Thursday, 19 August 2010

1990, 2010 - It's Different This Time...

It amazing the euphoria that is currently being embedded by the media and the politics in Finland. I am pretty sure, had I live 1990, the same atmosphere would have been in the air. The media, politicians and bankers slowly but surely closing a trap on the one having mostly a "naive" view of the current situation.

Of course, the peak of optimism could go higher, time where you could see people tatooing themselves Katainen or Tarja Halonen face on their arm or belly. Housing or "Home sweet home" (in japanese character) tattoed in the euphoric fashionable hair free skull.

So Euphoria, somehow, can be measured by the consumer confidence chart as shown below:

This government has been excelling in the art of deceiving as it was demonstrated by this blog (post in late 2007-08)that post-crisis in 2008 where they were anouncing miraculous growth that failed to materialize instead we had an historic slump.

This time is not different and they reiterate that by providing misleading guidance such as :

The government estimated gross domestic product to grow by almost 3 per cent next year, while the inflation level was expected to be at 2.5 per cent.
The market has a different view on where inflation will be in year time:

Let's look at some other facts.

The monk
and me
Once I was told by an old chinese monk, while meditating in a small montain in the himalayas, that "trees do not grow to the sky". I asked, immediately, can the politicians managed this achievement ("master")? He told me close your eyes and what do you see? I told him UPM, YLE, YIT and Corrupt politicians achieveing the un-achievable - making believe or feel in a sublimal way that trees can go very high - maybe to the clouds.

Almost desperate, the monk pointed toward a frog, and told me give it a kiss... I asked where? well, I so did. he asked me "so what had happened". I told him "nothing". Well you see "one may think that a frog can change itself into a charming prince (or principessa), the reality is that the force of nature will always win- the equilibrum is essential - the yin and the yang of the universe. what goes up go down"- I was highlighted ...and cold too on the top of the smallest mountain, on top of the himalayas.

The Keynesian failure

So, subsidies are still applying to housing even after multiple warnings (since 2004) from the OECD economical review studies. The government has set, ill designed and ill targeted measures toward housing where some will expire at the end of the year or pretty soon. This was engineered to put a break to the unemployment growth, however this has put more oil onthe fire. With unlimited government guaranty to banks, and with the combination of low interest rates associated with world wide fiscal and monetary stimulus which have artificially boosted export, it has given the sensation of a sustainable recovery- glorifying moral hazard as the way to go.

The Overheating

That is the thing that was missing in 2008 to make the bubble burst. As highlighted above, thanks to the government programs, fiscal and monetary stimulus they succeeded. They created the missing impulse that is necessary to create the conditions for a housing "fast" collapse.

From a construction perspective, we are in unchartered territory in term of new housing construction, this has just bursted - like a politician coming out of the bushes - in a very un-surprising manner. This construction burst was most probably concentrated in the uusima (capital) region :

Household debt are at record synchronizing with multigenerational housing price high. I wish not deflation but god if it happens that is going to be historic and i am not sure of the subsequent consequence. Politicians will all long live the boat, maybe migrate to the second best place, switzerland? (damn they miss the podium for 0.03 point, almost a rounding error.)

... and the last thing, a snow crystal ball based prediction then I stop here before I scare some readers...

Your servant,


Andrew said...


One thing worth considering is that since 1990, 'money targets' have gone out of fashion. The new method is just to supply all the money the banks need, while still aiming for a target inflation rate. Because the banks are awash with spare cash interest rates are low. And importantly the mountain of cash can be drained away more or less overnight if that became necessary.

The whole thing about money is different now.

Anonymous said...

There's an old story of a Wall Street tycoon who in September 1929, noticed that his shoe-shine boy was peppering his daily chatter with various stock tips and revelations of "sure winners." The pinstriped mogul concluded that when shoe-shine boys are dabbling in equities, the market must be massively over-bought. He went up to his office and sold everything and was unaffected by the subsequent crash.

Before 2000, it was possible to turn a few thousand into 20 grand in unrealized profits by buying companies we knew little about. We, of course, ended up significantly poorer than we began once the bubble in Global Crossing, eToys, Lucent Technologies and the like finally burst. And I can bet that shoe-shine boys were doing the same ...

Major tops, bottoms, and turning points occur at moments of absolute certainty on the part of the general public. Remember back to the mid-2000s when you'd get instructed by women at cocktail parties about how "housing only goes up" and "it doesn't make sense to rent." It was a good time to sell your house.

Have we again reached a moment of absolute certainty ... this is the question ...

Are we heading to hyper inflation or deflation ... or both in a row

I recommend a really good book ...
When Money Dies: the Nightmare of The Weimar Hyper-Inflation

HousingFinland said...

New Note 5


it would be good that you develop what you mean by money target.

The ECB base its analysis on economic and monetary. So somehow the monetary component have always been taken into account (M1, M2, M3 growth).

The monetary analysis has always been ignored by the US Fed. It criticized, and categorized it as being a bad or misleading indicator.


In fact house price, even as reported by statistics Finland are not only much higher that what is be produced but has never really clinched in the past 15 years with a an exponential growth in the past year or so.

Housing price going higher and higher has set itself in the mindset and has slowly been digested as the new normal year after year forcing household to take higher and higher debt at variable interest rates.

To my opinion, the growth prospect are poor, especially if China and the US were to slow considerably as foreseen recently.

Now you can flip house since it's a relative game - I think it's fine. However if you are first time buyer you may be playing "your life", it will be burden that you will have to carry for the rest of your life (to the satisfaction of bankers, politicians and speculators).

There is no doubt that deflation is ongoing and has not yet unleashed its full force, something inevitable (unless a phenomenon were to happen to destroy productive capacity world wide while suddenly reversing the ageing and population growth trend in the western world, in particular Europe).

Of course, central banks politicians will fight full force the deflation threat, limit its damages but that could have a price.

Andrew said...


I would guess that when M3 is surging then the compass that trichet steers by is altered a little and when like now M3 is falling then the compass gets altered also. Either way the exact amount of M3 is irrelevant for day to day policy and they just supply all the money the banks need at whatever the current rate is, where the rate has been set to the value required by the adjusted compass.

HousingFinland said...

Info Needed:

I had an interesting discussion today with a friend - He was highlighting the fact that politicians and construction builders are somehow meddling up with municipalities and underlines that for example in suburb like Espoo, land were released in a very short supply excercing artificially higher price in land thus in housing as a whole?

Do someone have some information on that, as it is in a way at the limit of corruption since there is price manipulation? of course this could be as well bad rumours or some consipiration theory....

Any information will be welcome.

In any case, price are absurd and I think dangerous for the financial stability of the country as whole. I think Regulators, Financial watchdog and politicians are currently playing their reputation.

Anonymous said...

Despite the fact we reached the highest prices the greater Helsinki has ever known, this unfortunate situation could be lasting:
-It concerns mainly the greater Helsinki and not Finland as a whole
-The land in this region is being released for construction very slowly.
-Tax deduction of the interests sharply softens rises of the loan interest rates
-Real estate developers have a great influence on the market price and can wait a long time before they even think about lowering their selling price level
-Real estate developers substitute themselves as banks when offering loans, therefore extending the buyer’s budget ceiling
-The greater Helsinki offers the lowest unemployment in Finland, helping maintaining the demand high
-2010 is slightly different than 1990 since unemployment rate at that time was double the one it has been at the beginning of 2010, with different consequences regarding the market demand
I wish the market would go down, but it is not so easy to predict what is going to happen in the next months…


HousingFinland said...

I forgot I had once covered this issue concerning land (thanks to the google search box in this blog, you can quickly browse through archive).

I think, the issue has been put aside as the political and economical situation dictated it during the financial crisis.

Today, there is a mute from the invisible and (incompetent) housing minister that has somehow allowed the worse housing bubble ever created in Finland.

@ Mickey, I will take your argument one by one and comment on them. shortly I would say the same comment could have been made during the peak of the last moderate bubble, the one in 1990.

Andrew said...

The new reality has arrived.

Anton said...

The new reality has arrived ?

What do you mean?

Andrew said...


I posted on the board and the comment was deleted. Or maybe it was just a glitch??

HousingFinland said...

Hi Andrew,

No censure on that side. Could you repost it?

I deleted few comments that were spam but not on this post and not from you.

Anonymous said...

Do you ever take into consideration the fact that you might be wrong?

Prices are high, yes, but a lot of Finlands wealth and infrastructure is centralized in and around the metropolitan area.

Someone already mentioned the lowest unemployment rate in the country, but there are other facts to be taken into consideration as well, like the magnet function that the Metropolitan area has in general.

Therefor, as long as we do not see prices decline in the rest of the country, the prices in the metropolitan area will continue to keep going up.

It's simply a matter of there being more demand than supply. If 3 million people all want to live in an appartment in the metropolitan area, there is a good demographic reason for the current price development, regardless of say the US economy. Also, balance sheet of banks is much stronger here than in say US or southern europe (less defaults).

The other clear trend is that detached houses are becoming less popular, which seems to be reflected in the price development as well, which supports my claim that demand in metropolitan area remains high.

Last but not least, last crises was so deep because of the collapse of the Sovjet Union. Unless the euro collapses, I do not see how the 'bubble' that you speak of will burst.

Are you really stating this based on the historical graphs that you show in this article? Mind you this is speculation on your behalf and not empirical evidence by any means.

Most entertaining blogpost nonetheless.

Andrew said...

I said the primary effort of Finland will be to prevent deflation and protect the interests of the buisiness community who will lose most from deflation. If Finland needs to have a house price correction due to fundamental imbalances that can come later.

Other countries are also working to prevent deflation and I then quoted Germanys ECB member Axel Weber.

November 2007: Weber today said there is a risk the ECB will fail to meet its price-stability objective for another two years. ECB at 3%

March 2008:The ECB "will act'' to contain "alarming' price pressures if its inflation goal is threatened said Weber ECB at 3%

April 2008: Weber said the bank will assess whether current interest rates are high enough to contain "intolerably" high inflation. ECB at 3%

August 2008: Weber said there's no scope for interest-rate cuts. ECB at 3.25%

March 2009: "the European response to this crisis will not be inflationary -- that is why guys like me exist," Weber told a business conference." ECB at .5%

July 2009: Weber said that, if central banks’ efforts to kick-start the economy failed because commercial banks were too cautious in lending, central banks could bypass the commercial banks and take more direct measures. ECB at .25%

August 2010: Weber said unlimited lending to banks into 2011 Q1 should continue.

The comments bring the Bundesbank chief in line with fellow policymakers such as Greeces Athanasios Orphanides and Irelands Patrick Honohan

Andrew said...


It would be more friendly if you supplied a name.

1. Balance sheet strength of todays very highly levered banks is an illusion unless they can get support from tax payers in times of crisis so that illiquid loan 'assets' can be used as if they were money.

How can it be that a country with so much land like Finland has such high land prices? It is only achieved with restrictions on the sale of land and all the corruption that goes with that kind of policy.

2. I think it would be true that detached houses are becoming more popular?

3. For sure the situation in the Soviet union is positive for Finland rather than negative.

Anonymous said...

Fully agree with all the discussion regarding restriction on land ...
I have heard so many times, Finns telling me that there is a lack of space in Helsinki and this explains why the price of land is so high ...
My answer has always been the same ... have a look around you guys see all the space ... when you fly to Vantaa and arrive above Helsinki you can easily see that there is plenty of space ...
Now wondering if we can talk about corruption ...

The other thing regarding a possible deflation ... it is clear that the ECB will fight it and rather prefer an inflation of 3% or 4% ... the reason for that ... well have a look to the huge debt that the European States have ... an inflation of 3% over 10 years will mechanically reduce the debt ...

HousingFinland said...

Corruption is embedded and its worse form as it is clever hidden.

Here is one example:

"...The choice of the GSK vaccine was dictated by statements and expertise from the National Institute for Health and Welfare (THL).
There have later been claims that THL would have had a conflict of interest, as it had received financing worth EUR 6 million from GSK for its pneumococcus research."

Coming back to inflation, you said
"an inflation of 3% over 10 years will mechanically reduce the debt"

Well tell me how they will do that? look at the US...they are in firefighting mode and yet deflation is the threat. (they have interest rates at 0-0.25% and did quantitative Easing, their balance sheet is so enormous, the th transparency principle is broken...)

...there is a limit until your currency lose all credibility...then you have the weimar story.... where a currency is worth nothing.

in the 30's the US went through a terrible deflation while Germany went through a terible inflation...guess which one I'll choose.

Andrew said...


The hyperinflationists have been saying for years that the fed cannot QE without massive inflation.

The reality is pretty simple, the Fed can QE as much as it wants providing it can be believed it will exit that strategy if inflation rises.

The ECB and others will do the same thing.

Right now the Greece situation is worse than it ever was and the US is heading for a slowdown.

There is no chance that policy makers are going to chose the deflationary route. QE2 will be launched on both sides of the Atlantic 100% guaranteed.

HousingFinland said...

I think you are overestimating the strength and power of central bankers.

They had a window where they could at best stabilize the economy from disaggregating - and they managed it - they had no choice but to deploy all their monetary bullets.

Now at best they can fire blank bullets - and hope people will believe in that - it's all about confidence - should it falters - it's game over.

Andrew said...


You make is sound so difficult. All they have to do is devalue the currency at the target rate.

HousingFinland said...

simple? I'm not sure what is the gain on what you are suggesting.

It's a relative game. In the current situation, it's a global problem so I will ask you, what if they all devaluate their currency at the same time (to boost their export?)?.. at the end, relatively speaking there is no gain.

It will also show that the country productive system is somehow uncompetitive since they have recourse to artificial way of boosting export - isn't that a temporary solution that in the long term is damaging as it reduce incentive for innovation.

Andrew said...

If you have a posative inflation target then, over time, you aim to produce new money at a rate required to devalue the existing money.

The gain is that innovators can hope that by the time what they have produced reaches the consumer, they can sell the finished product for more than their production costs, which gives people incentives to invest and take on debts.

Anonymous said...

Andrew, QE2 was launched 20 September 1967, and only on one side of the Alantic!

Beware of using too many abbreviations, especially with a verb that can apply to both meanings!

"Island Crow"

ps. now you can go back to serious discussions

Anonymous said...

Funny ...
QE - Quantitative Easing and yes we are heading to QE2 ...
To HF - Indeed there is a deflation trend at the moment, but I am pretty sure that the ECB and the Fed will do anything to have some inflation ... at least to please the states (and/or on their request) since we know by now, that the ECB is not that much independent ...

Your point is accurate what is the best deflation or inflation ...

Have a look to the figure 9 in the attached paper ...

Really enjoy this blog ...

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