Friday, 30 April 2010

Finnish Housing Bubble - April 2010

"Compared with the corresponding period of the year before, prices went up by 11.3 per cent in the whole country. In Greater Helsinki the growth amounted to 15.7 per cent and in the rest of the country to 7.7 per cent."Statistic Finland, 30 April 2010

The words of the eighteenth-century Anglo-Irish philosopher, Edmund Burke, set the context and put a parallel between 1990 and 2010:

Those who don't know history are destined to repeat it.”

Let's try to evaluate the arguments that could support 1- the existence of an housing bubble or 2- on the contrary, arguments in favor of a correctly priced housing market.

1- Arguments for the Finnish Housing Bubble

First of all there are many compelling reason that we are currently witnessing a bubble of the same of bigger size that the one in the 1990's.

From an economical perspective

The reality was that in 1990, the economical prospect for the world economy was more brighter than it is today. The globalization was at its enfancy and the prospect were huge - it was the propeller for the "rich" country.

Today, the emerging markets - mainly China, India and Brasil are overheating and the risk of their economy to encounter a substantial recession is very high (see the following article demonstrating the irrational exuberance of the Chinese housing market that could hit substantially their financial system or internal consumption: Chinese Bubble about To Burst). India monetary policy has also been far to loose combine with massive capital inflow threaten to destabilize their economy (see article : India Capital Control) .

In the previous recession, Finland managed to get rapidly from its recession thanks to the vigour of the world economy as well as its tremendous positionning on the technology front. It was most probably not politically/policy driven but due to the know-how supported by strong enterprenorship that developped during the 80's.

Today, the same miracle try to be re engineeered by the state supported by policies toward the energy sector - the clean energy bet. In fact, it is mainly driven to rescue a dying forest industry that is shedding jobs at speed light. In any case, it is an overcrowded market where only few players will rip most of the benefits - it is no clear as of today, the outcome of those policies.

From a monetary perspective
Interests rates have been falling in the past 20 years, to record 1%, an all time low.
This has pushed asset price higher and higher as there was little incentive to save.

However, it is without doubt that we have at hand an historical low for the European interest rates and it is not hard to forecast that in the next few years, the probability to have higher interest rates is very high - one would not be surprised to see at least 8% at some point especially if the Euro weakens due to the current European crisis that has just started and that will most probably let long lasting scares from a monetary and economical view point.
The amount of drawdown for housing loan is far below the record reach in 2008 which coincidate with the first high before a correction took place. While the trend in price resumed higher, following an exponential growth similar to the one in the year 1990, it is not marked by a new high in loan drawdown- to me it looks like a speculative move, hence I urge to be very cautious as we may have reached an historical high (a muilti generation high?).

Other reasons could explain this sudden rise in housing price:
-fear of the banking system, investors with capital that exceed the guarantee feel safer to invest in housing than trusting the banking sector.
-fear of very high inflation due to an exceptionally accomodative monetary policy
-shift from pensionner toward small accomodation (1 room flat) - those quite easely push price per meter square very high. There are evidence that construction builders have been focusing on building very small dwellings.

From a population perspective

We are dealing with a completely different population characteristics that will be marked by huge amount of retiree that will in the years to come flood the market with housing whilst the population size is merely stabilizing (the birth rate being under 2).

In addition, rising unemployment and reduced immigration due to economical prospects can only worsen the situation.

From a consumer sentiment perspective

The consumer confidence is at level similar to the pre financial crisis - that is to say that confidence is again at almost record high for this decade.

From this point, it is easy to imagine that a reversal will happen - which obviously will be an indication of weakness either in the economy or housing market.


We have had unprecedented fiscal and monetary stimulus in the past year which objective was to stabilize an economy that was contracting at a very rapide pace.

This resulted into distorting many asset markets (stock market , housing market). While in many advance economy the previous peak of 2008 has not been reached, Finland on the contrary has gone even higher - this is could be partly explained by the fact that 98% of Finnish mortgage rate are linked to variable rates.

2- Arguments in favor for the rational in the current price increase and level

One of the neighbourg, namely Russia, has tremendous economical potential that could boost the export industry and allow to keep employement in check. (however, demography is an issue in Russia, also the country is mainly energy dependent - if a shock were to happen in the global economy, then the Russian economy could do particularly badly as witnessed in 2008)

Wage have been growing steadly with the Union having negotiated high wage in the past 3 years (however, current negotiation clearly highlight a weakening position with very low wage growth for the next few years. In addition, due to the acceleratio of wage growth, the country has become uncompetitive, pushing further delocaliation in key sectors (IT, Forest, Shipping Industries etc..))

Interest rates could stay low for a longer period sutaining the current price.

Inflation could show is head especially in Finland if the European Central Bank focus its monetary policy tuned for the country in the South (Greece, Spain, Portugal) or the biggest economy such as Germany, French and Italy. (This will further hurt the Finnish competitiveness and could also result in higher than usual strikes combined with social tensions)

Tuesday, 27 April 2010

Greece, Portugal and Wonder(Fin)land ...

"With government debt across the world soaring, the man who predicted the credit crunch is predicting a reckoning.

"The recent problems faced by Greece are only the tip of a sovereign-debt iceberg in many advanced economies,” Said Roubini, 27 April 2010

We know that Advance economies have been pilling up debt in the past 20 years - Finland is no exception with a blip in 1990 that just slowdown a phenomenal leveraging of the system where the debt burdened citizen was at its center and that is now shifting to states.

In the past few years, I have been asking myself, how would that end - as it is not clearly sustainable. The answer has never been clear as policy makers have always pushed the outcome - delaying and worsening the core issue and making it worse each time.

So now, not only the public but also states have unsustainable debt -especially when considering the economical outlook and retirement tsunami, when looking forward.

-Today we got a hint of what could happen-

Yet, there is a land on this planet where its citizen are either on pills or drawn into media disinformation - a kind of wonderland: Finland - just have a look to the following picture:

Consumers' expectations concerning their own and Finland's economy in 12 months' time 10/1995-4/2010

It is either due to an ever growing irrational , exuberhant housing bubble that makes people feel wealthy associated by historically low interest rates that reinforce the impression of wealth - and of course supported by bankers that keep on adding fuel to the fire...

So we are not far from the beginning, where reality catch up and where we will suddenly realize that the current housing "ponzi" system is based on illusion and that in any months it could reverse for years or decade to come. - Any opinion on the reverse view, please give your aguments-

And let me finish with those words taken from a speech of Jean-Claude Trichet - ECB president :
At the outset of this quest, it is worth remembering the words of the eighteenth-century Anglo-Irish philosopher, Edmund Burke: Those who don't know history are destined to repeat it.”

... people have already forgttent the outcome the financial crisis in 1990's in Finland where fast and massive credit expansition was allowed by banks and pushed household to very high debt burden that ultimately pushed the banking sector to its knees. Borrowing in foreign currencies was also one the recipient of disasters, have a look to that particular article published in the Financial Times...

Thursday, 15 April 2010


"...when to start tightening monetary policy... :

1. Don't wait too long, especially if the signs of recovery are apparent and interest rates are at very low levels. The sooner tightening starts, the less tightening might be needed later on.

2. To be sure, don’t wait to see inflation rising before raising rates. It will be too late.

3. Use a wide set of indicators and arguments to explain to market participants and the public at large why tightening is needed. Money and credit aggregates, asset prices and the level of interest rates might be useful indicators of why the time has come to reduce accommodation.

I leave it to you to judge how valid these recommendations are for the current conjuncture.", Bini Smaghi
I don't know why but when I read the paragraph above, I read it as a clear signal that the ECB is preparing to tighten the monetary conditions...not because we have a robust and sounds growth in Europe - far from that - but simply because of external factors that may force the ECB to raise interest rates earlier than anticipated in order to anchor inflation expectation.

What are the external factors?
- an imminent reevaluation of the chinese currency,
- a rise of the oil price (more than 70% in a year),
- and overheating of the new world engine: the emerging markets.

Would the ECB allow to let inflation go out of control - as some suggest - in order to reduce the burden of debt on European states? let's get the answer for the future ECB president (2011) - jurgen Stark:
"let me stress that any call to reduce the real value of public debt through higher inflation will be firmly opposed by the ECB. A low and stable level of inflation is a prerequisite for confidence, stability and sustainable growth."

Wednesday, 7 April 2010

"most prominent global bubble in generations" ?

"The house price bubble, the most prominent global bubble in generations, was caused by lower interest rates was long-term mortgage rates that galvanized prices, not the overnight rates of central banks, as has become the seeming conventional wisdom," Greenspan on Bloomberg, 07 Apr 2010

... "Imagine all the people" , 98% to be precise of all Finnish mortgage are linked to variable interest rates which are at historical low level, what kind of bubble we have currently at hand...

Following the same line as ex-Fed president Greenspan, we may be observing the biggest bubble ever created and witnessed in generations...

oops I feel the earth trembling under my feet...

Tuesday, 6 April 2010

Biggest Threat, Inflation or deflation?

The FOMC said in its statement last month that the recovery “is likely to be moderate for a time.” Low rates of resource use and subdued inflation “are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” their statement said. Central bankers have used the “extended period” phrase in statements since March 2009.

such forward guidance would not limit the Committee’s ability to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably.

This information is coming from the minute released by the US Federal Reserve...

To my view it clearly shows that they will not allow high inflation to emerge - they have tool for that, increasing interest rates however it seems that they still fear the deflation threat which is still in the pipeline since it is much harder to fight...

So no high inflation or hyper inflation coming... In the worse case, if they have underestimated the recovery and the inflation threat, they could react the way they did in the late 80's, raising rates to very high level...

However I still think that we are heading (especially in Europe) to much more troublesome economical time ahead which will warrent low rates (something that could look like a japanese scenario or a German one with regard to the economical situation, interest rates and value of housing)