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?



Andrew said...

As an exporting nation Finland will probably manage with the much lower Euro. 1:1 or lower is possible with the USD. Not long ago the euro was at 500 to one ounze of gold. Today it is 1000.

Total doom seems to have been avoided for a while to come and now it is just the long haul along the bottom of what is likely to be an inflationary recession where policy makers seem likely to protect endangered banking interests in places like Austria Spain Ireland Germany Greece and France etc.

Short of a revolution i cannot see policy being changed.

I dont expect hyperinflation. I dont read the mainstream media or have a TV.

Anonymous said...

On the topic of risk...although very carefully worded it seems to me that the Finnish FSA is still worried about the risk banks are taking in giving out housing loans.

The two points that struck me were that banks should calculate the affordablity of a loan on a period no longer than 25 years, and the second is that it seems too many banks are still giving loans of over 90% of the market value of property.

Link: //

From my point of view if the FSA flags too lax lending standards at a time of a contracting economy (the BBC recently had a big thing about Finland having in a double dip resession), then there is trouble is store for a lot of people and their banks. But I have no idea when the trouble will start to manifest itself (although it is often much later than I think it should).


HousingFinland said...

If the Euro is weak, it's simply that the European economy is weakening.

As I said the recovery miracle we have had in the past 12 month was nothing more than a mirage....throwing more money to a system that is burden by debt just worsen the situation...a drunken cannot be cured by providing more alcohol...

The export can be an advantage as long as the company provides competitive products that are innovative and keep or increase their market share ... so it's more than just a currency play...

With regard to commodity player it will all depend on China/US health in the month to come...this could be shaky.

HousingFinland said...

"...too many banks are still giving loans of over 90% of the market value of property."

Nordea, has managed to push it to 95%

"But I have no idea when the trouble will start to manifest itself (although it is often much later than I think it should)."

My guess is that no later than 2012 we will see a big slump in the housig market... 2011 is still the target and as time goes it becomes more and more realistic and is backed by how the event are currently unfolding.

Andrew said...

The european economy comprises the irish economy and the greek economy as well as germany and finland and so forth. Many believe the euro cannot survive. Most think Greece will default.

So one side goes down and thus propels the other side up while there is one community.

China has much tighter lending standards than the west, so if the economy slackens they can adjust policy.

Nordea told us they calculate the loan amount based on our ability to afford interest rates of 5%. So far with the recently rising one year Euribor, our mortgage would have gone up 4 euro per month if we were on a flexible euribor loan.

As for alcoholics being cured with more alcohol. The ECB method is to provide more beer with less alcohol - or something like that.

HousingFinland said...

"Nordea told us they calculate the loan amount based on our ability to afford interest rates of 5%"

And you believe them?

Andrew said...


Not sure what you are getting at.

5% is not a very high interest rate. We already pay 1.96% My mortgage in NZ was 9.38% with base rates at 8.25% in 2008.

We dont have a very big mortgage but they absolutely refused to give us more.

HousingFinland said...


I don't follow you too - are you suggesting that lending in Finland is pretty strict having in mind that current price especially in the Helsinki region are disconnected with real income, the fact that loan growth is still robust...

Not only I have seen around me people getting credit in a very easy fashion and I have not encountered a single perso whose mortgage application was rejected.

This will change when price start they downturn, since bank will take into account future depreciation as opposed of stability or growth as foreseen today.

Andrew said...


I have no idea about lending in Finland. I have practical experiences with Nordea.

You seem very confused however. ECB policies enable banks in Finland to have easy lending terms. Your own quotes show that Trichet is happy to ensure lending continues. Indeed he is worried it does not continue sufficiently. He is doing all he can to ensure credit is easily available.

In your confusion you praise him and condemn me.

You are saying something will definately happen while your hero says he will do all he can to loosen lending further to prevent it.

HousingFinland said...

"Your own quotes show that Trichet is happy to ensure lending continues"

Lending is needed - if it was not I think we would not be chatting as of today. In 2008, the market explored shortly this aspect, the outcome could have been terrifying.

So the ECB and other banks did in a very short time what central banks should not do in the longer time. Keeping rates that low and buying government bonds.

And again lending but to whom? - I think the confusion, we may have is that lending to the private sector - to the company that have sound business is necessary and needed.

Lending to speculators, to people who are ready to work for over 30 years for an overvalued asset - this is bad and this is exactely where I think it is crazy.

Today in the ECB conference, it was highlighted that lending to private sectors is still growing while lending to corporate is still shrinking - and that is where the ECB is hitting at .. definetly not what you are implying.

I think you are making a gross mistake by thinking the ECB will do whatever it can to keep asset price hight and support them at unsustainable level.

If you look at the US market the housing bubble has deflated and price has reach 2002 level where the credit bubble started and most probably will continue to decline until the mid 1990's level.

I think we should make another bet and see how the housing price will be in 2 years time. My view is that there will be between 30-40% lower than they are today inflation adjusted.

At the end, people behave like a hord, they follow the trend and it's up it goes up until tipping poing and when its reverse , the down trend start. An important feature is that the trend up is generally long and start slowly while the trend down reached its bottom very fast. That is why I am suggesting a fast drop, a matter of 1 or 2 years.

So what is the downside risk? that price don't fall and go higher :-) think about it.

Andrew said...


I dont think i have ever said the ECB will do all it can to keep assets prices high but i have mentioned the 60billion that was allocated to mortgage lending in june 2009 and reported that Trichet is commmitted to ensuring lending continues and inflation keeps rising and we now have his comments about supporting the banks and providing liquidity.

We also know the euro area are committed to propping up the southern countries who are threatening the collapse of french and german banks.

And we know that all of this is going on to avoid deflation and ensure inflation continues so that prices of things in euros rise.

HousingFinland said...

"ensure inflation continues" yes but less than 2% on average.

Housing has grown far above average tells me either prices will stay at this level forever or have a sharp decline so that the numbers adds up.

Inflation you can fight but not can put a drunker into a rehabilitation center while you cannot force people to drink.

And I'm seeing many drunk around as if they want the party to continue.

Anonymous said...

I have a very, very serious concern, which I would like to listen to all gentlemen here for your explanations of the whole picture seen from your sides.

Yes, we all know something unsustainable will discontinue for sure. The housing price in Finland seems to be one of such. However, why does the price continue to go up significantly (has been so since middle 1990s basically)? In our common sense, it should have been corrected a few years back already, but didn't and does not. Why?

The question itself is not my concern. My concern is, if the correction indeed happens some time in the future, what will be the damage? Here are a few facts that make me even further scared:

* In China, the banks can give a 70% (maximally possible) housing loan and, usually one can get a loan between 40% and 70%, where the average loan is roughly 55%. Their banks have much, much more cash reservation than western banks do. A report shows that a stress-test made there one week ago revealed that the Chinese banks could tolerate up to 30% housing price drop but not more. Then, if we do a related stress-test of the Banks in Finland now, how much the banks can tolerate the housing price drop, given their 90% or even higher housing loan??! How much better is Euro zone wise?

Maybe, it is a main reason why the banks and their representatives (e.g., the Gov and central banks) would stabilize the "market" with whatever means they have. Though, the story does not stop here certainly. I would ask how long they can continue to fix a bubble through creating another bigger bubble?

* ON the US side, there are two very, very high debt-repayment walls waiting for them, in 2012 and 2014. The only feasible way for them to repay the debt is to "print" more USD cash.

The trouble will continue for many year. I am now seriously thinking to move my wealth eastwards...

Back to Finland, do you still think the price could go down, but when?

Andrew said...


There is always a way to spend money. If necessary the ECB can buy major corporations or tracts of land or the entire share market.

Deflation can always be avoided because 95% of people will sell to the highest bidder.

HousingFinland said...

"Yes, we all know something unsustainable will discontinue for sure. The housing price in Finland seems to be one of such. However, why does the price continue to go up significantly (has been so since middle 1990s basically)?"

Because the government/Central bank - ECB entered in the crisis in better shape than it did in 1990's. However the finance have deteriorated very rapidly as a consequence of deploying massive stimulus, should another crisis (which is pretty certain) hits soon, then, this time, there are no more buffer - the consequence could be dramatic from an economical, social perspective.

But then, What could be the trigger?

I only see two- at the moment the engine that is propelling the rest of the world is Asia and the rest of the world. The world is supported by various stimulus, monetary policies and governemt intervention - its about to exhaust.

Asia needs the rest world as a market which in turn keeps the world engine running and keep some support to various commodity prices
(we slightly saw what would be the outcome back in Q4 2008, where commodity prices collapsed wher the rest of the world stop funtionning or getting more credit)

I will also be watching, particularly China and India.

An economy that dramatically overheats tend to end its business cycle in pieces with deep recession if not depression sometime.

China and India are overheating. China has not know a serious crisis for decades and has been growing at a outstanding rate - double digit growth.

The US bubble has deflated and is readjusting faster than its European counter where corruption or political maneuvoering are of the essence, unfortunately and we had recently daylight examples in almost all countries.

Coming back to Finland, So you ask, When the readjusment in housing price will happen?.

We are clearly near the end than the beginning of the housing growth process. As I said in a previous comment it is an assymetric growth, slow and lenghty while the reversal is sharp and fast.

Technically I think, the period 2011-2012 will be the most turbulent economically. in 2008 the crisis started, the policy makers and government fired all their bullets that resulted in a stabilization of the economy, in some cases sluggish growth but it allowed economical, social and political stability in 2009. 2010 still benefits from the inertie created by the policies created during 2008-2009 stimulus where in fact we clearly see dark shadows in the sky.

- So 2011-2012 is my bet for the readjustment -

However I would like to signal this is my personal view. I do follow it and I am not encourage people to follow my views I, m not a politicians : I says what I think, I do what I think it right for the current moment in time. It does not necessarly mean I'm right- just to be clear. I m also using this blog to communicate those views and hear counter arguments (they are welcome).

Anybody situation is different, one has to form its own judgment - everybody situation is different. I just wanted to clarify that in case it was not clear.

HousingFinland said...

"Deflation can always be avoided because 95% of people will sell to the highest bidder."

When you have historically a correction in housing price, it is always due to force sale - huge rise in unemployment or inability to repay its loan due to a reset of its condition (higher interest rates, no more paying only interest, or a job that pay less)

So in general in crisis, if you do not have the privilege to wait. Forcing someone to sell when a crisis has erupted and when buyers are shrinking , would litterally mean that the price is converging near to nothing.

Of course, this has implication in the market as whole since the price be set lower and lower... in a spiraling manner.

Another important aspect that nobody talk about, is the implication for the government as it has guaranted about 30% of all the mortgage market ... not sure the implication if the market were to go drastically lower .

Andrew said...


I was not talking about forcing sellers to sell.

Anonymous said...

Seeing as that the poll on this site implicates house prices going down with at least 5%, how do you explain the actuality that prices are still on the rise`, at least in the metropolitan area?

Isn't it just a matter of demand / supply where Helsinki Metropolitan region is still one of the fastest groing hubs in Europe?

Anonymous said...

"I am suggesting a fast drop, a matter of 1 or 2 years"

You said this already in 2008 and despite a crushing crises houseprices went up - not down.

How do you explain this?

HousingFinland said...

Isn't it just a matter of demand / supply where Helsinki Metropolitan region is still one of the fastest groing hubs in Europe?

Have taken some illegal substance? fastest goring hubs??? do you have some stats that back up that? I have been to Paris, Barcelona, London, greece ...and the difference is astonishing..

The problem with Finland, is its location you cannot do anything about it.

"You said this already in 2008 and despite a crushing crises houseprices went up - not down."

I underestimated the stimulus the government and other entities will throw at the first part of the crisis. I misiunderstood How hard they wanted thing not to change.

So it's ok, asI said they used all the power they had same as the Asian country and the developed country...for me the housing price could fall any minutes ..of course you may not understand it ..please bear another year then we can discuss. It's always hard to imagine something that has not happened but always easy to extrapolate something that has hapenned... in short, stop looking in the rear mirror, what I propose you is to have a forward looking view...

Anonymous said...

"do you have some stats that back up that?"

Are you saying you are not familiar with the demographic projections for the metropolitan area?

Here is one source at the drop of a google search (see page 3):

"A new demographic forecast puts the Helsinki Region among the fastest growing regions in Europe.

The forecast, published by the City of Helsinki Urban Facts, extends to year 2040. According to researchers Seppo Laakso and Pekka Vuori, the population of the Helsinki Region, comprising 14 municipalities, will exceed 1.5 million in 2022 and 1.7 million by 2040, as compared to 1.3 million today. The population of the City of Helsinki, today 577,000, will grow to 675,000 by 2040."

"The population of the Helsinki Region will reach
1.5 million by the end of 2025, and that of the Metropolitan
Area 1.17 million. This means that the
population of the entire region will increase by
300,000. The Metropolitan Area accounts for
215,000 of the growth."

"The number of jobs in the Helsinki Region in 2025
is estimated at 815,000, up by 166,500. The number
of jobs in the Metropolitan Area will be 700,000, or
up by 133,500."

2The growth in jobs and living space will require
plenty of new construction. The need for housing
construction until 2025 is estimated at 25 million
square metres of floor space, of which the Metropolitan
Area will account for 18.5 million square

Here is another source saying:

"The Helsinki Region will have 1,460,000 inhabitant
by 2030, which implies an increase of around
225,000 since 2004."

and here:

"On a fast growth track

Helsinki is one of the fastest growing metropolises in Europe. Housing construction and development of new areas for housing are key priorities for the City. To meet the need for new housing and to secure adequate workforce in the city, Helsinki aims at 5,000 new housing units per year, available for residents at reasonable cost."


"statistics reveal that the city is one of the fastest growing areas in the European Union. Within the last decade, over 100,000 inhabitants have moved into greater Helsinki and by the year 2030, government statistics predict over 1.3 million people will be living within the region.

Read more:

and here:

"it is predicted that it will remain among the fastest growing cities in Europe"

The other thing where I strongly disagree with you is that you say that deflation is more likely than inflation. I'd say inflation is bound to take place and we can only hope it doesn't happen too fast. Have a look at this:

Granted I am not a financial expert but I do know that you need to get the fundamentals right in order to make solid projections. If you agree that inflation is hard to stop (and often higher than reported) houseprices are not likely to go down unless for example tax deductions would be removed, but it doesn't that would happen anytime soon:

So, in short, demand remains high, supply remains low, hence prices rise. The only reason that there is overvaluation might stem from the tax subsidies for house owners.

The other typical thing going on in helsinki is that families increasingly move away from helsinki for affordable housing, very similar to what happens in other metropolitan cities.

HousingFinland said...

my views with regard to population projection are to be found here :

HousingFinland said...

"So, in short, demand remains high, supply remains low, hence prices rise. The only reason that there is overvaluation might stem from the tax subsidies for house owners."

Exactely the same scenario can be applied to the peak of any bubble be it Finland in 1990's, the US in 2008, UK in 2008, Spain in 2008 etc.. etc.. this argument has always been used to justify irrational prices.

Tax subsidies on interest rates? you mean that it explain the level of prices we have? ... Interest rates are at historical low, so subsidies based on that are also at historically low.

I think the debate has started because it is now the best time for the government to ramp down those measures as it will marginally affetc the consumer or frankly the one that is voting... the issue is the medium term whe interest rates will start rising then the government will have deeper problem if he has not tottaly removed those measures.. I think he has a year or two...especially when its deficit get further in the Red

Anonymous said...

"So, in short, demand remains high, supply remains low, hence prices rise."

It seems to be a good assumption, but not necessarily the root reason.

How many people are easily living in an Asia city? There are many over 20M cities there now, grown from ~500M to there in ten years, while the housing price is not going the same way.

In short, it is the money people have or the banks like to provide that pushed the price up as such, not the number of heads, no matter human heads or animal heads.

Then, how much money is available now? Let's look that the Finnish GDP droped significantly in 2009 and maybe in 2010 and onwards. Do they still have the same demand as before? If they have, I do a doom in the future for it.

HousingFinland said...

Actually there could be another trigger for an housing correction .. a political, the election of Marie:

The 41-year-old Kiviniemi, minister for public administration and local government, is set to replace Prime Minister Matti Vanhanen, who announced in December he would not run for re-election as head of the party.

HousingFinland said...

one important element that I do not know how regulators and banks are handling, is the following :

"Hintatiedot ja muut kustannukset
Velaton myyntihinta 311 000,00 €
Myyntihinta 93 300,00 €
Hoitovastike 266,80 € / kk"

The real price is 311 000 euro, however I think you can take a mortgage for 93 300 euro at your bank, the rest is paid as a rent...because the rest is a loan that the housing company has taken on your behalf (in simple word) you end up paying a sum that can drastically rise since it is fixed or set at rate that is currently advantageous.

So in fact, bank can gloss themselves by saying they require 25% of deposit, which will mean 20 000 euro (for the 93 300 euro) where in fact it should have been 5 time more: 100 000 euro.

Not sure if the argument put above are correct, if so it could also explain why first time buyers can still buy...of course these is the recipe for creating the "Finnish subprime" if that is true, the problem could bigger than I thought?

Any deeper analysis on that?

here is the sample I took :

Anonymous said...

An interesting blog
The best extract:
"So when Ben Bernanke waxes poetic about how the economy won't fall into a double dip recession don't believe him. Remember, this is guy that had a hard time spotting the housing bubble."

To make it clear, his folks at the ECB are not better than him ... meaning that they are not getting it ... which is really bad for us ...

I do agree for the prices (inflation adjusted) to go down by 40% but not only in Finland, this will be the case in other economies in Europe ... France, UK ... may be not Germany though ... we should line up in order to buy some Deutch Mark ... Merkel should start an auction with a waiting list ... lots of people will be in the queue ...

Now coming back to the housing market correction, usely the faster the correction is the better for the economy ...

I am really worried for Finland (a country that I really appreciate ...) and actually all of us here ...

My wife told me that she saw a queue of people waiting for the State bread and soup in Helsinki ... which made me feel really sad ... this will get worst as the GDP will still go down this year and the unemployment rate will go up ... soon the Finnish banks will have problems ...

2012 sounds intersting ... let s see ... we are entering the most interesting decade in terms of challenges ...

I do not agree with the demand and supply explanation for the price to go up ... lots of Finns will tell you that there is a lack of space in Helsinki for building ... no sence ... just take a flight and go above helsinki ... I do not see any lack of space ... in comparison go to Hong Konw in order to see what it means a lack of space ... Who is making sure that we cannot build in those empty spaces? the Finnish State ... the result ... the price of land for building is going up ... it is like the state fuelling a bubble by limiting the available space for construction ... scarry ...

I am currently saving a maximum of cash ... the reason for that ... well soon again cash will be king .. not assets ... the problem with cash is the inflation ...
Thus why I am hoping to see the Deutch Mark coming back ...

Anonymous said...

"I am currently saving a maximum of cash ... the reason for that ... well soon again cash will be king .. not assets ... the problem with cash is the inflation ..."

I gather, a perfect situation for those major owners of the banks and goverments would be that there is no winner for a normal person, no matter you are owning a house or cash. They will have a way to take part of it away.

Any way to escape from the trap in your opinion?

HousingFinland said...

"Any way to escape from the trap in your opinion?"

At the moment I recommend cash. As the threat of deflation is real, At least in the year or two to come.

Changing the strategy can be done overnight-So you can have this as a baseline scenario if it invalidates you change it - I would also advise to have a trading/investment account in few banks if you have cash.

Because if inflation were to be in the pipeline, than it will better to buy some stocks, or even swap to safer currencies - the best would be to have an account in other countries (see the argentinian case, with savers their deposit in dollars...).

At the moment, the only card in the favor of owning housing is if the policy and politics are bluntly lying and not respecting their mandate. In this case, the worst would happen: hyperinflation.

Even in this case, cash holder, should have already some company to invest in the following sector: Energy, resources and real estate. I would recommend an exposition toward emerging market (there plenty of Fund and ETF that can be bought...but not now, I think it's too early see the following paragraph)

However, my views is that the deflation scenario outweight the inflationnary scenarion in the short and medium term. The reconforting aspect is that China, never wanted to slow in the past two years while the rest of the world is slowing down. So surcapacity is a clear threat.

On top of that pressure on wage in the western world is too strong to warrant wage/price spirale as seen in the 70's.

To that you should add the fact that government must put in balance their budget (Finland is irrelevant in the picture) - we will be talking to major economy readjusting their budget : Germany, France, Spain, Italy... Europe look like is going to push the world into a big recession if this austerity measure are applied and seem there will be.

The housing play at the current juncture is more a gamble than anything else. If deflation was real threat then you will be with a highly illiquid asset. And if you are forced to sell then you could lose big. In the case there is high inflation, the deflation scenario is invalidated then just buy a house. But at the moment, it could be the surge up we saw was maybe frightened investors that are diversifying where to put their cash and also the ponzy scheme still at play (people sell to each one pushing pricing and higher with the help of investors and banks - but this has an end as all housing crisis).

My view is that I do not believe a second that the current housing price reflect the fundamentals.

Note: see Disclaimer,

Andrew said...

I am assuming by the way that the headline for this thread of running out of fuel was created as a result of looking in the rear view mirror at data prior to April while writing in June?

I was under the impression orders had dramatically picked up for April and things generally are picking up if we look at this kind of rear view information?

Some of this was somewhat predictable because demand from China has created massive demand for forestry products amongst other things. And we now have a bit of a recovery in the USA and in Europe. And the Euro is much lower.

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