Sunday, 20 February 2011

Scenario 6 : Toward a Japanese Style Correction -60%?

This article presents one the 6 scenario that has been put in the following article : Finnish Housing Market

Scenario 6 is the most bearish of all, it was a possibility during the peak of the financial crisis in the end of 2008. However, central bankers around the world were prepared and had clear plans on how to treat the severity of the crisis - cutting rates to virtually zero, purchasing states/government debt however I'm not if they how it would unfold and how manageable it will be.

All in all, during that period, private debt was shifted toward public institutions, and tax payer's money was used as an air bag to contain a rapid and violent shock. Finally all Banks were rescued or so were given the promise. The market recovered and credit flowed as nothing had happened - at least on the surface.

So scenario 6 was avoided, a scenario that would have seen housing price falling by 60 % in a matter of a year or two, something similar as in the 1990's Finnish Housing Bubble.

Could scenario 6 be totally avoided? Should it be removed from the probable scenario? Not so sure. The difference will be its duration, this time it could take 3 decades before house price fall by 60% - a scenario that is currently unfolding in Japan housing market.

Let's look at the Japan housing price to refresh memories or for some to discover it , something that could be at first a surprise or a shock - after all people have been conditioned that real state never falls and it is still well anchored in all mindset:

So what could push Finnish housing price into the Japanese type scenario and see its value slashed by 60%?

Remember also that land is a limited resource in Japan, after it's an island, but the most striking similarity would be an ageing population.

Interestingly enough, Statistics Finland kindly has provided a projection of the population for the next 50 years - one could argue that accuracy, on that projection ,would be higher for the next two decades... Good, because this is what interest us.

The chart below is really striking. It is the first time in a century that the Finnish population stop growing and in fact start shrinking - re-read that as it defies common senses.

The chart below only focus on the population that can participates in the housing market - this from a generous perspective (I have not seen yet loan given to the 15-20 years old group, but I'm sure it must be in the pipeline - remember vouchers bankers are always turning around and looking for any possible opportunity even if it means selling its soul to the devil in a Dante way)

For me this will have an impact for at least two decade to come. Interesting to see that 2010 is the turning point.

In fact, prices slowly fall for a very long period if the government try to artificially support it (for whatever reasons be it influenced by the industry or for political reasons) and doesn't allow it to reach its fair value where holding real estate will not bear great risk as it is currently the case.

It astonishing to see the structure of the Finnish population in 1900 compare to 2010/20 where the importance of the amount of young and elderly are reversed. The other interesting fact to notice is the period during 1st and 2nd World War where the population kept growing (were they really fighting? :-> peace and love?)

Another interesting and important side of the effect of ageing population is it is an inflationary phenomenon as retired people become net consumers as the following study highlights "The Effect of Aging Populations on Inflation" , here is an extract :

"... those recently entering into retirement (aged 65-74) create great inflationary pressures into the economy as their consumption stream outweighs their earned income potential during that time..."

Conclusion: Not my favorite scenario as I put my faith on the intelligence of this government , regulators and somehow the ECB ... however it could materialize.

Monday, 7 February 2011

Finnish Housing Market

We have all in all 6 clearly defined scenario - that a fact. The question is what will enable one of those scenario, also what are today's elements that could favor one of those.

Let's first describe each of those scenario , secondly set the current political, economical and social context, and finally put some probability on each one, highlighting one. All need to be done in a neutral and analytical manner.

Since lately I have been quite busy - I will complete that on a regular basis. You are free to provide some elements. It will be very fruitfull to have a collaborative approach in this analysis.

Scenario 1:
Scenario 2:
Scenario 3:
Scenario 4:
Scenario 5:

Scenario 6:

Population is ageing very fast which will put the housing market in a completely different direction, at least not behaving as it did since 1980. This could unleash a Japanese type housing scenario. You will find more on the following article: Scenario 6 : Toward a Japanese Style Correction -60%?

Context: Economical

Context: Political

Context: Social


To help on that here are some important chart to take into account:

Year-on-year changes in index of wage and salary earnings 2000–2010, per cent :

12 Month Euribor charts:

Households' indebtedness

Housing Price inflation adjusted - 2000 as the base (100) :

Finnish housing Loan rate reference:

An interesting point: Trichet, Liikanen are all but leaving this year.