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.

33 comments:

Anton said...

If oil price goes over 100 $ and persits... Interest may have to go up sharply to avoid second rounds effects ( company raising prices, salary going up)....that could unleash scenario 6 ...

-Anton

HousingFinland said...

Anton,

I agree if oil continue rising..interest rates will go up...I think at the moment it is the only thing that allow asset price to be so elevated.

The Euribor has to be watched very carefully : http://www.euribor-rates.eu/euribor-charts.asp

Andrew said...

If food and energy prices rise for reasons that are beyond the control of an economy and most of the money required to pay for these things leaves the economy it acts to slow the economy down. There would be no need to raise rates in such a situation.

HousingFinland said...

Andrew,

I agree to some extent. We are not going to see the 1970's stagflation settling in Europe. The reason is that it is well understood the damage
to have high inflation with low interest rates.

So yes inflation is not really going to be a threat because it is currently balanced by threat of deflation in the medium horizon (2 years). However, some industry will be threatened not to push higher commodity price to the consumer and pressure on union to have reasonable wage rise i.e <=2% ...

The inflation we are witnessing is temporary - due mainly to the fire-fighting government and policy makers devised - to avoid deflation.

However, once the deflation threat gone - get ready for living in a world of high inflation (2-5 years down the line?) and higher in average interest rates compared to the past two decades...

Billpete002 said...

http://maplecroft.com/about/news/fiscal_risk_2011.html

note Finland in red..

HousingFinland said...

Thanks Billpete002,

Interesting article...Finland is not positioned at the top because there is fiscal order, I'm wondering for how long? nevertheless ageing is a massive issue from all possible aspects.

Regarding inflation - here we are a state sponsored company raising fares due to (temporary) factors - Finnair...

"Finnish flag carrier Finnair announced Friday it would raise all its fares by three to five per cent in a fortnight's time, citing the recent oil price increases.

The government-controlled airline added the increases would enter into effect on 9 March."

Not sure if they have pricing power...if they don't unless they have set a small cartel, then people will be looking into other carrier...putting Finnair into the red sooner than later.

Anonymous said...

Re: Andrews comment about food and energy prices:

"Professor Jyrki Niemi of MTT Agrifood Research Finland says the recent price rises have taken many by surprise. He now expects an overall food price rise of five percent this year. "

http://www.yle.fi/uutiset/news/2011/02/food_prices_continue_to_rise_sharply_2392224.html

Maybe not such an outstanding guess as the inflation rate for food (without alcohol) is already 4,6% in January (see Teksti-TV page 847).

When the snow clears I must get to work on my garden!


"IslandCrow"

Micky said...

http://www.kauppalehti.fi/5/i/talous/uutiset/etusivu/uutinen.jsp?oid=20110262677

What a scoop...

Andrew said...

Island Crow, by the time the snow clears we might yet see how all of this Euro debt plays out. Somehow the Irish managed to create 25% of GDP worth of Euros out of thin air to support their banks and somehow the ECB has managed to buy out all of the senior bondholders for all of the PIIGS. The next plan is to get us all to pay for this. HF meanwhile is talking about sensible government and prudent central banking and how those bad poor people should not be asking for higher wages!

Anton said...

Have you noticed the euribors jump? Looks like the ecb is really credible with their inflation fighting credentials...

Micky said...

Indeed. +0,144 for the 12 months Euribor rate.
Back to the year 2009 beginning level. Some more increase and we should see the impact on real estate price levels...logically.

Anonymous said...

Well,

I had lunch with Chinse collague yesterday, he told me house prices very cheap in Finland.

By laugingh on that I got an hour presentation where are living most rich people on th second richiest country in the world. (some poor there as well, not taken into account here)

Where are now the success stories about invest money on stocks ? I haven't heard any or did all put their money on Apple early 2000 :D, like did put money to Nokia early 1990

HousingFinland said...

Was he planning to sell you his house?

Seriously, with what is going on currently, with interest rates going higher, with a major industry in Finland on free fall, with the current political worst case scenario in place...I think we have something brewing that could be quite bad for the housing market - now the question is about the speed of the readjustment ....

Anonymous said...

http://www.kauppalehti.fi/5/i/talous/uutiset/etusivu/uutinen.jsp?oid=20110365575

House prices in Finland ...

Eric said...

Indeed ... the end of an industry ... but hey the Finnish state is still investing in those start-ups ... which are ... what? developing applications for the iphone and android ... sure those firms will drive the GDP higher ... more seriously, an interesting way to hide the unemployment by subsidising some start-ups ...

Regarding the political landscape ... it is getting quite bad indeed ... I saw this coming a couple of years ago when I had the pleasure to experiment the racism of taxi drivers in Helsinki ... amazing in a country where there is less than 3%? of immigration ...

Scary ... this looks like a lot what happened in the 1930s accross Europe ...

For the housing market, yes the interest rate will go higher ... and the Finns wills tart feeling the pain ... not funny ... the question is how long will it take before having a deep correction?

Anonymous said...

http://www.bbc.co.uk/news/business-12997333

Eric said...

I am wondering what will be the next big fish to be bailed out ... Spain?
It could be interesting to consider a worst case scenario for Finland ... yes its financials are good and its debt rating is excellent ... but in a what if scenario will this still be a rosy picture?
Let s think about a repeat of the 90s in Finland ... then the country and the Finns will be really happy to get a rescue ...

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