Monday, 4 October 2010

Finnish Housing Bubble - AsuntoKupla 2010

I’m very worried,” Finnish Finance Minister Jyrki Katainen said in an interview. “There could be a housing bubble in the making in Finland. There is a risk that mortgage borrowing costs are too low.”

House prices in the three countries (Norway, Sweden, Finland) rose last year even as their economies contracted and unemployment shot up, creating imbalances that economists say now need to be corrected.

About 95 percent of mortgages in Finland and Norway track money-market levels, while about 60 percent of Swedish loans are based on adjustable rates. That compares with the 90 percent of German homeowners whose interest payments are fixed, meaning last year’s record low borrowing costs fed into the Nordic region faster than elsewhere in Europe.

In Finland, the ECB’s 1 percent benchmark rate may be misaligned to the Nordic economy’s needs.

“For preventing bubbles, it would of course be good if Finland had its own monetary policy,” said Mikko Forss, an economist at Roubini Global Economics in London. “Still, it’s not enough alone, as has been argued also by central banks in Sweden and Norway. Regulation is probably the best tool.”
Source: Bloomberg

The worrying part is the consumer confidence that break all time records while the global economy is fighting for its survival. Who says that media didn't have any power and didn't distort information?

Nethertheless, as you have notices on the right top side, I will start counting the decline of housing price from 1st quarter 2011, since the dynamic will most probably hold until year end.

I don't know why, but I feel if I was back in 1990, I would have been living the same situation- let's wait and see -

35 comments:

Anonymous said...

"last year’s record low borrowing costs fed into the Nordic region faster than elsewhere in Europe."

Could that be because the Nordic Banks did transfer the low cost of borrowing money to their customers where as other banks did not?

Of course there is a risk if the interest rates go back up, SOME people will not be able to afford their mortgages anymore, the question is ow many households this would affect in practice.

Andrew said...

As far as i can see there is absolutely no reason why Bank of Finland cannot require and impose upon the banks operating in Finland that they alter their Basel risk weightings to reflect the risk of a property bubble in Finland so that they must hold more capital in reserve than at present, where this can be variable and part of Finlands monetary policy.

And now we have a finance minister echoing BOF governors comments from years ago. Will they actually do anything however??

Meanwhile Euribor is creeping from the record lows.

Andrew said...

Bubble trouble in Finland?

http://fistfulofeuros.net/afoe/8164/

Anonymous said...

The human cost of the bubble is already showing, although a correction in prices will not help them:

"The number of families with children facing poverty and debt has increased significantly in recent years.

Many families struggle to pay off housing loans, reports the Mannerheim League for Child Welfare. Today, a family consisting of two parents and one child is saddled with an average 120,000 euros in debt. This sum is double that of mortgages a decade ago"

http://www.yle.fi/uutiset/news/2010/10/more_families_struggle_financially_2030729.html


----
Related to Andrew's reply, there is also the situation where banks can be forced to take into account the ability of people to repay loans. I seem to remember the FSA of Finland some months back complaining that the banks were still taking unnecessary risks in this area.


"IslandCrow"

Eric said...

The low interest rate regime in the EUR area has only add fuel to the fire in the past year for nations that didn’t already tip over the edge in 2008/1H09. And the freaking banks have just kept the lending song playing because they know when the music stops they’ll feel the pain, so they are incentivized to push the day reckoning out as far as possible, by keeping the lending up, even if it makes the end-game worse because they know the taxpayer will be there to deal with the pieces. And hell, in the meantime they can collect some solid semi-annual bonuses. Politicians/Regulators have totally failed, but I guess they too don’t want to rock the electoral boat for fear of losing their seats/posts in the near future.

Just have to love myopic incentives!!!
E.

HousingFinland said...

The relationship interest rates and housing price is not that clear cut.

-Regarding interest rates:

In general, when interest are going up, house price follow suit, goes higher - the reason: a pick up in economical activity that is generally inflationnary push interest highers and boost confidence.

Two years Ago, when interest rates were falling so did the housing price.

So... I think interest are going to stay low, because in theory, they should go negative to counter effect the deterioration of the economy...so following the previous analogy, price will fall while interest rates will still stay low... (A Japanese scenario, or an American one for the recent history).

-Regarding Bank governance:

Well Bank Of Finland, Finance Ministry or to a lesser extent the FSA(just too incompetent, you wonder their use?) ... I suppose are strong believer in free market and let the private participant do the right decision and not have a central body that gives directions... the problem is that banks have just shown, in the past few years, especially befre the crisis broke (and also in the late 80's) that they look at their own particular interest than the one that could benefit the society....

So it's a deaf game no one is talking to each other ...the end result is the wall...for the financial sector... Too little too late will be remembered, most probably this is what will be remembered in the next century... I wouldn't like to be in the shoes of Liikanen or Katainen.

-Regarding social directions:

As I put in the title of this blog, back in late 2007... we will be witnessing a massive housing correction while social tension will rise... especially toward immigrants... well one can refer to the work of Mr kondratieff work, and assume that we are currently what he is calling the " winter" period...

Anonymous said...

Juhana Rossi just wrote in Helsingin Sanomat, that according to IMF, international monetary markets are in a more unstable condition than six months ago. This cannot be good...

Anonymous said...

Any view on how this scenario will impact the stock market in short and long term? Is it a good time to invest in stocks or funds or should one keep his saving in cash?

Any links to blogs discussing investement in Helsinki stock exchange will be highly appreciated.

Billpete002 said...

I'd recommend GLD and SLV as being good ETFs to look into.

As for companies in Helsinki - you can check into crowdfunding via Venture Bonsai or other websites.

These are great tools to get investing into startup companies (which have a higher margin than stocks) the risk per person is lower (as you invest less money).

For stock market companies I'd look at mining companies in Lapland or even, dare I suggest for a Finn, to invest in Sweden or Norway.

I would stick to commodities and materials (non-construction or industrial!).

Just my thoughts.

Billpete002 said...

"These are great tools to get investing into startup companies (which have a higher margin than stocks) the risk per person is lower (as you invest less money)."

Should clarify that it is more risky than stocks (typically), but this is lowered because of lower initial investments.

Anonymous said...

I liked this comment from Henrik on the blog that andrew was pointing to earlier:

"real estate prices have gone up in Finland about 100% since 10 years. In Spain and Ireland the prices went up by 400%. I have lived in many countries and recently repatriated back to Finland. I do believe in Helsinki metropolitan area the prices are relatively high but then again go to capital city of any country, and prices tend to be high. There are plenty of reasonable priced real estate only 45-60minutes drive from Helsinki.
Do not really understand the concerns in respect to variable interest rates – they have always been the cheapest interest for mortgage owners. In addition the variable interest rates provides flexibility to change the loan terms or payments. With fixed interest you are literally fixed to the mortgage for the entire loan period regardless.
Two years ago Euribor was 5.5% and there was not big increase of mortgage defaults. In fact the impact of the interest change is not that much as people think. For Eur 200k mortgage for 20 years the gap between the monthly payment at today’s rate and let’s say 5.5% is about Eur 300 per month.
In worst case scenario if you lose your job the general welfare system protects your income pretty well for 500 days, and today you can negotiate with banks to pay only interests up to 2 years.
So I don’t believe in these dooms day theories, I believe the growth will be flat and rise of income the housing become more affordable moving forward."

Billpete002 said...

Here's a brief summary of what is happening in the US at the moment:

1) Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper—only the note-holder has legal standing to ask a court to foreclose and evict.

2)But once mortgage loan securitization happened, things got sloppy—they got sloppy by the very nature of Mortgage Backed Securities.

3)Somewhere between the REMIC’s (Real-Estate Mortgage Investment Conduits) and the MERS (Mortgage Electronic Registration System), the chain of title was broken.

4)If for whatever reason, any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.

5)Now, the banks had hired “foreclosure mills”—law firms that specialized in foreclosures—in order to handle the massive volume of foreclosures and evictions that occurred because of the Housing Crisis. The foreclosure mills, as one would expect, were the first to spot the broken chain of titles.

6)turns out that these foreclosure mills might have faked and falsified documentation, so as to fraudulently repair the chain-of-title issue, thereby “proving” that the banks had judicial standing to foreclose on a delinquent mortgage. These foreclosure mills might have even forged the loan note itself.

7)The move by the United States Congress last week, to sneak by the Interstate Recognition of Notarizations Act? That was all the banking lobby—they wanted to shove down that law, so that their foreclosure mills’ forged and fraudulent documents would not be scrutinized by out-of-state judges.

8)As soon as the White House announced the pocket veto—the very next day!—Bank of America halted all foreclosures, nationwide.

9)The reason the banks are F***ed again is, if they’ve been foreclosing on people they didn’t have the legal right to foreclose on, then those people have the right to get their houses back. And the people who bought those foreclosed houses from the bank might not actually own the houses they paid for.

Conclusion: This is a major, major crisis. This makes Lehman’s bankruptcy look like a spring rain, compared to this hurricane. And if this isn’t handled right—and handled right quick, in the next couple of weeks on the outside—this crisis could also spell the end of the mortgage business altogether. Of banking altogether. Hell, of civil society. What do you think happens in a country when the citizens realize they don’t need to pay their debts?

Here is the blog you can read the information from:

http://gonzalolira.blogspot.com/2010/10/second-leg-down-of-americas-death.html

Billpete002 said...
This comment has been removed by the author.
Billpete002 said...
This comment has been removed by the author.
Andrew said...

I was surprised to learn that the common European practice of issuing covered bonds secured on mortgages or pfandbriefe as they are known in Germany means, that the investors in the covered bonds are ahead of you as a depositor in the even of the bank being insolvent.

Maybe the case for hyperinflation is not so far fetched?

Andrew said...

Euribor creeping up. Trichet ecb president saying lets spend like no tomorrow 'to build a consensus' Weber (this is why people like me exist) saying lets tighten up.

Irish and portugese bonds better. US housing bottom is on balance probably already here. Cotton about to break the 1870 high! Wool at a 14 year high. Oil not wanting to go below 80.

Gentlemen please place your bets!

My bet is that deflation is dying and will be soon dead and buried.

I will be stocking up with home brew and baked beans if any of the gold bugs go hungry

Billpete002 said...

With the foreclosure market in the US at a standstill and those Alt A and Option ARM loans still resetting (this last quarter there was a surge in foreclosures)

I think (as far as the US is concerned) still in the deflationary spiral.

HousingFinland said...

Andrew,

Core inflation is slowly but surely declining and this for the past 20 years...

Cotton, wheat , oil etc... are very volatile....

The day you see people going on strike for pay rise because manufacturer are passing to the consumer high commodity prices then I will get worried.

In the meantime, this is just powder in the eyey... maybe it is the last trick from the bankers to anchor "inflation expectation"...

The reality is that when housing market in the nordic, Finland in particular start its readjustment (which will take between 4 years to 10 years depending how politicians are trying to corrupt free market forces)...then people will feel that prices are going down...whatever headline inflation...

Andrew said...

Billpete

Seems the foreclosures are already moving. Anyway how can a reduction in foreclosures be a bad thing from an inflationary viewpoint where the central bank is doing all that it can to support the banks?

In such a large economy houses are continually being bought and if super cheap houses are not available at the courtroom steps it will tend to bid up the price of the other houses.

We dont have to have a deflationary disaster when we can have an inflationary disaster.

Because i follow farm commodity prices in NZ it appears to me that inflation and demand for products is winning over deflation and lack of demand. The major exception being wine which has huge problems of oversupply and is impacted by cheap imports from places like Chile - good wine too.

Andrew said...

HF

I never mentioned Wheat.

Oil is an interesting one. In my view if oil falls in price from here then it will be signalling more deflation, otherwise we may well be heading into higher oil prices and therefore natural products like wood wool and cotton should get better prices.

Anonymous said...

The bubble IS now about to pop but this site seems to have give up the ghost?

Seems like maybe the market has stayed irrational longer than our blogger could maintain motivation?

Eric said...

Indeed it will pop up ... the question is when?
The other issue that we are facing is discussion such as ... "well a 2 bed room appartment for 500,000€ in Helsinki is a cheap investment ..." people do not bother compute in Finnish Marks ...it would be 3,000,000 ... then the number appears as being quite staggering ...

Just had a lunch with nice colleagues in Stockholm ... I asked them whether or nor the 90's crisis could come up again in Sweden ... they all told me ... no, not possible, people have learned what went wrong plus today the banking market is international therefore, we benefit from low interested rate thanks to the dynamics of the global market ...
scary ...

HousingFinland said...

"Seems like maybe the market has stayed irrational longer than our blogger could maintain motivation?"

:-), nothing to do with that - I moved to another interesting job that takes me more time than the previous one, that's the main reason .-)

And seem that nobody noticed the new look and feel of the web site...I changed it because I'm expecting huge amount of visitors from 1st Quarter of 2011 when buyer from seller will be puzzled by the fact that a new reality has started ... let's call it "the great gravitation"

Otherwise, I was planning to release (still in beta version :-) ) a forecast of housing price before the official 3rd quarter housing prices planned end of this month...

HousingFinland said...

@Eric

I agree with you...When you start to hear that this time it's different, better to be worried.

The same people would have said to you back in the 1990's that globalization forces were acting and would have found a rational explanation of the 1990's bubble.

In Fact, back in 1990's one need to remember that the current Finnish central banker was ...
1987–1990 Minister of Finance for Finland

Katainen next? maybe at least the condition are in place...

Andrew said...

although there was a bubble in the 1980's the soviet union was also collapsing from around 1987 to 1991 when tanks were in moscow and Gorbachev was 'too ill to continue' as hard line communists took over.

http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html

http://www.coldwar.org/articles/90s/fall_of_the_soviet_union.asp

The situation today is that the USA still has imports near the levels of 2007 and trade is far from collapsing at this moment in time, and of course Russia is once again returning to be a prominant player.

You can imagine that 15 years ago money was fleeing scandanavia for somewhere safer whereas today we seem to be a place of safety in uncertain times to some degree anyway.

So can you compare? Prices are too high perhaps but interest rates are rediculously low also with little possibility of rising by very much

HousingFinland said...

@Andrew,

The worse in late 2008 was averted or let's say delayed.

In 1990, China was emerging as many other country - the prospect was massive.

I think the Collpase of Russia, on one hand had short term negative impact but on the other it open new markets...hence the light at the end of the tunnel.

The US was in good shape so was France...

Today - Imbalance are massive, the US, even if it has started rebalancing its economy , it is not the case for Europe and China and others...

Now the current issues would be the survival of the Euro or the current European monetary system (its collapse would be far worse than the 1990 dwarf Russia collapse), the first major "economical "crisis in China and its social consequence.

And also The current US monetary policy that is being trapped - unless engineer to cause the concern above...

I think the world is at a turning point compare to 1990 where we were in the middle of a transition phase (1980 ->2007, deflating interest rates, globalization etc...)

It's amazing to see people confident about price going higher or being at fair value where they are at historically high level and in total disconnect to future prospect in term of country wealth and interest rates evolution ....

Andrew said...

prices will go higher only against a more and more useless currency where the nature of europe is one of cronyism and dodgy deals, where politicians with no answers to the crisis will keep on spending euros into existance.

Andrew said...

The french for example say they believe in frienship and equality and working people are not going to tolerate austerity while the fat cats are largely immune. Hence there are strikes.

Germans are talking about the need to punish the countries their banking system has enjoyed lending to so they can make lots of money.

So what is now going to happen? Nobody can know but it does not look good for the future of Europe. Will Finland soon have its own currency just like the rest of the Nordic zone?

All people seem to be able to understand is spending their way to prosperity. Hopefully it does not get bloody ugly before it all gets worked out. History will tell us it will get bloody ugly.

But maybe it is different this time?

Eric said...

The strikes in France are due to an other issue ... more than 50% of the French were in favour of the minor change to the age of retirement (which is still too low)
The France's problem is the French ... we are always complaining, we do not like the authority ... it is in the genes plus comes from the education I guess ...
Anyway ... the demonstration are more against the French government and/or president than the reforms ... plus the people in the street are manipulated as always ... by the left wing ... especially the teenagers who are in high school ...
What is funny in France is that they teach at school that the globalisation is "bad" and that communism is not that bad and sometimes even good ... with all these facts in mind ... we should see the strikes there from another perspective ...
All this explains why I left the country 8 years ago and I am not planning to go back there in the near future ...

Mickey said...

France's situation is slightly more complicated. And besides, slightly off-board?
Back to the possible housing bubble, "Uudis kohteet" New housing construction programs from RE Developers are now selling pieces drop by drop.
For those who are really interested and following the housing market, just look at NCC, YIT, SRV...and all other RED programs, even when the delivery date is very close, you can find dozens of free apartments.
Furthermore, average square meter price of brand new programs in pre-sales phase are slightly cheaper in comparable areas than programs being delivered soon.
Isn't this showing a new direction?

There's a still a worrying issue in Finland, which makes the bubble difficult to explose: the offer of recent (let's say post 1990) houses or flats (excluding new projects) in the metropolitan area is dramatically low. (Government and authorities are definitely responsible for this situation)

But Euribor is now clearly climbing up, and just reached its last september 2009 level.
Let's see if this trend goes on, alongside with the persistent rumors of tax deduction disappearance...

Be that as it may, the situation is quite funny to describe and will never change:
Those who would like to buy think there's a bubble ready to explode whereas recent owners are sure they bought at the fair price and prices will go on rising!

Anonymous said...

"What is funny in France is that they teach at school that the globalisation is "bad" and that communism is not that bad and sometimes even good " ---

Remind: If I understand the "communism" right, it promotes "globalisation" too. Maybe, Mr. Max was also an agent from the banks...

Billpete002 said...

http://topdocumentaryfilms.com/overdose-next-financial-crisis/

Here's a great documentary that sums up 2001-present

and includes some information on Sweden near the end. Enjoy.

Andrew said...

seems like a new wave of job losses coming thru again.

Anonymous said...

While housing goes up so does the Finnish household need for debt:

"Finnish households are taking on more debt this year than ever before. Unlike in many other countries, the economic crisis did not dampen Finns' tendency to take on debt. However, there are some surprising reasons why people are borrowing more.

There are a number of causes for the new record level of indebtedness, among them higher prices for housing, more consumer spending and, for example, a growing number of divorces....

The average consumer credit is around 5,000 euros. Under-40 year-olds with children are the biggest clients for home financing loans. Another new record in borrowing is expected this year, followed by a decline."

http://www.yle.fi/uutiset/news/2010/10/credit_still_appeals_to_finns_2103561.html

"IslandCrow"

Eric said...
This comment has been removed by the author.