Tuesday, 23 February 2010

Chart of the Day: Central Government Liabilities

Stock of central government guarantees EUR 19,4 billion at the end of 2009. At the end of 2009 the stock of guarantees was 27 per cent higher than one year previously...

Central government guarantees include all guarantees for which the state is ultimately liable.

Guarantees to enterprises make up 49 per cent of the stock of central government guarantees. Guarantees granted to housing associations made up 22 per cent and those to households made up 16 per cent of the guarantee stock. Statistics Finland

...just wondering until then they will stop fuelling the housing bubble, maybe after the next major election?...

In the same worisome development, we have the following statement:
Minister of Housing Jan Vapaavuori (Nat. Coalition Party) sees signs of possible overheating in the housing market.

“I wouldn’t call this a bubble yet, but there are slight signs of concern in the air. In some growth centres, the situation is worrisome”, Vapaavuori said in Helsinki on Monday.
...so please refer to that ("Prophet of the past") to understand the real value of such statement.

Wednesday, 10 February 2010

Finnish Housing Market: Doom, Doom and Gloom?

"Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding.

We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.", Chairman Ben S. Bernanke on "Federal Reserve's exit strategy" Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. February 10, 2010

I think what is said is of prime importance, especially the following critical words:
- "raising short term rates"
- "at the appropriate time"

This could lead to many potential scenario, which I could quickly highlight without going into much details - Obvioulsy it is based on the fact that the ECB (European Central Banks) mirrors with a lag the behaviour of the US Federal Reserve:

Scenario 1: The economy show futher signs of strengh, it signals an "appropriate time" to remove policy accomodation, the consequence would be to "raise short term rates"
-> the Finnish housing market readjust sharply due to an overwhelming amount of default, linked to the fact that the mortgage market is mainly on short term variable rates, that leads to futher weaknesses in the banking sector that may need governmment rescue.

Scenario 2: It is not an "appropriate time" as the economy shows signs of weaknesses and need to be further supported by an accomodative policy which means that tightening will not occur and "short term interest rates will not be raised"
->The Finnish housing market readjust sharply as the economy deteriorate further amid rising unemployment and plummeting banking profit that ultimately questions the solvability of the entire banking sector which will ultimately require government intervention that could jeopardize its credit ratings.

Scenario 3: The economy neither weaken nor show signs of growth. The "appropriate time" to withdraw stimulus is extended futher in time and "short term interest rates" stays lows in a similar japanese deflationnary scenario of the 1990's
->The Finnish housing market deflate at a snail speed. In real term housing price do not budge but a low inflation slowly but surely reduce its value overtime. Like the air of a bike tire that is left in a cellar for a very long period, it slowly deflates.

Scenario 4: well all in pictures...

Legal note: what is said in this article should not be taken as an advise for any decision you make on any type of investment. It is highly advisable that you do not consult banks but instead use common sense when making a lifetime decision. This article purpose is to trigger a discussion if any, and gather different perspectives. Whatever is said in this article should not be taken seriously and this account for comments too.

Friday, 5 February 2010

Finnish Housing Market and Psychology of a bubble

Above here the characteristics of a bubble, below is the trend of Finnish House price.

Guess what?

Monday, 1 February 2010

Finnish Housing Market - Biggest Bubble EVER?

THE Biggest bubble EVER, you have been warned... Of course, nobody knows in the next century there won't be one on such scale...regulators and investors never learn and greed seem to transcend time...

The last uprise was expected as discussed in the last blog article on the previous housing price release see link , so it was clearly expected to have such a rise and was in fact necessary to remove any doubt on the fact that we are clearly experiencing a bubble.

You don't have to be a genius to understand that the Finnish housing market is at a very critical level.

Heuu, about genius, is there one in the room?
“It appears that consumer faith and confidence in the economy has been channelled into the housing market”, says Anssi Rantala, head economist of the OP-Pohjola Group.

Rantala does not believe that the prices will continue to rise this year as sharply as at the end of 2009, especially in a situation in which unemployment is expected to continue to grow.

“Housing construction will start to recover gradually, and interest rates will rise. Another reason why the increase cannot continue at such a high rate is that people’s ability, and desire, to pay are limited”, Rantala says.
Had they not put his title, I would have guessed he would be working for the banking industry.

I need to chat with him...let me take my mobile phone .... "tut tut tut..."
"Mr Rantala?"
"This is HousingFinland on the phone, from the Housing bubble Blog"
"Coming back to your latest media comment, I would like to remind that historically speaking, when interest rates rise so do housing price... and instrumentally the economy"
"Don't you think that your arguments, the one you put forward in HS are flawed?"
"I beg your pardon?"
"bip bip bip..."
Apparently, it didn't like to debate... back to interest rates, when they rise, it simply mean that inflation become a threat (i.e salary rise, price pressure increase, and the economy is back to growth, etc...). I don't believe a second that such event will occur end of this year...on the contrary.

Now it doesn't mean that there are not cause that explain why the Finnish housing market is distorted...As I said earlier see link , the Finnish housing mortgage market is based on variable interest rates for an astonishing 90% of it.

Moreover Interest rates will stay low simply because the economy will resume shrinking, maybe end of this year and next year (maybe the next and the next). Current growth is based on borrowing future wealth...obviously there is a limit to that (see Spain, Greece). So stimulus and monetary effect will fade and the economy will resume its downward spiral as its foundation and its banking system is not sound.

Indeed, there is a price to pay for having allowed an economy to grow for about 20 years on ever increasing and ballooning debt level, failing regulation and greed- at some point, you reach the breaking point, and we have reached it.

For sure, interest rates will rise but not yet maybe in 4 (10?) years? when the deflation threat become smaller than the inflationnary/hyper inflationnary threat.

In addition, historically speaking, a massive correction should occur from both stock market and housing market (strangely, every 20 years, the economy transform itself for good or worse).

If one is hesitating whether or not to buy, it should ask itself: "is it safe to buy at an historical peak, a level even greater than the one witnessed during the 1990 bubble (inflation ajusted)?"

Maybe it will be worth to make a comparison between the Nasdaq bubble when euphoria took over all common senses and where banks advised private customers to invest in the stock market , even pushing them to borrow for buying stock... let's see the chart:

legal note: whatever it is said in this article is not of the responsability of the author , any reference to any entities may be accidental. Anything said above is not true and may be removed at any stage, at anytime (you like it or not) - the article above is meant for entertainment purpose and only targetted to trigger a smile or two...