Monday, 26 July 2010

Finnish Housing Market: Damned or Doomed?

Well still on Holiday and pretty happy about the title of this post. After all, some sun and fresh(?) air work give your the optimism needed to write that type of title.

Indeed Damned or Doomed will be the question (of the summer?) we would be asking in the next 12 months, but what does that mean?

Damned : The housing market will follow the Japanese path, an ageing population, ultra low interest rates and forever-ever falling housing market. This scenario is alluding to a non existing recovery- no or little growth the next generation or so.

Doomed : The latest stress test is showing that everything is under control, banks should not be afraid to loosely lend and maybe optionally behave in the same pre-crisis way- after all everything is fine, the banking collapse was just a bad dream. So recovery you asked, recovery you will get. A growth of 2 or 3 %? of course, there is a price to pay, and it is a rise in the interest rates. oops, I should not have said that... you know - 98 % of the Finnish mortgage rates are linked to 12 or 3 month euribor rates and on top of that, there are technical subtleties used by construction company (NCC, YIT, etc...)" that play intermediary between banks and mortgage holders...

Hard to choose between a Damned housing market and a Doomed housing market, I let you choose.

It is worth to note that Statistics Finland will publish the 2nd quarter result for the Finnish - gravity free - housing market on 30 July 2010. I will come back on that...


Anonymous said...

Enjoy your holiday, the sun, the fresh air, the horse flies (if you are still in Finland for the holiday period)...

After your holiday it might be good to look at the effect of interest rates.

They are still low, but the Euribor has been climbing since a low at the end of March (just over 1,20% for the Euribor 12 months). In 4 months this has climbed to 1,40%, still low by historic standards, but for a 100 000 Euro loan that would mean an extra 16.67 euros a month in interest.

How high can interest rates go before they trigger defaults on housing loans? I think we are still some way from that point, but if the interest rates keep rising we should see some people getting into difficulty.

"Island Crow"

Andrew said...

Of interest to me one year Euribor has risen every day for the last month or so, since the ECB 'reversal'. Our mortgage if refinanced today would be .25% higher than when we began.

Meanwhile Helsinki detached housing inventory has fallen back slightly to 126 which seems low for the time of year going by the last few years.

Eric said...

Enjoy your holiday ...
The question is probably when will we see the Austrian School in charge?
I doubt it since this is not good for politicians ...

Andrew said...

people always seem to misrepresent keynes and austrian type thinking to have private freedoms to create financial chaos without adequate regulation to me just seem silly. We evidently got here today because the regulators did nothing to prevent the buildup of so much toxic debt. Who created the toxicity? Private corporations. If you have less regulation can you enforce a gold standard?

But evidently these are chasms of ideology that can never be crossed while you remain only on one side of that divide.

Eric said...

My two cents:

1) That "K vs. A" article sucked!!!

2) America is more interested in the option of simulating, at this point, because this recession has been significantly more painful for them then it has for the core of Europe. Here I am excluding the hog tied PIGS, and talking about the nations with real balance sheets. But lets face it, despite their size of their present challenges, America still has a very robust underlying economic base. Unfortunately though, their current unemplyoment picture is horrible and the suffering has only been exacerbated by the economic inequality that they've let creep further into their society over the past 30 year. (some data points:

On the other hand core Europe has not been hit all that hard to date by "GDII", and is worried about the PIGS (perhaps Italy too) sovereign debt risk hampering their own Banking System's Balance Sheets, and there own tax payers/voters, from the perspective of politically unpopular bank bailouts. So their primary (public, PR) focus is nagging on the peripheral European Nations to get their OPEX run rate in-line with actual Tax Incomes. Hence the Austerity mantra riffle-ling though Berlin, Paris, etc. However, we all know that if the delta in unemployment, or distance from what the major European consider their own Full-employment gets anywhere as bad in France, Germany, Holland, Sweden, etc they'll be throwing so much STIMULATION at the problem that entire work force in Amsterdam's Red Light District will be jealous of the feet.

The Other Eric

Eric said...

Just a little more data on why the US is thinking from a "Keynsen", or some might just say rational perspective.

The Other Eric

Andrew said...

All the mainstream economist respect Keynes. Most would have argued that tax cuts for the rich to stimulate the economy in some of the years gone by, or ultra low interest rates were not a good idea 6 years ago. Neither was it a good idea to have out of control deficit spending with little hope the planned liabilities could ever be funded.

Keynes was pretty clear that in the better times you cut back spending and withdraw stimulus and prepare for the bad times.

The greenspan era simply kicked the can down the road to this point in time.

Since we are now here i am sure keynes would have said 'well damn it guys! you have to spend today to avoid the catastrophe of tomorrow', but he would also be clear that when tomorrow comes and catastrophe is avoided that much of the spending yesterday will have to be burnt in taxes rather than spent in the new tommorrows.

People often talk about a failure of money but really it is a failure of people. Imposing a gold standard upon people will solve nothing that cannot be solved by imposing financial discipline upon people.

We are living in interesting times.

Andrew said...

I see the Euribor has finally stopped rising every single day for weeks on end. It has now risen 0.2% since we bought the house and fallen back slightly to the level of last week.

HousingFinland said...

Hi Andrew,

Frankly speaking I am more oriented toward japanese type scenario where interest rates stay low for an indefinite period and where asset price adjust slowly downward for also an indefinite period.

The only thing that would change this scenario would be a shock that would readjust asset price to their normal level, in a very fast fashion and all the weak players i.e banks and pension fund are eliminated or merge with other to survive.

So basically instead of having a two decade deflation trend , the best would be to have a good deflation for 1-2 year where the system purge all its excesses it has build in the past 20 years...that would be a difficult scenario taking into account the politicians and central bankers stance (and that is the current situation...).

Otherwise I have not time to post anything lately ... be sure I haven't bought a house or anything similar (i.e jail cell) my perspective is i.e. sharp deflationary shock that will peak in 2011-12...something I had envisioned already at the start of the blog 3 years ago.

Billpete002 said...

hasn't the prices been slowing in their climb or leveling off? I thought with Finland entering recession (again) would have set off alarm bells..

Andrew said...


Not sure what to say. By the end of the year we will know the outcome of the USA double dip and if Germany is doing ok still. Where germany goes finland will follow.

So far, many of the doom and gloom predictions have been at best delayed.

Andrew said...


To a degree a house is just commodities. I dont really understand the argument that commodities go to the moon while leaving behind house prices given our modern money system.

We might agree that all prices are sooner or later related to the quantity of money available.

But interestingly with modern monetary policy, sufficient money is supplied to achieve the desired interest rate target where only inflation can cause the consequences of too much money to result in reduction of the money being added.

This kind of central bank money policy is fairly new and arose where strict money supply targetting was abandoned about 10 years ago, so that now money in whatever quantity is required, will be supplied to keep inflation trundling along.

Many of the old ideas no longer apply.

Deflation for example requires restrictions in the amount of money in the economy. Yes there is 'pushing on a string', but if you have unlimited money and exstremely low interests rates designed to enable inflation it is hard to see how you will not get inflation.

Importantly, the central banks do not need to think about long term financing of their operations. They simply create what they need. The commercial banks also simply create what they need which is enabled because the central banks simply supply whatever central bank money is needed for them to settle their commercial bank money claims at the target rate.

In such an environment how can there be a sustainable fall in prices? Will there be any fall in prices?

What will be different in the future is that for example interest only loans will not be allowed for people who cannot afford the repayments on the same amount of loan. Loan to values will be lower. For now however, all money pumps are are at full power until inflation goes too high - then the restrictions can be introduced while rates remain very low. The UK is starting to go this way already.

Anything can of course happen however.

HousingFinland said...

"if you have unlimited money and extremely low interests rates designed to enable inflation it is hard to see how you will not get inflation."

US 10 years yield ...

Looks to me that, whatever QE the US is taking, the market is currently foreseeing sharp deflationnary move ...

Andrew said...

All that seems to be saying is that inflation expectations have fallen by 1.5% but that they remain higher than when lehmans failed.

There is no beneficial deflationary route for the USA. The goal is to keep inflationary expectations low to finance the debt while doing whatever QE is required to avoid deflation.

And all the other economies know what is at stake and nobody is ready to abandon the US economy.