the Spiegel a few months ago, J├╝rgen Stark, the ECB’s chief economist, said that the ECB was not permitted to buy government bonds. Who is right?

Trichet: I have already said that this is explicitly authorised by the Treaty. Over the past 11 ½ years, we have ensured price stability in Europe and have successfully met our target of keeping inflation below, but close to, 2%. We have done a good job fully in line with what the best central banks in Europe were doing before the euro. Those who believe - or, even worse, are suggesting - that we will tolerate inflation in the future are making a grave error. The Governing Council of the ECB did not hesitate to increase rates in July 2008 in a period of financial turbulence in order to ensure price stability. We were criticised at the time by the markets. This is a measure of our inflexible determination.

SPIEGEL: But the banks, too, are being spoilt by the ECB. As part of your so-called non-conventional measures, you have again made it possible for them to borrow countless billions. In doing so, are you not handing out even more play money to the financial markets?

Trichet: Again, we do what we believe we have to do in all consciousness in order to be able to deliver price stability over the medium term. We do not take into account pressure groups and lobbies. We supply liquidity to the banks so that they can finance the real economy and support the recovery, they know that.