Finnish Housing Bubble Bursting - Asuntokupla

Prices of dwellings fell in December

2012-01-28T10:40:00.006+02:00

Development of prices of old dwellings by month, index 2010=100

Development of prices of old dwellings, index 2005=100

Source: Statistics Finland

What is important is to see if a downward trend has really started. In all cases the upward trend has been broken as it did during 2009 in the midst of the financial crisis. Wait and see...

So the ECB averted a serious credit crunch in the last quarter of 2011. Again, is it just delaying the inevitable? In the meantime, Euribor is falling, again providing some oxygen in the housing market, but for how long ? (2014 as suggested by the Federal reserve, the American ECB)?

Coming back to the Finnish housing market - we will see a readjustment in prices at least due to sellers coming back to reality and understanding that the demand is shrinking while first time buyers are priced out.

Another interesting chart, is the wage versus housing price which shows you a disconnect in 2010. That tells to me, that we will have at least 2 quarters of readjustment - if wages stay stables which is not fully granted...

Year-on-year changes in prices of dwellings and in wages and salaries

Note, also that prices have kept going up since 1993 with minor correction along the way. Also Since 1974, percentage change in Wages have been declining. The only time we did not have any growth was in 1992 and 1998...are you going to see the same phenomenon or worse a new one: wage deflation?

Finnish Household Debt and Income: Alarming Signals

2012-01-21T11:38:00.004+02:00

Rates of indebtedness of indebted household-dwelling units by age group 2002-2010, %,

source: www.stat.fi

The chart above was extracted from a nice article from Statistics Finland. The article start with a sentence that put the tone on a very important subject: indebted household due to large housing mortgage.

"During a decade, household-dwelling units’ debts have gone up by clearly more than their income."

Also, you will notice that the debt level among the 30-39 years old is at an alarming level and has been rising steadily without any disruption since at least 2000 - the 2008 crisis had only a minor impact, just slowing the progress, not stopping it.

What to think? well clearly we at unsustainable level where any shock could weaken the financial situation of household - especially those who are counting on an ever increasing housing price or on low interest rates.

France Downgraded...

2012-01-13T18:40:00.001+02:00

France Downgraded by S&P

Happy New Year 2012 !!

2012-01-01T12:15:00.001+02:00

Consumer Confidence - New York Times - Finnish Housing Price

2011-12-27T11:58:00.005+02:00

"Helsinki’s housing market did not suffer greatly in the wake of the 2008 global economic crisis.

“First, there was no price bubble prior to 2008,” said Jukka Malila, the managing director and chief executive of the Central Federation of Finnish Real Estate Agencies.

“Secondly, Finnish people were initially frightened by collapsing banks abroad, but they realized they were not affected, as Finland is quite isolated, and went on living their lives as usual. So consumer confidence is high.”

Mr. Malila attributes Finland’s relatively levelheaded response to the downturn to the lessons learned in the early 1990s, when the collapse of its neighbor, the former Soviet Union, sent Finland’s economy into a steep recession.", NYTimes, May 2011

Interesting to see the confederation of Finnish real estate agent doing marketing on the New York page, sign of despair, sign of trying to support a housing market by trying to bring "dollar collapsing purchasing power" investors.

The housing market that has topped in the same way it did in the early 1990's but this time:

Nokia is collapsing while at the time it was emerging as a global player
The European Monetary Union is questioned while back then it was a savior (in 1996, Finland join ERM, and in 1999 the EMU)
Emerging market were powering off, China and India economy exponential growth started...today both are struggling with slowing economy, high inflation and property price bubble.
The active population is shrinking at record level due to historically high growth level of retiree population

So the situation is more dire than it was in term of future outlook.

In all cases, I wanted to highlight the timing of such article relative to the "consumer confidence" and the perfect timing of its release. It highlights somehow a knowledge of the deteriorating situation back then (in fact, we were in the mist of the Euro crisis, and a worsening of the financial crisis that started in 2008).

Now, this is what happen afterward....in December 2011, the Finnish consumer confidence has collapsed, approching its worst level made at the beginning of the financial crisis, and even worse than the IT Bubble of 2002. Here is the chart:

Merry Christmas!

2011-12-24T15:36:00.001+02:00

Trees Don't Grow to the Sky

2011-12-23T19:27:00.003+02:00

"The country(Finland)’s debt dynamics are far from unsustainable at this point, but given the weakening in the country’s export performance and the steady unwinding of the housing boom we can now anticipate I would expect growth to be weaker than either the EU or the IMF are currently anticipating, and pressure on the country to increase fiscal spending to maintain expectations to rise, with the implication that pressure on the Finnish spread over 10 year German bunds will continue, as the country risks drifting off from being part of the core towards the growing periphery, at least in the eyes of investors.

So finally, coming back to the ECB and movements in the policy rate, it could well be the case that perceptions about rising future interest rates played their part in encouraging individuals not to leverage their balance sheets further thus weakening the housing boom, but my feeling is that in the Finnish case the catalyst for the coming property implosion may not have been the recent 50 bps interest rate rises from the ECB, but rather the ongoing impact of the sovereign debt crisis on confidence, subsequently reinforced by the inbound shock from the recessionary wave now steadily sweeping Europe.", Source : Edward Hugh

A good article, I will encourage you to read...

On the Housing Trend...

2011-12-18T18:01:00.008+02:00

Fitch Warns Nordic Countries Of Potential Crisis Unless Much Is Done To Bring Down Costs
Wednesday, 28 September 2011

Credit rating organisation, Fitch has warned the Nordic countries to put their acts together or face crisis in the nearest future.

In a report, Fitch described the Nordic countries of running an economy characterise by inflated housing prices, high household debt levels and over-sized banks compared to the size of their economies. These are risks in the Nordic countries, including Sweden, according to a new report from credit rating organisation, Fitch.

Among other points, Fitch analysts point that the major banks depend on short-term financing in foreign currency and a level of indebtedness among households that are among the highest in the world.

Countries specifically affected by the report are Sweden, Norway and Denmark as well as Finland which the organisation feels that they are living up to their top rating of AAA. Fitch gives these Nordic countries praised for its well-managed economies.

"Scandinavia has some of the world's most creditworthy states. However, some risk factors remain. It is especially in the housing sector and the market and banking system, "writes Douglas Renwick of Fitch in the report." Source

95% of Finland's mortgage are linked to variable rates, a very high rate compared to any country in Europe, meaning that the historically low level of interest rates has mostly impacted this little nordic country compare to the rest (in France or Germany most mortgage rate are linked to fix rates for the duration of the mortgage).

On another note, I had a discussion with an assistant secretary that was wondering how people could afford those prices, she could not understand. I told she was sane not as the people behind recents reports (Nordea etc...) and that price will go in only one direction and it is down. My arguments were based on the following:
1- interest rates cannot go lower i.e. in the future price will not be supported by lowering interest rates.
2- we are heading toward a recession in the coming year that has the potential to turn into a depression
3- 2012 will see a record number of layoff (many are on the pipeline : Nokia, NSN, and others as highlighted by some media )
4- 2008-2009 saw a record number of temporary layoff, with prospect that production will rampup after the slowdown. Today, temporary layoff seem not to be on the table as prospect are bleak.
5- China (see article), India are slowing down due to inflation threat, housing bubbles and export collapse.

Conclusion to the assistant : if you can wait one year before buying you should. If you find something that match exactly what you want and you can afford it and pay a premium on it (since price are all inflated) then you can take the risk. My last word: just wait another year at least - renting feels safer todays (see also article).
.
Conclusion to "The Finns": Stop consuming - keep saving - a deflationnary trend is pointing its noise, then invest since thereafter politicians and economist will unleash whatever they can to fight it which will trigger the start of a ravaging inflation...you are warned.

On the Political Trend...

2011-12-14T06:16:00.003+02:00

"Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.

Right-wing populists are on the rise from Austria, where the Freedom Party (whose leader used to have neo-Nazi connections) runs neck-and-neck in the polls with established parties, to Finland, where the anti-immigrant True Finns party had a strong electoral showing last April.

And these are rich countries whose economies have held up fairly well. Matters look even more ominous in the poorer nations of Central and Eastern Europe.", Krugman, NY times, December 2011

Just wondering when the economy start to drastically slowdown and unemployment rising, what would be the outcome?

By the way, Mr Krugman made a mistake in this article as now we know then as "The Finns" and not as "True Finns"...

In societies, where physical borders are slowly disappearing (taken over by virtual communities i.e Facebook, internet in general ), and where societies are more mix of different nationalities and religion - it is odd to still think that we can live in silo with "True citizen"...

Also refer to this article to see the very worrying development in Eastern Europe.

Rating Downgrades: The Euro Domino...

2011-12-05T22:13:00.003+02:00

"The US ratings agency is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “credit-watch negative”, meaning there is a one-in-two chance of a downgrade within 90 days."

Well, looks like a chain reaction is about to start... Finland is part of it. Well, when you see the household debt, your hair start to rise...and start to fall knowing that most of the debt is on variable rates tied to the Euribor. Just wondering is rates were to suddenly shoot up, what will be left to the banking sector and on the side to internal consumption (albeit declining with confidence flirting with historically low levels...)

I will summarize this week, the debt level , wage growth in the past few quarters to highlight the unsustainable situation.

In the meantime, keep consuming - you might be the last hope :-)

Pivot Point: 2012...a 1992 replay.

2011-11-23T18:57:00.007+02:00

You may have noticed that this week large move occurred in the Finnish Government Government Bond (2 Year Bond below):

Since Summer, Finland seem to be the safe haven - Politicians and finance ministry have been glossing whenever they could that Finland is well managed, the economy is strong bla bla bla... the same broken tune...actually since a week something really got broken...

Maybe people realize that :

1- That the Finnish bond market is highly illiquid market hence volatile. When people see that inflation is becoming a threat or when they need the money asap (deleveraging i.e deflation force here), then all exit through the same door...and yield (interest rates) start to shoot up

2- Finland , whatever good economical and budget practices are made , remain a export oriented economy with an aging population and low immigration country. If the rest is sneezing, Finland get the Flu. Finland is not immune to the global slowdown or to an European slowdown.

So I have noticed a vague of layoff planned for 2012 by multiple of significant industry and company in Finland. The impact is going to be huge in term of employment and of course, our key focus housing price.

I bet, as I did in 2008 that the market will readjust except that this time I see little room for recovery as it did back then (due to mostly to global coordinated monetary and fiscal stimulus that resulted in a short spaced recovery). This time all the ammunition have been used or little is left. Of course, the central banker "magician" will make you think that it can make disappear all the problem - its an illusion, a confidence trick that has ran its course.

Be ready, the Mayan were right :-)..and of course the price will readjust by 2013 by at least 30%...if not then by 60% in the next 30 years a long slide similar to the japanese housing market: You were warned.

Let It Go!

2011-11-02T04:07:00.001+02:00

The chart above is the 1 year yield of the Greek Government Bond.

Well the market believes it should default, or other nasty things... yet european politics seem confident they can resolve the problem.

Are the Greek issues a Lehman Brothers in the making? a predictable black swan?

ooops I Did It again: Britney Papandreou

2011-11-01T15:49:00.002+02:00

Earthquake hitting Europe , the epicenter has been located in Greece.

Would the shockwave break the very "artificial" recovery and sink economies to the ground? answers...2012.

Housing Bubble Burst in China...overnight: 22% drop

2011-11-01T04:06:00.002+02:00

A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. One report said the price cuts exceeded 25% per square meter.

The local media reports said an unspecified number of people were injured.

Chinese media separately reported that another group of Shanghai homeowners gathered on Saturday to speak with Longfor Properties Co., after it dropped asking prices to 14,000 yuan per square meter from 18,000 yuan per square meter at a residential development in the city’s Jiading district.

The Shanghai property-owner demonstration found little support on China’s Internet, where most still expressed worries that housing prices are too high.

The drop from 18,000 to 14,000 yuan is a 22% overnight drop and that is just a down payment on the carnage that is coming.

Source

While at the same time in Hong Kong the worse is to come during the period 2012-2013 according To Barclays Capital:

"Hong Kong’s residential property prices would drop by 35 percent to 45 percent over the next two years in the “hard landing” scenario of a deflationary economic environment, Barclays Capital Research said.
In a “soft landing,” continued mortgage rate increases and a slowing economy would drive prices 25 percent to 30 percent lower over 2012 and 2013, Andrew Lawrence and Vivien Chan, analysts at Barclays, wrote in a report dated today."
Source

EspoonKruunu Oy, Madness At Play ...

2011-10-28T19:03:00.008+03:00

This article is to honor my barber. A nice single mother lady, always smiling and ready to put you in good mood.

As usual, we have a small chat of what is happening around the world she is in, made of customers of various background - the citizen of Finland.

Today, she cut my hair very well - she is a real professional and hard worker who do not speculate CDS or is short oil or wheat on the NYSE CBO stock market - a normal citizen from Finland.

She told me the following story. She had to move from the place she rents because EspooKruunu, a communal owned company ( of the republic of Finland) owner of the rivitalo (build in the 80's, 2 floor - 80 m2) , decided to renovate it. They also....

humm...also, kindly requested that the rent will be raised from 800 Eur to 1000 Eur. A 25% increase overnight.

Of course, a quarter or more of the renter of the same housing community decided to look somewhere else. To me, the action of the EspooKrunnu, deserve some attention, and the media should be a bit more critical of this kind of action.

In addition, to that State owned company playing with the rental market - you have also state pension fund heavily invested in real estate in rental market, easily setting the price to their wishes....

DISCLAIMER: All characters appearing in this work are NOT fictitious. Any resemblance to real persons, living or dead, is NOT coincidental. Believe me it is a true story.

2012 - The Liikanen-Mayan Forecast

2011-10-14T04:06:00.001+03:00

In a hearing with the Finnish Parliament, Liikanen (Bank of Finland) stated that global economic growth for late 2011 and early 2012 was falling behind this summer’s projections. Liikanen emphasized that banks now need to preserve their own liquidity, securing additional capital from private sources.

to me it looks like Liikanen is telling to banks to get ready for the worse...

Full House or Flush, a poker lie?

2011-10-02T15:58:00.004+03:00

Are house prices Safe As Houses? from Neil Monnery on Vimeo.

I am wondering what is the current housing price versus income in Suomi Finnland?

When you see that new flats put in the market are at over around 400 000 euro and that income are between 30-40000 euro/year, you wonder how long this house of card will sustain before we see the flip side of the coin. Maybe god is playing with dice, but it seems that down earth, people are playing a poker game...

On the trend of housing price

2011-09-25T15:10:00.006+03:00

"It is a fallacy to think that loose monetary policy can solve the large structural problems we are facing. Central banks must not become the victims of their own success and should not become overburdened. Historically, whenever policy makers tried to broaden the role of monetary policy beyond its original role as a guardian of the value of a currency, it had to compromise on its objective of price stability. For monetary policy to remain effective, its responsibilities must remain within clear limits.

Instead, we need a growth model that is different from the one during the years before the financial crisis. We need economic growth that is based on a genuine increase in productivity, and not on low interest rates and the accumulation of debt. The unlimited accumulation of private and public debt before the financial crisis has now become a burden on economic growth and should be reduced progressively. [14] To achieve this we need far-reaching structural reforms that increase competition in labour and goods markets, more financial supervision, and a stronger fiscal policy framework.", Jurgen Stark, 24 Sept. 2011

I always liked Mr Stark, too bad he resign from the ECB executive Board.

One important thing, He is highlighting is that the crisis as show that private or public accumulation of debt as witnessed in the past 20 years is not sustainable.

It interesting, in fact, to see that the the crisis that started in 2007-2008 marked a turning point in the economical model we were accustomed. In particular, it is at that point I thought that the housing price rise driven by massive credit growth was put in question. Of course, it takes time before the trend reverse, you are dealing with "agents" that shift their behavior with a drastic lag.

Most people would not consider that price of housing will be lower than it is today in the year to come- it is not what they have been conditioned to.

Bankers still want to ride on easy-to-take profits at the expense of people, promoting all but a stable economy.

Real Estate are also accustomed to easy commission, easy sales and would not think that their industry would start to shrink in the year to come with plummeting commission and higher competition.

Greece About To Default

2011-09-14T20:03:00.007+03:00

1 year government bond shot up to 140% !!, Finland has better hurry to get its collateral in place otherwise it's gonna be collateral damage.

Will Greece default ~~this week end~~ in the next few weeks?

9/11 - Nine eleven - We are all Greek - ...and also Italian...

2011-09-09T09:11:00.004+03:00

On Sept 2011, nine eleven - to echo clearly what is going on, let's put few facts on the table:

interest rates on 1 year government greek bond shoot to 98%, which means that if you invest in those bonds you double your money each year. Obviously, you won't do that. The market is saying that Greek is about to default on its debt.
Mr Juergen Stark resigned this 9.11, following few months early the departure of Mr Axel Weber, high figures of the ECB executive board. That says a lot on the fragmentation of opinion or strategy on the direction of the ECB monetary policies. On other words, The germans totally rejects the bond buying purchasing program or the bail out initiatives launched on the Greek and Italians debts.

Disintegration or no disintegration of the euro area, that is the question on the item highlighted above. Would a break occur and if so what are the consequences? This will shape the future of the economical and political landscape in the generations to come.

Break of the euro zone is what the market is pricing and it is what the ECB has been fighting all along during this crisis. Would Greece exit the euro zone and get back to their drachma in order to regain lost competitiveness or would German exit in order to safeguard Germans against inflation, returning to their old currency the "Deutsche Mark" in order to let it appreciate?

What would be the consequence of such event on Finland - especially on the housing market?
My answer would be to paraphrase Joe Granville from his 1960 book, "If it's obvious to everyone, it's obviously wrong." As a contrarian, I feel that everybody sees housing price going higher and never retreating, I see people investing in housing and seeing it as a 100% safe investment and I see irrational exuberance around an asset that does not produce anything...then this worries me.

On the monetary front, It seems now that the ECB policy has aggravated, rather than ameliorated our basic problems because it has encouraged an unwise and debilitating buildup of debt, while also pursuing short term policies that have increased inflation, weakened economic growth, that will ultimately decreased our standard of living. As a consequence, People are defecting the ECB, and encouraging unilateral initiative as expressed by Finland in its pursue of collaterals in the Greek bailout. All in all, the mess get bigger and bigger and history is no guide as what is happening is unique.

Hypo...potam?

2011-09-08T04:59:00.005+03:00

"Finland's Mortgage Society (Hypo) warned Thursday that the country's housing market was losing steam quickly, with prices having peaked in June.

The lender added that consumer confidence was set to revisit the late-2008 low this autumn.

Hypo said the drawn-out sovereign debt crisis was raising the spectre of a credit recession."

source : STT

I will be interesting to see if Hypo past track records were in line with reality....

Housing and Demography

2011-08-31T19:43:00.004+03:00

"At the end of 2010, the number of families with children totalled 582,000... the lowest figure ever recorded in the statistics, with a decline of 1,800 from the year before...

Twenty years ago in 1990, the total number of families with children was still 640,637, and approximately one half of the population were part of a family with children."

Source: Statistics Finland

The number of families is at historically low and lower than it was in 1990 - really astonishing!

A similar discussion on this subject had already occurred in the blog, refer to "Population Perspective"

Indeed, Finland is facing with very serious issues. family formation is on the decrease and is getting older. In the meantime, housing building permit had an exponential growth in the past two decades and price tripled. A real conundrum for assessing where the finnish economy is heading and particularly how the housing market will behave in the next two decades.

"The Thin" Capability, Maturity Integration ....

2011-08-22T06:12:00.000+03:00

"Moody’s criticises Finland’s demands for Greek guarantees

US credit rating agency Moody’s told on Monday that the bilateral guarantee agreement between Finland and Greece could lower the Greek credit rating, and the credit ratings of other struggling eurozone countries.

The Finnish guarantee demands could also delay the second Greek bailout package and so lead to failure to pay, Moody’s added.

The agency expects the euro countries to reject the agreement between Finland and Greece."

I am actually shocked by the initiative launched by the finance minstry regarding the Greek guaranty. Not only it has been a showcase, where Finland lacked complete understanding and maturity on the Political european stage, but also endanger a fragile cohesion that is currently being tested within all the european countries.

I suppose it was driven by vanity and for domestic political gain- maybe even to reduce the popularity and the electorate size of the "the thin" party.

Deflation Forces, back Again in Finland.

2011-08-07T15:33:00.008+03:00

Link
The chart above - the 2 years Finnish government bonds - shows that the yield (interest) has literally collapsed since July as if investors are panicking, ready to get almost no return or even paying for it (less than 1% when inflation is running at 4%) on those bond investment in return to investment safety. Sure they must be betting for deflation, they clearly foresee no inflation or worse deflation.

To me it looks like investors hint a recession in Europe - a deflationnary force that would be inline with the bond reading. In this context, It would be strange to see real estate price going up, or at least a last shoot up and a collapse. Actually, here is my forecast, from this point:

The bizarre situation is that in Germany, Finland, interest rates on 2 years are falling while in France, Italy, Spain and Portugal, yields are soaring. What can the ECB do? nothing really .

I am wondering how Finnish Pension Fund (Ilmarinen, Varma, etc...) will be able to cope in such environment, which would mean higher unemployment, low interest rates , lower stock price and rising retiree departure (which means income need to be provided, a promise made during the worker lifetime). Of course, this is based on the catastrophic scenario of Europe going back to recession.

Above is the chart of the 10 years Finnish Government Bond and a possible project on where yield could go. To me this chart is important, as it could show that the rebound in yield we say in the past two years (similar can be said to the economy
) was powder in the eyes, only supported by more debt and an artificially inducted confidence.

So should yield fall to the level of March 2009 or go lower than, we are a depression territory. Obviously this are only conjecture from a long time bear (since 2007), my negative view on debt binge and artificially supported economy has not changed, and more they fail to recognize the size of the problem , the bigger will be the fall and the negativity it will bring to the society as a whole (I'm still thinking of post 1929, and its far reached consequences - I'm just hoping they have learned their mistakes)

Finnish Housing Price - The Party is over?

2011-08-05T10:26:00.006+03:00

Considering what is currently happening to the European Monetary vision, considering that Finnish Household indebtedness is showing worrying features, considering that housing price had double nationally since the beginning of the decade, (and even triple or quadruple locally). I think WE ARE ABOUT to witness an historic downturn for the housing and economy in Finland and in Europe as a whole - (and still holding my breath) - The party is about to end.

So far people have been spending, logically in sync with housing price rising, in a phenomenon called the wealth effect. People, sometime forget that housing price are cyclical, and are bound to go down after going up. So how the household will react when his wealth start shrinking, would he continue to take more debt, to spend more? The answer is simply no, based on what is currently happening in the US (high leverage household with falling house price, starting saving quite heavily).

Finnish Construction Sector - A Market View

2011-08-03T11:32:00.010+03:00

A picture is worth a thousand words as the old ~~banker~~ wise once said. Above is the construction and engineering sector in Finland. Apparently the market is seeing a sharp slow down, something similar to the summer 2007 where a year after the housing market made a tentative readjustment.

Talking about the readjustment that did not happen in 2008, there are many reasons for that.

1- Interest rates tumble, literally fell in a free fall - helping interest rates sensitive mortgages, which represent above 90% of Finnish mortgages. To that, add also the record length of mortgages provided by bankers.

2-The current crisis (which we have yet to see the end) was a threat to the banks and the financial system as a whole. During that period, real estate was seen as a safeguard - at least money had to be parked somewhere perceived solid. The same was witnessed for Gold, Silver etc...

3-A relative game, North europe is seen as safer than the south in all possible dimensions, hence investment is rolling, fueling , even greater household leverage, that have been pilling up debts, as never witnessed before. to that extend, Banks had never stopped lending...

Nevertheless, the market is saying that the housing sector or construction sector is about to experience "something" not so good. A simple readjustment or an "Iconic Nokia" type readjustment that could bring price toward their 1996 prices. Time will tell.

Post Traumatic Stress

2011-06-22T09:00:00.004+03:00

"In Finland, the rising trend in house prices has flattened out since spring 2010.

The moderate rise in market interest rates has helped restore a more balanced position on the housing market. Even so, the relative price of housing is still higher than the average for the past decade.

From the perspective of macro-stability, the trend of recent years in household debt has displayed worrying features.
The proportion of highly indebted households grew rapidly throughout the first post-millennium decade.

Continued growth in household debt will undermine the ability of both households and the economy to adapt to economic disturbances."

Source: http://www.suomenpankki.fi/en/julkaisut/bulletin/financial_stability/Documents/B_2_11.pdf

To that statement, I see a worrying Bank of Finland that is relief that housing price somehow take a pause in 2010 however Bank of Finland seem to show all the element of a post traumatic type stress due to the unprecedented rise of debt level, when compared with what makes sense to compare to, the trend in debt over time.

I highlight the fact that recently bankers and politicians like to play the relative game by measuring data with other international data - i.e our debt is lower then the neighbor debt while failing to see and address the internal issues at the time when all warning are red.

That was my morning thought...I go back hibernating.

Finnish Politics, From Another Angle ...

2011-04-18T22:32:00.003+03:00

So Finns usually quite in the international scenery, have spoken - out loud -

So here are the results in 3 statements:

* 80% of people did not vote for National Coalition Party - hence a party that represents only 20% of the total share of voters - yet there is plan to raise extract from it a prime minister.

* 700% more MPs for True Finns - for the anecdote, each time I have talked to finns (true or not, how do you recognize a true finn - A Nokia mobile owner? oops I have a great iPhone)..so I talked to (88.2% true) finns around me they always find good thing in this party - maybe PS program is not clear, so whether they represent or not evil, we will see. This blog will alert you if it is the case ;-), and time to pack to the "bad" countries: to Greece "dream" Island, "Margarita" Spain, or "nice curve" Portugal - I hope it won't happen I have got used to -20 degrees for 6 month of the year (As Darwin theory predicted, I have evolved rapidly, my skin adapted and looks to have mutated to a bear type - cold proof- appearance showing a new layer of "true finns?"cells)

*Collapse of the Center Party - wondering if in the last election they did well due to the help of a corrupt behavior.

Result: Not sure if this will end up in a government ungovernable - something like the titanic hitting the Soini-Iceberg.

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

2011-02-20T17:34:00.014+02:00

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.

Finnish Housing Market

2011-02-07T07:17:00.002+02:00

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

Conclusion:

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.

Happy New Year 2011 !!

2011-01-01T01:11:00.002+02:00

Would 2011 be the year that demonstrate that housing is solid as rock or inflated as one of the biggest multi-generation housing bubble?

"Solid as Rock or Rock and Roll?"

My guess is that all the possible ammunition have been fired (low interest rates, government subsidies, municipalities land cartel, no (or incompetent, biased) regulators, economical and monetary subsidies, all subsidies that have been fired around the world...).

So the only one left is the high inflation card which will be disastrous for Europe and the Euro in particular and certainly not in the card of the next president of the ECB (The German austerity oriented Mr Axel "Axe Inflation" Weber).

Nevertheless, I will start as planned the countdown quarter by quarter of the Finnish Housing price.

In the meantime, enjoy the start of a new decade, one that will surely be different to the past one. By the way, not sure what it will mean but my first post for 2011 will be on the date : 01.01.11-01.11.00 (the binary decade)

ECB Covers while Consumers run naked...

2010-12-16T20:32:00.002+02:00

16 December 2010 - ECB increases its capital

The European Central Bank (ECB) has decided to increase its subscribed capital by €5 billion, from €5.76 billion to €10.76 billion, with effect from 29 December 2010...

In order to smooth the transfer of capital to the ECB, the Governing Council decided that the euro area national central banks (NCBs) should pay their additional capital contributions of €3,489,575,000 in three equal annual instalments.

...maybe consumers should follow suit after all... risk management as they said...

Finns Commit 91% in Crime in Finland

2010-12-16T20:30:00.003+02:00

See the link

No Comment.

The link is not valid any more ... the news which was spread in all Finnish newspaper was that 9% of crime in Finland were done by foreigner - obviously the news headline suggest to most reader that crime is associated with foreigners (readers are not good with maths)... this is again the power of communication....

BOF

2010-11-08T04:20:00.000+02:00

Artificial Rebound

"Domestic demand has also picked up in response to the revival of household consumption demand and housing investment. Exceptionally low interest rates and government action to support housing construction have supported the domestic market through the recession."

For several years, Finnish labour costs rose faster than the average for the euro area. Although the most recent wage settlements have been much more moderate, this will be insufficient to correct the exaggerations of the ‘crazy years’.

The growing levels of debt have recently been a source of general concern. It is not possible to draw a firm line that would indicate in all situations what is an appropriate level of debt, and what is excessive. In the final analysis, this depends on numerous household specific factors."

"From the perspective of households themselves, the greatest risks relate to not being properly prepared for a potential rise in interest rates, a sudden drop in their income or other unexpected situations that could undermine their ability to service their debts.

With this in mind, it is very important that households conduct their own sufficiently rigorous ‘stress tests’ on themselves when considering taking out a loan.

Households need to be able to service their debts in the event of interest rates becoming considerably higher than they are at present. This is also in the interests of the banks and other lenders.

Finally, it is also important that households leave themselves sufficient room for manoeuvre in case of possible changes in their general income and expenditures."

1- Indeed, Interest rates will go higher...at some point(that is the 712 600 € question), that is the only direction it can go unless the deflation threat has not really disappear since so far there is no obvious signs suggesting otherwise.

Sudden drop of their income, interesting point. This recession could have provided an opportunitty for better Finnish competitiveness or the convergence in term of wages with the rest of Europe ... However thanks to Politicians (not excluding the finance ministry), they thought otherwise - the group of wise wild wisest started to think hard how to fight a natural readjustement and they managed it ...( even contruction workers wages are going higher, above the inflation rates -ast)

2- Mr Erkki Liikanen & Co, somehow worries me and in some extent scare me when he talks of the need of "Stress Test" on Household - isn't that the role of banks in Finland and ultimately the roles of regulators - after all that is their job. Worrying idea, highlighting the fact they have no visibility on how securely they grant loan to household.

3- In the last press conference from the ECB, there was a very interesting suggestion from Mr Jean-Claude Trichet, highlighting that non-conventional monetary operation could happen and outrule an increase of interest rates. So I read it as, if the deflation threat was overdone and the tsunami of liquidity trigger a sudden deadly rise of inflation (mostly imported that could or giver the tentation for translating into higher home inflation), then they will pull the trigger and of course the Finnish market and politicians would not be able to do anything about it. The municipalities debt would also slowly but surely look like the one experienced in California.

Monitoring closely Debt levels

"Moreover, a large debt burden weakens the ability of households – and, indeed, the economy as a whole – to adjust to disturbances of various sorts. In order to ensure stable development of the economy, it is vital to closely monitor debt levels."

When the symptom have already appeared, isn't it already too late? So BOF will become firefighters always a step behind the event....let's closely monitor their inaction and how they will act to prevent the system to break apart when it would have been simpler to request moderation and stability.

At the end we do not have central bankers but alchemists...

Source: BOF , there is more to say, but I will try to extract some other interesting info whenever I can

For Fun : The Kalmar Union (KU versus EU)

2010-11-05T05:14:00.002+02:00

"The Kalmar Union (Danish, Norwegian, and Swedish: Kalmarunionen) is a historiographical term meaning a series of personal unions (1397–1523) that united the three kingdoms of Denmark, Norway (with Iceland, Greenland, Faroe Islands, Shetland, and Orkney), and Sweden (including a part of modern day Finland) under a single monarch, though intermittently and with a population less than 3,000,000.^[1]

The countries had not technically given up their sovereignty, nor their independence, but in practical terms, they were not autonomous, the common monarch holding the sovereignty and, particularly, leading foreign policy; diverging interests (especially the Swedish nobility's dissatisfaction over the dominant role played by Denmark and Holstein) gave rise to a conflict that would hamper the union in several intervals from the 1430s until the union's breakup in 1523 when Gustav Vasa became king of Sweden."

The establishment of a single currency zone with a unified monetary policy that rules all countries in Europe have shown mixed results. The north, the south, the center and the east have all shown signs of divergence instead of the desired convergence.

So would it be better, instead of having a monolithical system, splitting the control into smaller more manageable entities - The north by re-establishing the Kalmar system , for the South by creating the "Calamares" (...let's not call that PIIGS...) entity , the center by creating the Franco-German Group ...."

Bon Appetit!

Finnish Housing Bubble - AsuntoKupla 2010

2010-10-04T04:18:00.000+03:00

“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 -

Housing Price Monitor - 2011 Historical Turn?

2010-09-06T01:02:00.003+03:00

The blog started in Q4 2007 to warn that we were entering in a "turbulent" period from an economical, political and social perspective.

After the year that followed , we saw the stock market halving in value while housing corrected but gained even more momentum.

The housing market benefited indirectly to measure that was aiming at stabilizing the economy- call it a "collateral damage". Around the world, in the past three years, fiscal and monetary stimulus were enacted, reversing or stabilizing a synchronized world wide fall in trade and consumption.

The Finnish housing market is now showing all the characteristics of a very severe housing bubble that mainly inflated due to :

- various government stimulus , designed to support employment in the construction sector
- Finland interest rates are controlled by the ECB that has its monetary policy designed to support Germany, France, and the southern countries (Greece, Spain, Portugal ...) that are at the hedge of defaulting on their unsustainable debt.
- land control -cartel like- from municipalities
- bank model on assessing credit risk and fuelling an unprecedented housing loan growth)
- bank granting only variable rates based mortgage (98% of all mortgage originated) and the fact that the government is still guaranteeing 30 % of those mortgage.

I have added on the right menu, a housing price monitor that I will start to update from the 4th quarter of 2010, since I'm calling a sharp reversal into 2011-12. I will use the 4th quarter as the base from price coming from statistics Finland.

Why do I think that a turn is now settling and probably sure to happen. Here are some arguments:

1- An unsustainable Household debt that has shown that when the growth reverse, the trend carries for many years to come based on the fact we had a biggest run-up in credit growth than even the 90's or 80's.

2- Consumer confidence at all time high. Consumer Sentiment has always suggested a sharp reversal when a peak is reached.

Note: This article will be updated as it is a first draft but I though it was better to share so to update it depending on the comments...

ECB, inflation, debasement, or...

2010-08-31T04:17:00.000+03:00

I have just read a very interesting article from the ECB, which I recommend to read. It somehow clarifies the strategy foreseen by the ECB to get out the current crisis. Inflation and rolling debt is not an option - reassuring. I have highlighted below interesting parts and also made some references to the Finnish Economy through the usual charts.

"Household indebtedness rose substantially – in some cases, doubling relative to the 1980s – reaching historically unprecedented levels and exceeding 100% of disposable income in many advanced economies. Increased indebtedness meant that households were increasingly stretched to cover their commitments and therefore less resilient to adverse shocks."

"Leverage also increased for non-financial corporations leading to an overall expansion of balance sheets and a change in their structure. As a result, debt-to-GDP ratios for non-financial corporations in the euro area and the US increased in the past ten years from roughly 65% to 75-80%."

"The crisis suddenly brought to a halt the progressive accumulation of private debt. Partly as a result of large-scale stimulus measures, but also reflecting the impact of the automatic stabilizers and, to a more limited extent, the cost of supporting the financial system and the implicit liabilities of guarantees to the banking sector, leverage has started increasing in the public sector."

"The key challenge for stability and growth over the coming decade is to ensure a progressive reduction in the debt overhang and strengthening of the balance sheets of banks, households, firms, governments and central banks."

B- Options for reducing the debt overhang

1. Inflation? Nope
2. Living with the debt? Nope
3. Growing out of the debt? Yep

1. Why not Inflation?

"A recurrent suggestion for solving a debt overhang is the creation of surprise inflation. Again, let me clearly dismiss this type of action. The history of the debasement of money through hyperinflation has been disastrous everywhere.

Even before reaching extremely high levels, surprise inflation produces an arbitrary redistribution of wealth and creates a burden for the unprepared, especially the weakest."

2. Why not living with the debt?

"What about the option of “living with the debt”? Some have suggested to ignore existing financial imbalances “for the time being” and focus only on the short term. Rather than pressing on with the deleveraging process, more spending could be encouraged to sustain growth in the short term."

"I believe that adopting this view would be very dangerous for our economies. There is a very clear example of the consequences of choosing to live with the debt: Japan in the 1990s. The “lost decade” in that country was the result of allowing the banking system to remain fragile over many years. "

Please have a look also to FinnVera, a framework to support "Zombie" company

"So the option of ‘living with the debt’ indefinitely is not a solution to the challenges currently facing policy-makers, nor is it a means to ensure sustainable economic recovery. We must focus on policies to address the debt overhang.

3. Growing out of debt

The most appealing solution to the debt overhang is clearly to achieve strong economic growth. Strong growth produces higher income and wealth, thus increasing the net worth of households and firms and reducing their leverage.

... Robust economic growth also boosts government revenues and reduces expenditure, especially when large automatic stabilizers are in place, thus leading to a rapid reduction of the government debt-to-GDP ratio."

Nordea: Ooops I did it Again

2010-08-30T18:58:00.003+03:00

"Nordea predicted that economic growth this year would reach 3.5 percent. Despite forecasting a drop to 2.7 per cent growth for next year, the bank expects growth to return to previous rates in 2012."

"In the land of the blind, the one-eyed man is king." ... or in (Fin)land of this kind, Nordea is blind as Astyanax fasciatus mexicanus.

When the GDP fall by somewhat 8% the previous year, and trumpet a 3.5% growth for this year, I think we are not any more dealing with economist but instead mathematician clowns or fools. It is also worth noting, that their timing is always at the perfect moment for making disastrous investment.

- that was a short breaking news - more to come... not on Nordea - just ignore them :-) - but instead on the ECB vision...

1990, 2010 - It's Different This Time...

2010-08-19T20:10:00.008+03:00

It amazing the euphoria that is currently being embedded by the media and the politics in Finland. I am pretty sure, had I live 1990, the same atmosphere would have been in the air. The media, politicians and bankers slowly but surely closing a trap on the one having mostly a "naive" view of the current situation.

Of course, the peak of optimism could go higher, time where you could see people tatooing themselves Katainen or Tarja Halonen face on their arm or belly. Housing or "Home sweet home" (in japanese character) tattoed in the euphoric fashionable hair free skull.

So Euphoria, somehow, can be measured by the consumer confidence chart as shown below:

This government has been excelling in the art of deceiving as it was demonstrated by this blog (post in late 2007-08)that post-crisis in 2008 where they were anouncing miraculous growth that failed to materialize instead we had an historic slump.

This time is not different and they reiterate that by providing misleading guidance such as :

The government estimated gross domestic product to grow by almost 3 per cent next year, while the inflation level was expected to be at 2.5 per cent.

The market has a different view on where inflation will be in year time:

Let's look at some other facts.

The monk and me
Once I was told by an old chinese monk, while meditating in a small montain in the himalayas, that "trees do not grow to the sky". I asked, immediately, can the politicians managed this achievement ("master")? He told me close your eyes and what do you see? I told him UPM, YLE, YIT and Corrupt politicians achieveing the un-achievable - making believe or feel in a sublimal way that trees can go very high - maybe to the clouds.

Almost desperate, the monk pointed toward a frog, and told me give it a kiss... I asked where? well, I so did. he asked me "so what had happened". I told him "nothing". Well you see "one may think that a frog can change itself into a charming prince (or principessa), the reality is that the force of nature will always win- the equilibrum is essential - the yin and the yang of the universe. what goes up go down"- I was highlighted ...and cold too on the top of the smallest mountain, on top of the himalayas.

The Keynesian failure

So, subsidies are still applying to housing even after multiple warnings (since 2004) from the OECD economical review studies. The government has set, ill designed and ill targeted measures toward housing where some will expire at the end of the year or pretty soon. This was engineered to put a break to the unemployment growth, however this has put more oil onthe fire. With unlimited government guaranty to banks, and with the combination of low interest rates associated with world wide fiscal and monetary stimulus which have artificially boosted export, it has given the sensation of a sustainable recovery- glorifying moral hazard as the way to go.

The Overheating

That is the thing that was missing in 2008 to make the bubble burst. As highlighted above, thanks to the government programs, fiscal and monetary stimulus they succeeded. They created the missing impulse that is necessary to create the conditions for a housing "fast" collapse.

From a construction perspective, we are in unchartered territory in term of new housing construction, this has just bursted - like a politician coming out of the bushes - in a very un-surprising manner. This construction burst was most probably concentrated in the uusima (capital) region :

Household debt are at record synchronizing with multigenerational housing price high. I wish not deflation but god if it happens that is going to be historic and i am not sure of the subsequent consequence. Politicians will all long live the boat, maybe migrate to the second best place, switzerland? (damn they miss the podium for 0.03 point, almost a rounding error.)

... and the last thing, a snow crystal ball based prediction then I stop here before I scare some readers...

Your servant,
HousingFinland

Finnish Housing Market: Damned or Doomed?

2010-07-26T02:52:00.001+03:00

Well still on Holiday and pretty happy about the title of this post. After all, some sun and fresh(?) air work give your the optimism needed to write that type of title.

Indeed Damned or Doomed will be the question (of the summer?) we would be asking in the next 12 months, but what does that mean?

Damned : The housing market will follow the Japanese path, an ageing population, ultra low interest rates and forever-ever falling housing market. This scenario is alluding to a non existing recovery- no or little growth the next generation or so.

Doomed : The latest stress test is showing that everything is under control, banks should not be afraid to loosely lend and maybe optionally behave in the same pre-crisis way- after all everything is fine, the banking collapse was just a bad dream. So recovery you asked, recovery you will get. A growth of 2 or 3 %? of course, there is a price to pay, and it is a rise in the interest rates. oops, I should not have said that... you know - 98 % of the Finnish mortgage rates are linked to 12 or 3 month euribor rates and on top of that, there are technical subtleties used by construction company (NCC, YIT, etc...)" that play intermediary between banks and mortgage holders...

Hard to choose between a Damned housing market and a Doomed housing market, I let you choose.

It is worth to note that Statistics Finland will publish the 2nd quarter result for the Finnish - gravity free - housing market on 30 July 2010. I will come back on that...

Gun Lobby 3 - 0 Population safety

2010-07-06T03:04:00.000+03:00

YLE, 21 June 2010 : "Anne Holmlund (cons), minister of the interior, told in an interview with the Finnish Broadcasting Company (YLE), that she would not push forwards to implement a total ban on semiautomatic firearms in Finland."

STT, 06 July 2010 : "Two people died and a third was seriously wounded in a shooting in a McDonald's restaurant carpark in Porvoo in southern Finland early on Tuesday."

Finnish Beauty Competition

2010-06-28T01:03:00.002+03:00

I think everyone has come recently with an housing advertisement that has a abherent pricethat is totally disconnected from reality but yet professional real estate agents and/or banks are often behind the sale. So I thought it would be good to highlight those cases for fun - A beauty prize could be given on a monthly basis . Such examples can be found easely on sites like Etuovi or oikotie

The charateristics should demonstrate the current Finnish Housing Bubble:

- Physical aspects: "kissable lips and inflated bottocks"
For example , a flat from an old buiding, cheap material or construction techniques. It could also expose the discrepancy between the asset and the proposed value. etc...

- Geospatial aspects: "walking on the sea"
For example, flats that are about 100 m or less than a rail line or highway. Some house that are build on potentially dangerous location demonstration poor health, or land conditions (noise, high traffic, mould, radiactivity in some cases, etc...)

- Financial and Marketing aspects: "in the kingdom of the blind, the one-eyed man is king"
For example, financial montage - a current and massively used technique from contruction builders/banks to attracts buyers bypassing the unfamous "vigilance" of the regulators. Or Also, how images are used to enhance the aspects of the dwelling in order to lure prospective buyers.

Here is one candidate found after only 10 sec search:

Candidate 1 (link)

Physical aspects: dirty, old, electril cables attached to the building, no architecture (chidren drawing type architecture), no parket, chicken style boxes and very small. For 21 m2, it looks more like a "jail" cell than a flat.
Geospatial aspects: No parks around - no space or trees
Financial aspects: Price 6500 euro per m2

No Comment

2010-06-23T01:41:00.001+03:00

Mr Liikanen on the Finnish Housing Bubble

2010-06-21T02:38:00.000+03:00

The Finnish economy has been slow to come out of recession. Both GDP and exports continued to decline in the first quarter of 2010.

On the brighter side, the employment situation has stabilised during the course of the spring, and the seasonally adjusted unemployment rate has actually fallen slightly.

On the other hand, the recent rapid rise in house prices contains some risks. ‘When deciding on a loan in Finland, both households and banks should assess the borrower’s ability to service the debt beyond the current low interest rate environment,’ Governor Liikanen emphasised.

In fact, all the policy makers are "touching wood", after all they consumed almost all the possible artifacts that were in their monetary and fiscal policies toolkit (ultra low interest rates, euro falling and higher state deficits)

Since they do not clearly know where the next shock is coming, the question is would they be able to handle it.

Coming back to Mr Liikanen, indeed confidence as you outline between the lines is key - but regulation, something the central banks failed to adress seem to still operate in Finland (otherwise how would you explain the current double digits inflation in housing price?).

Running Out of Fuel

2010-06-09T02:50:00.001+03:00

"June 9 (Bloomberg) -- Risks to the global economic outlook have “risen significantly” and policy makers have limited room to provide support to growth, International Monetary Fund Deputy Managing Director Naoyuki Shinohara said.

Most advanced economies are experiencing a “subdued” recovery, Shinohara said in a speech in Singapore today. “A key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted.”"

I think we all knew that the past year recovery was essentially due to historically low interest rates that gave some oxygen to debt-trapped consumers and the keynesian intervention of states that pushed futher in the red their budget deficit.

So yes, the economy recovered or let's stay stabilized but at what a cost? Today we learned in the case of the Finnish economy that it is still contracting even with the massive stimulus and guarantee that have been injected in it.

Worryingly the only thing that keep growing and steadely is the "True Fins" Party - the Finnish far right party that seems to get more and more partisans. Hope this is not the canary in the coal mine.

So what's left to policy makers and what's next?

Disclaimer

Monetary Roundup - Eliminating "The Noise"

2010-06-07T03:55:00.003+03:00

I thought it was good time to clarify some views on the monetary policies in Europe and around the world - as it is key to the housing market and will tell us whether or not policy makers are serious on fighting inflation.

In simple world, would policy makers allow a repeat of the 1970's period, where debt burden was somehow reduced by allowing high inflation to take place. For me the answer is "NO", I think we will head to period more like the beginning of 80's or 90's where asset price deflates to readjust to people's income as opposed to the contrary where income readjust upward to the asset level (i.e. 1970's).

In Canada, where a speculative bubble has developed in the housing market have started to tighten their rates :

"The Bank of Canada raised its key interest rate from a record low today, the first Group of Seven country to do so since last year’s global recession, and said further moves will be “weighed carefully” against future growth in Canada and elsewhere.", 01.06.2010 - Bloomberg

In the US, where the housing bubble has deflated in the past years and where usually the readjustment take place first, are starting to hint the exit strategy:

“In the medium term, like the Federal Reserve and many other central banks, the Bank of Korea will have to manage its exit from accommodative policies,” Bernanke said in pre- recorded remarks to a conference hosted by South Korea’s central bank in Seoul today. The Bank of Korea “will have to weigh the risks of a premature exit against those of leaving expansionary policies in place for too long,” 31.05.2010, Ben Bernanke

While the Fed will raise interest rates from a record low before the economy returns to “full employment,” Bernanke said officials don’t know when that process will start. The banking system isn’t fully healthy and lenders are “cautious” in providing credit, he said.

In Europe, the president of the European Central Bank, Mr Jean-Claude Trichet, is on communication campaign, making sure that the latest move by the ECB (huge guaranty for Greece and co) are not mistaken for a relax stance on inflation or misled with a Quantitave easing strategy.

Interview with Jean-Claude Trichet, President of the ECB,
conducted by Gerald Braunberger and Stefan Ruhkamp on 19 May 2010

FAZ: But by purchasing government bonds, you’ve crossed a red line. Has the credibility of the ECB suffered as a result?

Trichet: There has been no crossing of any line. Our line is price stability, and our credibility is derived from achieving this objective over the medium term. The Governing Council of the ECB observed that the effectiveness of the transmission mechanism for our monetary policy was being severely hampered. We are not increasing the money supply. By contrast with what other major central banks have done, we are not purchasing government bonds in order to inject liquidity into the markets. What we are doing is fundamentally different: we sterilise. We ensure an unchanged stance of monetary policy. This is why the liquidity supplied is immediately being absorbed again in its entirety. We have to do whatever we consider appropriate in order to ensure price stability. If we always listened to the criticism directed at us by politicians, social partners and financial pressure groups, we would be unable to fulfil our mandate.

FAZ: The crisis stems from excessive debts. We are now fighting the crisis with even more credit and even more money. How do we get out of this spiral?

Trichet: We have a number of ways of providing the banks with additional liquidity support, which will automatically be discontinued when the situation improves. Owing to the serious tensions observed very recently in the markets, we have now reintroduced some of these support measures. But you can be sure that we will exit those measures in a timely fashion in line with improvements in the functioning of the markets. We will never lose sight of our primary mandate of ensuring price stability over the medium term, with the right monetary policy stance. There is a clear separation here. By the way, note that the growth of the monetary aggregate “M3” is currently negative. I have been committed to price stability all my life. For me, inflation is a tax that would mainly hit the poorest and weakest in our society.

Another interesting interview:

Interview with Der Spiegel
Interview with Jean-Claude Trichet, President of the ECB,
conducted by Thomas Tuma and Christoph Pauly on 13 May 2010

SPIEGEL: In a talk he gave to the Spiegel a few months ago, Jürgen Stark, the ECB’s chief economist, said that the ECB was not permitted to buy government bonds. Who is right?

Trichet: I have already said that this is explicitly authorised by the Treaty. Over the past 11 ½ years, we have ensured price stability in Europe and have successfully met our target of keeping inflation below, but close to, 2%. We have done a good job fully in line with what the best central banks in Europe were doing before the euro. Those who believe - or, even worse, are suggesting - that we will tolerate inflation in the future are making a grave error. The Governing Council of the ECB did not hesitate to increase rates in July 2008 in a period of financial turbulence in order to ensure price stability. We were criticised at the time by the markets. This is a measure of our inflexible determination.

SPIEGEL: But the banks, too, are being spoilt by the ECB. As part of your so-called non-conventional measures, you have again made it possible for them to borrow countless billions. In doing so, are you not handing out even more play money to the financial markets?

Trichet: Again, we do what we believe we have to do in all consciousness in order to be able to deliver price stability over the medium term. We do not take into account pressure groups and lobbies. We supply liquidity to the banks so that they can finance the real economy and support the recovery, they know that.

What Has Really Happened?

2010-05-21T04:53:00.001+03:00

Strangely enough - more I talk to people about the housing market and more I get statement such as "the market is behaving normally", "I told you so, price are going higher". Of course, for not a moment, they think that price could stop from going higher or claim that if price were to adjust lower (be it, a single or half digit drop - they can only assume that as a temporary phenomenon, since price will, undoubtedly, resume higher -as they have always done). In addition, the most sceptical of all, will think that housing could correct, however deep downtheir heart (maybe brain too), they do not believe in that scenario for a second.

Now - Without being the one trying to ruin the party - it's time to remind that we are really in unchartered territory with regard to the economy as a whole and to the housing market in particular. A bit like when water reach the boiling point, any solid argument in favor of a sound economy and robust markets (stock and housing) can be pulverized into nothing... actually as a sign, all the digits of 100 degres celsius appear in the yeat 2010 (at this moment you should hear in the background a soft and delicate music to make it a bit like melodramatic)

Right - Let's go to the point - by having a fresh look at the chart above, the housing market chart as produced by statistics Finland, you suddenly notice a very strange phenomenon. a V shape (in some culture it's pretty vulgar, in some it's a sign of victory... for me it's the sucker smile ...)

So- How can price could go down and up so fast? after all, unemployement didn't shoot up in a matter of a quarter, in the same line employement didn't resume upward in the meantime. On top of that, there was not - yet- a massive wave of selloff and banks were and are still lending.

I have some idea, but I ask you what could explain this sudden drop and rise? this could be the key on when the trigger that will lead to double digit historical correction that will dwarf any other housing crashes.

Stock Market Collapse, wooww?

2010-05-07T04:52:00.004+03:00

Yesterday, the market collapsed withing seconds by almost a thousands points or 10% , a phenomenon not see since 1987 . While it recovered most of its loses, intraday, one cannot dimiss the importance of such event.

Either it is trading error that cascaded into a "heavy sell" snow ball effect or is it in any case selling and getting out of the market as soon as possible after a very powerfull rally.

In all cases, the economical situation in Europe and globally does not warrant complacency and the risk of a deterioration both economically and politically has never been so high in the past 20 years or more.

Taking huge debt in this situation, at the current moment in time... is just foolish.

Finnish Housing Bubble - April 2010

2010-04-30T04:24:00.010+03:00

"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.

Conclusion:

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)

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

2010-04-27T04:26:00.003+03:00

"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...

Signs

2010-04-15T04:40:00.000+03:00

"...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."

"most prominent global bubble in generations" ?

2010-04-07T04:05:00.006+03:00

"The house price bubble, the most prominent global bubble in generations, was caused by lower interest rates but...it 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...

Biggest Threat, Inflation or deflation?

2010-04-06T04:27:00.005+03:00

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)

Finnish Sterling Bond

2010-03-27T23:56:00.000+02:00

Finnish sterling bond issue leads trend

By David Oakley

Published: March 22 2010 18:22 | Last updated: March 22 2010 18:22

Finland has issued the first sterling bond by a government outside the UK in six years as record levels of debt make it harder for sovereigns to attract buyers in their domestic currencies.

The Finnish deal, which saw twice the demand for the £500m ($754m) raised, may pave the way for more similar transactions as other eurozone governments seek to diversify and attract new pools of buyers.

Myles Clarke, head of bond syndicate at RBS, said: “Countries such as Finland are looking to diversify and find other investors as issuance in eurozone debt rises sharply. This is a trend that is likely to continue.”

Finland paid only 3 basis points over the sterling London interbank offered rate in a five-year floating rate deal. This was cheaper than raising money in euros because of attractive terms in the basis swaps market. Finland immediately swapped the money raised back into euros, but at a cheaper rate.

A large chunk of the demand came from British investors, such as pension funds, Swiss retail investors and central banks. This is a different pool of investors to those who would typically buy Finnish bonds denominated in euros.

So far this year, three eurozone governments – Belgium, Italy and Portugal – have issued debt in dollars, with expectations that Germany, France and Spain are preparing to raise money in the US currency over the coming weeks.

With a record €1,000bn ($1,355bn) in issuance expected from eurozone states this year, sovereign debt managers are increasingly looking at different regions to attract buyers in a crowded marketplace. Last year, Germany, Spain, Belgium, Austria, Italy and Portugal launched dollar-denominated deals.

Barclays Capital forecasts that up to $20bn will be issued in dollars by eurozone countries this year compared with $12.5bn last year, $7.6bn in 2008 and only $2bn in 2007.

Although European governments are likely to choose the dollar for fund raising, the Swiss franc, the yen and sterling are also being considered.

Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

http://www.ft.com/cms/s/0/66d9a250-35de-11df-aa43-00144feabdc0.html

"Old Europe"...The Finnish side in a picture

2010-03-19T05:19:00.002+02:00

Number of persons aged under 15 in Finland’s population in 1875–2009

According to Statistics Finland, the number of persons aged under 15 in Finland’s population is the lowest in over 100 years.

This post should be put into context with what was said in a previous post: "Population Perspective"

"Red light" for the Housing Market

2010-03-15T05:22:00.007+02:00

"IN 1625, Pieter Fransz built a house in Amsterdam’s new Herengracht neighborhood. As the Dutch Republic rose to global power in the 1620s—with Amsterdam developing the world’s first major stock market as well as commodities and futures markets—the price of the house doubled in less than a decade.

Over the succeeding three centuries, the price of Fransz’s house was knocked down by wars, recessions, and financial crises and rose again in their aftermaths (Shorto, 2006).

When the house changed hands in the 1980s, its real value, that is after inflation, had only doubled over the course of 350 years––offering a very modest rate of return on the investment."

"From a historical perspective, it is not the trend but the volatility in housing prices that is distinctive"

"Starting in the late 1990s, prices of houses in Herengracht, and more generally in Amsterdam, doubled in value in 10 years, only to begin another sharp decline. This recent run-up and correction in prices in Amsterdam was part of a global boom and bust in house prices.", loungani, March 2010

A good lesson can be draw out of this article - After all it's all about equilibrium, what goes above or below its long term average tend to correct toward it. Somehow this what I have been suggesting all along in this blog see this post.

1- The ostrich effect

I think humans somehow behave like ostrich, they derive a strategy based on a very limited amount of information and tend to extrapolate it: like the ostrich that put its head in a hole and thinks it's safe...

Instead, this blog try to give you a eye bird view, a 10 000 mile view that allow you to see the whole picture... at least not to become an ostrich.

2- The FeedBack Effect

"One reason house prices go up so rapidly is that the supply of housing cannot be adjusted quickly.

Another reason lies in the interaction of housing and financial markets. Because houses serve as collateral, an increase in house prices can have a feedback effect: once collateral values increase, banks are willing to lend even more to households, which feeds the house price boom.

This feedback effect can arise regardless of what caused house prices to go up in the first place—demand momentum, government policies such as low interest rates, or institutional changes that increase the availability of mortgage credit."

We are spot on with regard to the causes and the effect it created. Clearly the mortgage market grew faster than the supply of housing , then the wealth effect took hold pushing price higher and higher in a similar fashion as in the musical chair game; when the music ends, one is set to lose and lose big in this case.

3- The conclusion

"First, house prices in most countries still remain well above the levels observed at the beginning of the upturn in the early 2000s. Second, house prices remain above rents and incomes, which, as discussed above, often serve as long-run anchors for prices. (...)

"That leads to an uncomfortable conclusion: house prices in many countries still have room to fall."

I think it is clear that from this point any rise in housing price is only strenghtening the case for the current housing bubble, but more worryingly bigger it grows, more damage will be inflicted to the economy.

Higher inflation, A "Stark" View ...

2010-03-09T05:27:00.004+02:00

"... While I do see the temptation for governments to ask for higher inflation in order to monetise the dramatic build-up of public debt, let us not forget that it serves to expropriate the income and wealth of the general public to the benefit of those who have lived beyond their means.

I can only reject the idea of raising inflation rates permanently. I would not like to imagine the consequences if, on top of the current financial fragilities and in an environment of high public debt, the general public were to lose trust in the purchasing power of money..." ,Jürgen Stark

This guy is a member of the Executive Board of the ECB (European Central Bank) and will most probably succeed Trichet as the next president of the ECB in 2011...which is reassuring, in term of inflation fighter thus will not allow a 70's type high inflation scenario (which is anyway not possible due to the population and growth configuration supported by a more globalisation business model).

So what? ... one will dare to say, somewhere in the background...

High debt, growing debt is unsustainable and it is what the current housing market is suggesting to do and so is the current way of living ... "beyond their means"...while salary are deflating or at best stabilizing ( stabilizing which is inconsistent with the current economical climate - one will discover that in the year or two to come)

Historical ...slump

2010-03-02T05:20:00.002+02:00

"The Finnish economy experienced a decline last year that is deeper than any that has taken place in any single 12-month period since the Civil War which followed the country’s independence.

According to figures put out by Statistics Finland, total production in Finland declined by 7.8 per cent last year.

Only in 1917-1918 has total output declined by more.

Not even in the economic crisis of the 1990s, nor in the Second World War, did the Finnish economy fall as steeply in a single year as it did in 2009... read the rest@ hs"

... Not sure what will be the price to pay for that in the years to come... Any idea?

"... Meanwhile, Finland’s Minister of Labour Anni Sinnemäki (Green) said on Monday that she hopes that unemployment in Finland will peak by the middle of this year.

“If this does not happen, and if it does not peak until next year, we will be in serious trouble”, said Sinnemäki at a meeting of EU competition ministers in Brussels."

...Strange, who will be in serious trouble?... Any idea?

The Housing Market, a Population Perspective : Part 1

2010-03-01T05:24:00.003+02:00

The outlook for the housing market ( and indirectly for the Finnish economy as a whole) in the longer term are pretty grim, due particularly to its demography and population characteristics.

I will try to highligh few areas that are of interest in this domain. Let's first project ourself in the future to understand how the population will evolve (Part 1) and then extract the causes of why it is that way (part 2) and its implication on the housing market (part 1 & 2).

This is a quick analysis, if you have some information or any interpretation you are welcome to enrich the discussion.

First let's look at the population as projected by the European Statistic Agency (View Source).

The projecton scenarios are based on assumptions for fertility, mortality and migration. The method used for population projections is the "cohort-component" method as stated in their web site.

Based on that raw data, here is a graph where I added important facts:

Based on the projection, one could clearly see that the need to build in greater amount new dwellings has no ground. Obvioulsy, some Finnish economists or politicians have been lately voicing the contrary - maybe to add oil to the fire to the current housing bubble?

So I want to highlight here, it is the fact that intuitively we would think that there is a need to build more and more housing since wrongly we think that the population will be greater in the future than now...we just extrapolate in a linear manner - (in)fortunately the human way of thinking is linear - we think in a very simple manner (it is even more true for politicians).

Moreover, this analysis takes the most optimistic perspective (not taking into account household formation which obvioulsy will drastically reduce the need of housing starts).

So what are the implications? are we building too much? would the supply excess the demand?

Let's have a look at the housing permit that were given for 2009 as found in Statistics Finland web site (view source) :

So no there is no excess supply and the contruction builder have understood it and have ramped down the number of construction. Most probably, they are looking abroad for keeping their shareholders happy or changing their business model into for example building railways or metro (guess who will win most of the contracts and who is going to pay for it?)...

Obviously at the end it all lies on one particular parameter : Immigration as we will see in part 2 the fertility rate in Finland can barely keep the population at the same level...so stop reading, act :->

Additionaly , immigration may also imply lower affordability level which could obvioulsy impact prices over time...

Chart of the Day: Central Government Liabilities

2010-02-23T04:59:00.007+02:00

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.

Finnish Housing Market: Doom, Doom and Gloom?

2010-02-10T05:27:00.005+02:00

"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.

Finnish Housing Market and Psychology of a bubble

2010-02-05T21:49:00.000+02:00

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

Guess what?

Finnish Housing Market - Biggest Bubble EVER?

2010-02-01T05:15:00.002+02:00

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...

Tap, Tap ... The "snow" palm 2010 is for ...

2010-01-26T05:20:00.007+02:00

"Finnish bancassurer Tapiola said in a statement Tuesday its pension arm had raked in a 13.5-per cent return on investments last year after taking a 8.3-per cent hit the year before. ... the result was the best ever.", STT

Put the music on - even if you are at work ;-> (that will chill you out)- the text below will make even more sense.

Indeed, applaude the speculator of the year ...but let me remind (may I ?) that they made gain on the back of governments stimulus (tax payer's money) and central banks financial rescue(generosity) . This company only represent , the exact same type of company that created this mess (price speculation - oil/food -) and will flood its managers with record bonuses - in some cases.

While at the same time some earn less, or lost their job...."what a wonderful world" as my friend Louis would echo...

"I see trees of greed, red carpets too
I see them boom for them and them
And I think to myself what a wonderful world.

I see skies of green and clouds of black
The dollar blessed day, the dark sacred oil
And I think to myself what a wonderful world.

The color of money so pretty in the sky
Are also on the faces of bankers going by
I see speculators shaking hands saying how did you gain
They're really saying I love it.

I hear bankers smiling, I watch them bet
They'll earn much more than I'll never work for
And I think to myself what a wonderful world
Maybe I think to myself what a wonderful world?

Delusion

2010-01-20T05:18:00.001+02:00

"I have the impression that many people, whether in the business sector, the financial markets, or in academic and political circles, think that the post-crisis world will be quite similar to the pre-crisis one in 2006-2007. In other words, they expect the economic recovery to bring us back to where we were before the crisis.

My feeling is that those who think like that are deluding themselves. The pre-crisis situation was not in equilibrium. It was not sustainable. The crisis occurred precisely because the situation was unsustainable, both within certain countries and globally.

If the world economy were to return to the pre-crisis situation, within a short time span a new crisis would be likely to occur because the same imbalances that led to the crisis would build up again. Considering some recent developments and behaviour, and considering the way certain policies are being discussed and the thinking of some key players, such a scenario does not seem that unlikely.", Lorenzo Bini Smaghi, Member of the Executive Board of the ECB, 18 January 2010

Another way to think of what has been said is to consider that the growth from 2003-2007 was based on illusion , an economy fuelled by an ever increasing amount of private debt that ultimately inflated all possible assets.

SO?

Well, my point is if 2003-2007 GDP growth, wealth creation was based on an illusion, what to think about housing price growth during that period?...

Not convinced?

Well, overall private wage are sharply falling (unemployment, furlough, bonus etc..), GDP has been on free fall in Finland wiping out the gain made during the period 2005-2007, interest rate is almost zero and has only one way to go...on top of that the economical situation's strengh is based on temporary measures (monetary and fiscal)...so you still think that price will go higher. Well my forecast for seeing a deflation of housing price in the next 2-3 years by about 30% (minimum) has never been so probable...

Convinced?

Finnish Competitiveness

2010-01-19T04:58:00.003+02:00

"Wärtsilä has analysed its manufacturing footprint as announced in October. To adjust to the fundamental changes in the market Wärtsilä plans to reduce its manufacturing capacity.

Wärtsilä also plans to move the majority of its propeller production and auxiliary engine production to China, close to the main marine markets. The current propeller manufacturing in Drunen, and the component manufacturing DTS in Zwolle, both in The Netherlands, are planned to be closed.

The Wärtsilä 20 generating set production in Vaasa Finland is planned to be closed and moved to China in order to stay competitive in this market."

If you look at the chart above, Finland has never been so uncompetitive, since the past decade or so. Had Finland stayed with the "Markka", the Finnish currency before the Euro, they would have certainly devaluated it...but they can't.

The result is a slow but sure disappearance of the manufacturing from Finland to low cost countries like China as expressed by Wartsila in the above article. By the way, it is worth noting that China is artificially keeping its currency at low level which of course accelerate the "one way" globalization.

Obviously, the competitiveness is a function of the currency - the Euro - that is far too strong at the current time and of course wage growth agreement not inline with the current situation.

Deflation, How Would IT Happen?

2010-01-10T04:54:00.002+02:00

"Unemployed for nearly a year, David Becker was relieved to land a new job in information technology last summer.

The offer carried a price, though: It was a lower-rung job than the one Becker had lost. He had to uproot his family from Wisconsin to Nevada. And, like many formerly jobless people who find work these days, Becker is now paid far less than before — $25,000 less.

It's one of the bleak realities of the economic recovery: Even as more employers are starting to hire, the new jobs typically pay less than the ones that were lost.

In the government's data, a job is a job. More jobs point to a growing economy. But to people who used to earn $60,000, a new $40,000 job means they'll spend less — and contribute less to the recovery."

Simply...by reshuffling the workforce following a period that will be remembered as credit excesses in almost all sectors.

Now one has to take that into account when purchasing an asset that will have to be served for 20-30 years i.e in the shorter term (at least 2-5 years) do not count on inflation to ease the burden of debt quite on the contrary...deflation will probably hold for the foreseable future making debt a real burden.

Please Applause... Mr Iceland President Olafur

2010-01-08T04:06:00.005+02:00

Iceland President Olafur R. Grimsson struck out at Fitch Ratings after the service cut the nation’s sovereign grade to junk following his decision to block a U.K. and Dutch depositor bill.

“This rating agency that did that, Fitch, has a lot to answer for because its rating in the last two or three years has turned out to be completely wrong,” Grimsson, 66, said in an interview with Bloomberg Television today.
“That is the same agency that gave the Icelandic banks in 2007 and 2008 top marks and we here in Iceland were perhaps foolish enough to think that this was a respectable agency, but it turned out to be completely wrong.”

How true it is. Those agencies that managed to "contaminate" the market and almost sink the economy are still around trying to give lesson as if people have forgottent are miserably they failed the system.

The same can be said to financial institution and a majority of economist... they ought to be humble and report to the public in a transparent and honest way.

Obviously let's not forget the reckless bankers:

Iceland “is not running away” from its obligation to compensate the U.K. and Netherlands for covering depositor claims that stemmed from the failure of Landsbanki Islands hf in October 2008, Grimsson said.

Because at the end it is the people that will pay the price.

Even so, “the people who are going to carry the burden, who are going to pay with their taxes in the future, will have the final say,” Grimsson said.

The same will happen in Finland, tax will rise because rescuing reckless banks and business (stimulus, liabilities, state exponential debts etc...) is and will be costly especially knowing that the people at the head of those institution were ripping millions in profit, bonuses and other largesse... but again this is not new and and it is well known and documented.

Variable Rates and Housing Bubble

2010-01-05T05:14:00.000+02:00

"Federal Reserve Chairman Ben S. Bernanke said the central bank’s low interest rates probably didn’t cause the past decade’s housing bubble and that better regulation would have been more effective in limiting the boom.

Increased use of variable-rate and interest-only mortgages, and the “associated decline of underwriting standards,” were more responsible for the bubble, Bernanke said today in a speech at an economics conference in Atlanta."

"Use of variable rates are more responsible for the housing bubble"... however obvious it always make more impact when coming from the "man of the year 2009" or simply the chairman of the Federal reserve, the entity that sets interest rates in the U.S. .

Maybe The Fed chairman Bernanke should talk to our Banks in Finland and maybe to our governors in "Bank of Finland" or (~~sleeping~~) regulators to wake up before more damages are made.

Indeed in Finland 95% of mortgage rates are based on variable rates. Knowing that interest rates are hoovering at around 1%, something that has never been witnessed in Europe, could create even bigger distortions in many markets including the housing market.

2010-01-04T05:05:00.004+02:00

"Finnish real estate agency Huoneistokeskus said in a statement Tuesday that the number of house and flat transactions had doubled year-on-year in December.

It added that an exceptionally busy month would raise the full-year transactions total beyond 64,000, or close to this decade's annual average." STT, Tuesday, 29 December 2009

First it is important to understand that we are dealing with a real estate agency, as it may not be a surprise that they jump on any piece of data that could be used to support their business.

And it is the case with the above article.

Comparing data Year on Year in december is rather mean. One must have in mind that the credit market and the financial system was on the brink of collapse last december. Icelandic banks were closing doors in Finland while the forest industry took the opportunitty to reorganize itself by shedding thousands of jobs. So confidence was indeed very low and housing transactions was low.

So It doubled, is that significant? it's a little bit like the deposit in my bank account, it went from 0.01 cents to 0.02 cents...well I got 100% interest when everybody is getting under 1%... you got the point? Same as the stock market gain 60% since March however many investors are still 20-40% down from the peak.

The other point is the "full-year transactions ... close to this decade's annual average", again you wonder if a politician has been working with Huoneistokeskus or at least helping writing such statement. First the full extent of the bubble started in 2003-2004, that is 5 years ago, the average for the decade is far lower that the average in the past 5 years where excess were made. Second close to doesn't mean equal...

Nevertheless, transactions are falling (note it won't be in a straight line) and it will continue. Nobody knows for how long maybe until a big shock comes (sudden increase of short term interest rates) followed by a readjustment as in previous periods...

Disclaimer : whatever is said above does not reflect the opinion of the writer or any one who makes comments on it. This was most probably written by some unknown force, that remind us not to underestimate the power of internet and the lack of knowledge on how the information is controlled, created and disseminated.

2009 "Crystal Ball" Review

2010-01-03T05:45:00.006+02:00

First Let's have a review on what I predicted beginning of 2009 but before that, one has to remember the context in Janurary 2009.

In a few words I would say that the global economy, beginning of 2009, was on free fall amid a very instable financial system. On top of that, economists were confused and disturbed: Their research and academic books did not describe such chaotic situation while their models were all failing to grasp the nature and forces that were unleashed.

More disturbing, signs of social instability started to emerge, during the first phase of the financial crisis (2008). Belgium's deep political crisis was averted by sworning Mr Van Rompuy and avoided a a very dangerous and slippery situation. In Finland, the Far right represented by the "True Fins" political party reached an historical levels in local elections.

Against the deflationnary forces that were set in motion, central bankers and governement around the world united. The Federal reserves in the forefront and The European central bank vowed to protect the financial system at whatever costs while governments started to accumulate debts and liabilities in order to support a wounded private sector.

The result was a stabilization of the financial system, sometime in the first quarter, followed by a recovery of the economy albeit from a low level, . The stock market did not any more discount a depression (or Armageddon) and recovered substantially since then.

So let's review last year prediction (1 January 2009):

Let's try to make some predictions on what we will see in 2009 in Finland.

1- The economy will probably enter into recession from 1st or 2nd quarter amid rising unemployment. Today unemployment is about 6%, it will most probably rise to 11%. Although we won't reach levels of the 1990's of 25%, for technical reason: the number of employed, the working force, will drop dramatically as the massive retirement forces start to kick in.

That was right, since the GDP contracted by 7.6%, showing the worse economical activities in Europe.

2- The Finnish Stock market will go side ways during the first half of 2009, in trying to assess the extent of the damage done to the real economy due to the credit crunch. Should a hint of recovery appear to be on the agenda from 2010, then we will see the stock market pointing it -rising- during the second half of 2009. I think we could have a growing optimism during the second half of 2009 only be watered out in the first 2010.

That was right, during second half the rise in stock market appeared globally as said previously the markets did not discount a depression. Optimism is at its peak as if the crisis was "behind us"

3- The Finnish has transformed itself, thanks to globalization, into an export economy. Relying mainly on the external demand, its strength of the past 10 years as become its weakness. The first sign of Finland recovery will be seen when Russia, Baltics and China start to recover...I do not see that until, maybe, end of 2010 at the earliest. Regarding the domestic economy, it was a factor of internal growth, partly due to an unprecedented credit growth, due to cheap credit and reckless lending. This will vanish too as consumer will start saving amid witnessing their principal source of wealth - housing- shrinking.

That's right, so far GDP is predicted to be "on par" i.e hoover around zero (0.7%? for 2010 as predicted by the Bank of Finland and echoed by the finance ministry).

4- Eastern Europe will see a major downturn that will put a very high pressures on Nordic and western exposed banks. Merging to survive could be a possible event as credit growth velocity will slow dramatically questioning the necessity of having a fragmented banking sector. The same will apply to the construction sector as well as satellite activities (real estate agents merger or disappearance could be on the agenda too)

That's almost right, Eastern Europe (Latvia, Estonia etc...) were and are in deep trouble and could drag with them quite many countries such as Sweden and Greece ... However we have not yet seen big banks merging such as Sampo and Nordea or real estate agents such as Kiintestomailma and huonestokeskus...but this could be the surprise of the next two years.

5- Housing price downward spiral had started end of 2008, and will accelerate on the first half of 2009. a 10-20% drop during 2009 cannot be ruled out. 2010 will see the same phenomenon or worse if a recovery is not at the end of the tunnel.

That's not right, Price did not budge as they are as the same level as the end of 2007. However, 2009 has been a very thin market the demand has collapsed (the same can be said to the new supply). In such market, very few players can set the tone. In any case these are just indication of an exhausted market where first time buyers are completely priced out.

6-Current politicians will still get the same support as they have enjoyed during 2008. During crisis, citizens tend to be conservative. History has shown that the same political group or figures are reelected. Matti Vanhanen could resign or be ousted from his party after failing to stop the decrease of popularity of his party.

Well almost right, pressure to see him resign were very high during 2009 however one could say that the call was right since Matti Vanhanenwill resign next summer 2010.

7-Deflation will be pointing its noise during the first half of 2009 with all asset/product prices going downward - all prices set by the market. On the contrary, prices set by government will rise, which can be seen as a form of taxation (Train tickets , Alcohol ,Electricity ....). Second half will see a pick up of inflation, although as for the first half, it will be mainly technical and short lived.

That's correct.

8- Interest rates will first stabilize at 2%, and depending if a recovery is on sight or if the deterioration is dramatic, they will fall to an unprecedented 1% or lower, clearly signaling that the deflation threat is real.

That's correct.

9- Rent will start falling from the second half, synchronizing with the unemployment growth. That will add to the deflationary threat.

I think that's correct - I need to check the rent growth or its velocity. Rent are going down since unemployment is rising and salary not rising any more.

10- This blog will slowly but surely disappear as the sole existence of it was to express the risks of a dramatic fall of housing price, something which was viewed as improbable, especially by figures such as the Bank of Finland, IMF, politicians and economists

I did not have that much time to post this year for professional reasons. However this blog will cease at the same time the bubble burst or reach a major bottom which could be sometime in 2012.

...for 2010

2009-12-25T00:01:00.000+02:00

Finding A Better "Compass"

2009-12-18T04:23:00.008+02:00

The extraordinary remedial actions taken by central banks and governments since late last year have been successful in restoring confidence in, and improving the resilience of, financial systems around the world.
...
Despite the recovery in financial markets and improved financial performance of euro area LCBGs (large and complex banking groups), there are several grounds for caution in assessing the outlook for financial stability in the euro area. In particular, the main risks identified outside the euro area financial system include the possibility of:
vulnerabilities being revealed in non-financial corporations’ balance sheets, because of high leverage, low profitability and tight financing conditions;

greater-than-expected household sector credit losses if unemployment rises by more than expected;

the surge of government indebtedness raising concerns about the sustainability of the public finances, as well as the crowding out of private investment; and

an adverse feedback between the financial sector and public finances as a result of financial system support measures, fiscal stimuli and weak economic activity

Within the euro area financial system, important risks include the possibility of:
renewed financial strains and that the recent recovery of bank profitability will not prove durable;

vulnerabilities of financial institutions associated with concentrations of lending exposures to commercial property markets and to central and eastern European countries being unearthed; and

a setback for the recent recovery of financial markets, if macroeconomic outcomes fail to live up to optimistic expectations.

SO a very important article from the ECB that highlight the great uncertainty that lies ahead. In particular, the risk of a renewal of the financial crisis which could endanger a very weak stabilization.

In the meantime, the Finnish finance ministry has published its growth forecast. First it cannot predict accurately the growth on a 6 month horizon but it is confident enought to highlight that 2011 will see growth , contrasting fully with the cautious view of the ECB.

"According to a new forecast by the Ministry of Finance, the recession has bottomed out... With the improving prospects, the ministry has raised its forecasts for economic growth in 2010 to 0.7 percent, up from 0.3 percent in a previous forecast. In 2011, growth is expected to accelerate to 2.5 percent.", YLE

In any case, I strongly urge to make your investment decision on the view of the ECB. In addition, I would like to highlight that since no one knows how the situation will turn out (due to massive intervention and its associated inability to identify the strengh of its recovery)...I will advise to just be an observer: watching how it develops and wait for better opportunity in case you are planning any investment.

Having said that, anyone takes its own decision and this is only my view and the one I will follow.

Finnish Q3 capital region house prices dive 13.5 pct yr/yr

2009-12-11T03:41:00.001+02:00

"Finnish third-quarter detached house prices fell by three per cent year-on-year, plummeting 13.5 per cent in the capital region and 1.8 per cent in the rest of the country, Statistics Finland (SF) said in a statement Friday.

The agency added that the average price of land for detached houses had fallen by 4.7 per cent year-on-year but was up by 7.7 per cent sequentially." STT

Taken as-is from STT.

When you think that interest rates are historically low and unemployment relatively stable due to extreme measure made by governments and central bankers around the world. I would expect a bigger decline going further.

The "Finnish" Distorted Food Market

2009-12-09T05:42:00.001+02:00

"Gross earnings by farms have fallen sharply this year compared to 2008 levels...in addition, revenues from grain sales fell by 110 million euros. A large harvest flooded the market, driving down prices for grains."

I understand that grain and in general any food related price went sharply down in the past year.

On top of that Oil price plummeted and is about half of the peak it reach in 2008. Moreover, transportation cost (for food stuff imports) have severely decline.

In addition, Uemployment has risen which mean the purchasing power as a whole as gone down on the consumer side.

So how on earth food price have not budge in Finland? Why is there not any competition coming from the two biggest supermarket? and what is the competition authority doing?

Disclaimer : whatever is said above does not reflect the opinion of the writer or any one who makes comments on it. This was most probably written by some unknown force, that remind us not to underestimate the power of internet and the lack of knowledge on how the information is controlled, created and disseminated.

Housing Bubble to deflate end of 2010?

2009-12-04T04:38:00.003+02:00

The ECB’s decision yesterday to end long-term emergency loans and tighten the terms of its final 12-month tender will give greater traction to any rate increases in 2010 should policy makers deem them necessary.

“The ECB chose a quicker exit path,” said Laurent Bilke, a former ECB economist now at Nomura International Plc in London. “It’s very difficult not to think it’s the beginning of a tightening process.”

...this will happen when the ECB had no other choice but to raise interest rates. It is not because the Finnish economy will do better associated with a risk of overheating, but it is because that the old economy (i.e France) seem to get out of this recession faster than thought. It is as well because states/governments are pilling up debt at alarming rate, thus one has to stop them before you get a situation where countries will not be able to service their debt and destabilize the European monetary system as a whole.

Nethertheless get ready for more shocks sometime in 2010 and see a dramatic correction in the housing and stock markets.

"The Black Death"

2009-12-02T07:53:00.006+02:00

Please if you were looking for a note of optimism this morning, then switch off you laptop. If you are at work, you should not anyway be browsing this site.

So, let's talk pandemic.It seems that the Finnish government want to vaccinate any living creature on the Finnish soil against the H1N1. I'm not sure about their aim, to enter in the World Record book? maybe as the country which vaccinated about 99.999% of the population (the 0.001% missing ... could be me ;->) .

Pandemic is nothing new, it has happened many time during human history. Not surprising to the readers, the human has always survived. The most known and deadliest is "the Black Death". It occured during the 12th century, precisely around 1348. The impact was tremendous, 50% of the European population was decimated. It was a very dark period marked by economical, social and religious instability. Tragically, like any similar periods, when nobody understand the true reasons, minorities became the targets and were hit very hard.

So this has happened 1348. This is important. Let's go a bit earlier in time an revisit the situation prior to that time:

"During the Medieval Warm Period (the period prior to 1350) the population of Europe had exploded, reaching levels that were not matched again in some places until the nineteenth century (parts of France today are less populous than at the beginning of the fourteenth century). However, the yield ratios of wheat (the number of seeds one could eat per seed planted) had been dropping since 1280 and food prices had been climbing. In good weather the ratio could be as high as 7:1, while during bad years as low as 2:1—that is, for every seed planted, two seeds were harvested, one for next year's seed, and one for food. By comparison, modern farming has ratios of 200:1 or more.

There was one catastrophic dip in the weather during the Medieval Warm Period that coincided with the onset of the Great Famine. Between 1310 and 1330 northern Europe saw some of the worst and most sustained periods of bad weather in the entire Middle Ages, characterized by severe winters and rainy and cold summers.

Changing weather patterns, the ineffectiveness of medieval governments in dealing with crises and a population level at a historical high water mark made it a time when there was little margin for error."

This finally bring to the "Malthusianism" theory:

"I say, that the power of population is indefinitely greater than the power in the earth to produce subsistence for man. Population, when unchecked, increases in a geometrical ratio (Exponential growth)." – Malthus 1798, Chapter 1

So after all, it might be the reason that governments take great care that such thing doesn't occur again or is it just to keep the consumer, the engine of the economy, consuming?

EasyJet : Monaliisa for 29.99 Euro!

2009-12-02T01:08:00.000+02:00

"EasyJet opened its first service to Finland, a route between London Gatwick and Helsinki-Vantaa, last year.

"We view Helsinki as an interesting destination because the national airline has held too big of a market share in Finland and there is a lot of demand for low-cost flights," Thomas Haagensen, easyJet's general manager for northern Europe, said in the statement, referring to struggling flag carrier Finnair."

That's a good news for the consumers.

At last we will have choice to choose between different airline and have beneficial competition.

Another news in the same line ...

Irish no-frills carrier Ryanair on Wednesday called for Anu Vehviläinen (centre), the Finnish transport minister, to explain why she had ignored a proposal to "incentivise" foreign carriers to enter the Finnish market, namely Helsinki-Vantaa airport.

"Ryanair can reverse the collapse in traffic at Helsinki airport if the government incentivises airlines to grow but our proposal to the minister for transport has so far been completely ignored."

So looks like there was really some breaks from this government to truly open the market, according to Ryanair...

Warning Signals... "The survival Of The Fittest"

2009-11-23T05:31:00.000+02:00

From a reliable source to another that is not... lets try to express the uncertainties that are currently taking place.

The reliable source is certainly the ECB that have started to send "clear" signals to the market. You could try to decipher their "secret code" or what are the messages that the policy makers are trying to send in order to influence the market participants i.e the investors - the profesional one (the amators are being misled by newspapers such as Kaupaleti or Helsanginsonomat and YLET (*)).

So the ECB last article is worth its weight on gold (when you know that gold price start to enter into a bubble mode...)

"The US and other advanced countries would exit last, as their economies are proving to be the slowest to recover. This would be the ideal sequence.

...Unfortunately, the reality appears to be quite different. Emerging Asian economies have not yet exited and do not seem to be in the mood to exit first, despite the stronger pace of their recovery, at least compared with that of the US..."

"The consequences of a late exit strategy have not been sufficiently examined. A delayed exit aims at increasing the incentives to lend at (low) fixed rates. But the more the exit is delayed, the greater the adjustment will have to be when interest rates are ultimately increased, in order to catch up. And the greater the interest rate adjustment, the larger the capital loss to fixed income asset holders."

Note that they are clearly syaing that the emerging market are currently making a mistake by not exiting from their current extraordinary policy measures. To that extent one can say that the next wave is currently developping under our eyes, a massive overheating of the emerging market (China, India, Latin America and indirectly Russia).

Obviously this is caused by the fact that interest rates are incredibly low in developped country (US around zero and Euro zone around 1%)...so money is flowing into emerging market. So we could be entering in an exception and turbulent period. And it is not clear whether the developed country (US and Euro zone) are creating in order to fullfill the following paradigm "the survival of the Fittest".

Another interesting point is the stress that interest rates will have to be increased on time, a failure to delay such a move (as the hyperinflationnary camps thinks) will have painfull consequences such as increasing interest rates to a very high level and during a longer that wished period.

The big question is again about "timing" and obviously the current state might change for the best or the worse in the next few months or years , so the need to monitor those developments.

Ok to be consistent with my introduction, here is the not so credible source:

"Pekkarinen says that stronger stimulus measures would help avert an interest rate trap and improve employment.
...
He notes that stimulus is one of the few options that Finland has to turn its economy upward in synch with the rest of the EU and avert an interest rate trap."

They will use any mean to use tax payer money that will be purely wasted (except for political purpose) as the finnish economy is fully dependent of the external world (even more as time goes) so no stimulus could replace that. However it could, at best, on a temporary basis (1-2 years), smooth the rise of unemployment and stabilize the strengh of the deterioration to an acceptable level (;->, can't help it might be due to the bad weather...) .

(*) spelling mistakes were mysteriously made by the spellchecker...

Large Scale Disinformation?

2009-11-21T04:13:00.000+02:00

Statistics Fniland has released the unemployment figure.I could hardly find any references to furlough or people being put temporarly out of work (since there are not job seekers, again they seem to manipulate the data by putting "Unemployed job seekers"). If there are not included in the figures and the figures itself have no values and again a disapointment from what should be a transparent and honest organization.

On the other side of Disinformation, the most unfamous media scare of the moment:

"A mutation of the H1N1 swine flu virus reported in Norway was also discovered in Finland some months ago. The National Institute for Health and Welfare(THL) says the mutated virus was found in a patient in April, 2009."

The virus mutated already in April but nothing was put in the media as it could jeopardize the idea of the efficiency of the vaccin. Of course most probably the vaccin were already produced and bought...

It is a very lucrative business especially during recession time...these are worrying times...

The Story Of Mr Dharod

2009-11-16T05:49:00.000+02:00

Nov. 3 (Bloomberg) -- Kajal and Vishal Dharod paid $559,000 in 2006 for a new four-bedroom house built in Rancho Cucamonga, California. Today, it’s worth about $360,000.

“We don’t know how we can come back from a loss like that,” said Kajal Dharod, 29, a first-time homeowner with a $4,200-a-month mortgage. “Buying the house was a mistake.”

Buying a house at the top of the market and on top of that being a first time buyer is the last thing to do.

Mr Dharod, by looking at my crytal ball, you could come back from a loss like that if the Federal reserve continue to weaken further the dollar and allow interest rates to flirt with the zero levels.

So Mr Dharod, Mr "hyper" inflation could come to your rescue however he may take time before ringing at your door...

Mortgage Situation Snapshot

2009-11-13T04:16:00.001+02:00

"The number of loan payments being delayed is slowly on the rise. Indeed, it is evident that households are having increasing payment problems," says Nordea Bank Unit Director Jussi Mekkonen.

According to Nordea, payment problems are being seen with larger home loans.

"Calculated in euros, newly contracted home loans have fallen by 25 percent, but in terms of the number of individual loans, by 15 percent. So, fewer large loans are being contracted," points out Mekkonen.

Who said that there was no problem in the mortgage market in Finland?

Housing Bubble : The Demonstration

2009-11-10T05:39:00.000+02:00

The last few days I read a nice research paper:
"The housing price boom of the late ’90s: did infl‡ation
targeting matter? by Sébastien Frappa and Jean-Stéphane Mésonnier, June 2009"

From that I extracted two critical information that fit pretty well with the current context.

"As households are confident that the central bank will not need to raise short term interest rates in a foreseeable future because they think that inflation is on check, they will tend to believe that observed and projected growth rates in housing prices are sustainable.

Since their expectations of low future interest rate should increase mechanically their assessment of the present value of houses considered as assets, they will be more willing to buy housing property at high current prices (compared to historical records).

Finally, they will be less reluctant to finance their home acquisition through mortgage contracts with adjustable rates, which are generally cheaper than fixed rate mortgages."

This is exactely what is currently hapenning in Finland.

"Since 1970, nominal housing price growth has fluctuated widely in developed economies with four expansionary phases:
-in the early and late 1970s,
-in the mid to late 1980s and
-from the late 1990s to the mid-2000s
and three slowing phases:
-in the mid 1970s,
-the early 1980s
-the early 1990s.

Note that, while housing price busts are normally characterized by a significant drop in real house prices, nominal house price defation is rare and was associated in the past with episodes of severe economic downturns, such as the recessions in the early 1990s in Finland, Norway and Sweden.
"

The ECB, The Government and the Donkey

2009-11-06T06:00:00.000+02:00

“…in the euro area, there is evidence that the credit quality of banks’ loan books has deteriorated on account of intensifying financial distress in the household and corporate sectors.

Banks could be getting over the valuation losses they have suffered on their securities holdings; however, the rapid increase in loan loss provisions suggests that a renewed wave of write-downs on euro area banks’ assets may be imminent, with ensuing capital reductions”. by Lorenzo Bini Smaghi, Member of the Executive Board of the ECB, Florence, 16 October 20

The first ECB warning shot...I suppose the "economical optmimism" period is about to be over in about 6-12 months and then we will be resuming the market correct in almost all asset types : stock market & Housing.

With regard to Housing, the media did a pretty good job at foolling the "last foolish"...spreading that the recovery is on its way and that the housing market was recovering...indeed it will temporarly, thanks to the "last foolish" and helped by generously blind banks (who will be waiting for the "last foolish", in the dark, round the corner, like a "bad dealer" providing the addictive "credit shot"...)

On 30 of October, Statistics Finland has published the Quartely housing price trend that has shown growth due partly by record low interest rates, no inflation and our "last -poor trapped- foolish".

As I said previously we will experience a "double top", troubling sign that happen at the end of a bubble (check the Nasdaa or OMX-H in 2000, or the petrole price in 2008)...after that, usually the fall is pretty sharp and last about a year or two.

Now what will trigger that, nobody knows ... in the meantime the government is borrowing as fast as it can in order to have a cushion (and avoid raising tax too early - that is, to ensure the current government is re-elected) in the next few years to come.

Raikkonen Lovely House

2009-11-04T05:21:00.000+02:00

"Oct. 30 (Bloomberg) -- Kimi Raikkonen, the world’s second- highest paid athlete before being dropped by the Ferrari Formula One team, is having trouble selling a 14.5 million-euro ($21.5 million) second home in his native Finland.

“The potential clientele for this price range is very small,” the realtor for the property, said in an interview. “It’s the most expensive home for sale in Finland.”
The price, 16,111 euros per square meter, compares with the mean price of 2,614 euros per square meter for new one-family homes in the Helsinki metropolitan area, according to second- quarter data published by Statistics Finland on Sept. 11."

It is bit sad that "Statistics Finland" is misleadng the external world on what is the real price in Helsinki. In fact you can quite easely double that.

One famous economist, British Prime Minister Benjamin Disraeli, said:"there is lies, damn lies and statistics" , He can't be more right.

Coming back to Raikkonen house, if one reader has still some pocket money left, why not making a bid? here is the link to the house.

It is worth to note that the picture gives you the impression that you are near Monaco...well don't be fool you are in Finland and if you are lucky you will be able to enjoy in between 1-2 month sunny weather.

So my point here is for 14 million euro you better put it somewhere a little bit sunnier, maybe Spain where price are bound to be divided by two in the next few years. Having said that, if it was a great house why selling it?

Predicting Interest Rates Burst

2009-11-03T06:47:00.004+02:00

The central bankers have driven their interest rates policies based inflation targets.The European Central Bank (ECB) target is 2%.

However, with globalization and massive speculation on financial markets, can we really be confident that central bankers are in control? For example, petrol price currently is mainly driven by financial institutions/speculators hedging against the fall of the dollar instead of reflecting the real fundamental of the global economy.

In addition, they clearly underestimated asset prices speculation (housing and stocks) effect on the real economy and its effect on consumers (wealth effect) or choose to completely ignore it.

Now here is one over many scenarios (see chart below) on what could happen to interest rates. This is based on the fact that central bankers have currently no choice than to support a very weak economy in which many actors are deleveraging (paying of their debt under low interest rates). They are taking big risks where we could see interest rates burst into an explosive and fast manner.

To check the inflation in Europe, here are links inflation indicators:

- ECB Inflation Dashboard
- 3-Month Euribor
- Government Bonds

PS: I have added a reference on the right menu of the blog

"Food" For Thought

2009-11-02T01:13:00.002+02:00

Back in 2008 during food price soaring including grain:

"Reijo Miettinen, 62, never had to worry about going hungry until global food prices soared and he had to join a growing number of Finns forced to turn to charity to fill their bellies.

Miettinen, a pensioner with thinning grey hair, eagerly shows off the day's catch: bread, ham, milk and a couple of ready-made meals -- all for free courtesy of a group called Veikko and Lahja Hursti's Acts of Charity.

"After I pay my rent and buy a monthly bus pass, I don't have much money left. That's why I come here," he told AFP as the food queue behind him circled around the yard before disappearing around a corner."

In October 2009, few months after hunger strikes around the world and growing queues in finland (which I suppose still exist but not so much mediatized)

The Finnish economic affairs ministry said in a statement Wednesday it had asked Esa Härmälä, a former head of the Finnish farm lobby, to draw up a report on the feasibility of launching grain-based fuel ethanol production in the country.

Mauri Pekkarinen (centre), the economic affairs minister, said Mr Härmälä's job was to establish whether surplus grain could be used to make ethanol while ensuring self-sufficiency in feed.

I suppose that this time they will use the "environment" reason and manipulate the "lost in translation" green party that are still travelling with big air plane and driving cars to sprout their green ideas...

Finnish Housing Bubble

2009-10-30T05:03:00.010+02:00

Statistic Finland has published the latest dwelling price for the third quarter. It is worth to understand that those prices just reflect a trend not necessarly the reality as experienced and observed on the ground since Prices are overly underestimated by Statistics Finland (even if this institution is transparent on its methodology and how it gets the data).

As expected, it shows higher prices compared to the previous quarter however still lower than the peak reached in 2007. I

The following picture shows the forecasted trend before statistics Finland published its data and provided some analysis see post "Housing Price : Warming Up Exercise".

Now what can explain the latest rise?

You must understand that the last leg up is not due to fundamentals and it is not coming from an healthy market. Distortion are hapenning at many levels and are pushing prices into a very dangerous and worrying path that could destabilize the economy as a whole and in particular the banking sector.

Now the facts:

1- Interest rates for housing purchase
As you can see in the figure above, interest rates are historically low. This is giving temporarly some oxygene to people who heavely borrowed at variable interest rates in the past few years. Lower interest rates is as well distorting the market as it is bringing into the market buyers that would otherwise not be elligible to borrow large sums for housing purchase, especially the young buyers.

Now, I would say that if Finland had its own currency and interest rates setting, I would then say that interest rates could stay low for a prolonged period but it is not the case. It is the European Central Bank that control Finland monetary faith. Indeed, the ECB will have to raise interest rates even before inflation shows its head and that could then be highly inadequate for Finland economical situation. It could be earlier than people would think.

2- State Sponsored Speculation

The government has still maintained interest rates subsidies even after IMF recommendation to phase them out. This has contributed over other elements, to an overheating of the housing market in the past few years.

In addition, the state in conjonction with banks is "lurring" the young to acquire price inflated flat, here is what YLE reported (full article here):

"Special bank accounts intended to help young adults get home loans are growing in popularity. Since July, customers of these so-called ASP accounts are eligible for a 3,000 euro bonus from the state.

OP Bank Group, Sampo Bank and Nordea Bank have all reported an increase in ASP account holders."

and from the Nordea site :

"If you start saving right away, you can have the necessary 8 deposit lots saved and buy a home before the payment period of the state home saving bonus of 3,000 euros ends on 31 December 2011."

3- Finland Economical Situation

It is pretty disastrous , just have a look the latest GDP figures, it is even worse than the 1990 recession. In 1990 we had the beginning of globalization and the birth of a giant Nokia. Today we have curretnly emerging markets overheating by ill designed stimulus that are putting at risk their economical stability - those stimulus and interest cuts were put in place due to economical distress. Moreover the Finnish giant industry are all but struggling.

Finland cannot devalue its currency which was the ultimate solution to bring back competitiveness and boost the export market. The Euro is too strong for an economy that mainly rely on export.

4- Finland DebtNow there was some talk that Finland will borrow huge amount next year (around 10 billion euro). I'm just wondering if it is a way for the country to lose its credit rating .

One explanation would be that it's better to borrow before it gets too expensive. Finland need to borrow is massive since it need to fund projects in order to limit unemployement from reaching scary figures. There are as well massive needs to fund a growing and worrying amount of retiree.

Of course, it is hapenning at a time of political elections hence no risk to see tax rise around this time hence the need to borrow...

Indeed there is nothing as a free lunch what is borrowed today will have to be repaid so expect higher tax down the line. It is sad that money being used today will mainly go to banks and builders, one that enjoyed an easy ride over the decade.

Let's see what "Bank of finland" had to say about that debt:

"As in other countries, the accumulation of debt by the public sector in Finland is justified. It has made it possible to soften the impact of the recession. Fortunately, the financial position of general government in Finland at the beginning of the recession was strong, at least relative to many other countries.

A continuing trend of increasing indebtedness is, however, not sustainable. Before long it will be necessary to reach a level at which the debt ratio can be stabilised. The higher the debt ratio, the larger the primary surplus will need to be in the future. The primary surplus is the difference between public income and expenditure, excluding interest expenditure. Rising interest expenditure must then be financed by tax increases or by cutting other expenditure."

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 may not be true and may be removed at any stage, at anytime (you like it or not).

And again I warn people by the media (lobby driven) that distort or try influence people mind - as an example see YLE (which is one the cheerleaders) and refer to the post : "...get some fresh air"

Switch-off Your TV/Newspaper and Get Fresh Air...

2009-10-29T05:05:00.001+02:00

As I have been repeating limit your exposure to news or media in general as without much notice your way of thinking will be out of your control, on the way , the vision of the world will undoubetdly be distorted.

Take for example the free newspaper "METRO" that can be found in metro or train station. Every morning while sitting in the train, in the way to work, and I shortly observe people around me, one will be amazed by the amount of people reading this newspaper as addicts in need of their morning information. At the arrival, the target is achieved, most will probably have the same view of the world ...

TV can be put on the same level and it gets people scared!
Here is an example:

Finns perceive more threats around them now than during the cold war. According to an expert from the Finnish National Defence University, politicians are largely to blame for creating new threats.

Another outrageous subject grossly abused by the Media and the politicians ... the "SWINE" or "H1N1" or "SIKA" or "PIG" Flue ... I wonder who come up with those names...

So the Piggy Flue have killed so far .....1 - one - Yksi person...

Yet it is considered as very dangerous disease while on the other hand more than 1000 - thousands are dying regularly from the same desease year after year, as shown in the following table while at the same time the bigger seller of alcohol is not behind bars (just kidding (see foot note)):

So my advise keep your mind "independant" and most importantly your judgement intact and not biased by the daily media calculated information coverage...

Footnote and 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 may not be true and may be removed at any stage, at anytime (you like it or not).

...Next the ECB rate increase?

2009-10-28T05:20:00.001+02:00

In yesterday's article I wrote the following:

"... In fact, price will correct due to the forced exit strategy by central banks that will led them into increasing interest rates to avert twin bubbles as already observed in the stock market and housing market."

So today we have the following headline news:

Oct. 28 (Bloomberg) -- Norges Bank raised its key interest rate a quarter point from a record low and signaled steeper increases than it previously forecast over the next three years as inflation accelerates and unemployment remains low.

So should the ECB follow the same path, we will enter a zone of turbulence with regard to the housing market.The dices are thrown ...

Housing Price : Warming Up Exercise

2009-10-28T05:07:00.001+02:00

This is my baseline scenario reviewed based on the current interest rates and bank lending behaviour.

I will come back to the housing price trend on the 30 of October, when "Statistics Finland" will publish 3rd quarter dwellings price.

It gives me an opportunity to prepare the ground before the data is released and try to make an analysis to explain the current situation. The economy is in bad shape, there is no doubt about that however the central banks and government have flushed the market with easy credit (historically low interest rates).

This will probably push any asset price even higher and make the current bubble even bigger and quite dangerous. So in order to avert the current financial crisis they have put the seed of an even bigger financial monster.

Having said that, the outcome of my baseline scenario is still valid, but instead the correction could be more severe and more violent on the economy. In fact, price will correct due to the forced exit strategy by central banks that will led them into increasing interest rates to avert twin bubbles as already observed in the stock market and housing market.

The other intersting piece of data that puzzle me is the consumer confidence component "Finland economy in 12 month" which is at record high, even greater than the dot com bubble...

Finnish Housing Indebtdness (Updated)

2009-10-26T06:07:00.006+02:00

By looking at the data provided by "Statistic Finland" (see reference) , one will not be surprised to learn that Finnish exponential indebtdness growth is behind the phenomenal surge in housing witnessed since 2000.

The following charts will try to demonstrate that we are currently walking on thin ice... It underlines the country's politicians and/or economists inability to oversee a situation that went out of control in the past 10 years.

Since the data has been gathered by "Statistics Finland", income has always been greater than credit, however since 2008 the situation dramatically changed...

In order to compensate for the difference between the income growth (linear) and asset price growth (asset inflation : housing, food, land, rent, etc...), credit was used to fill the gap hence the exponential growth witnessed.

Now Nordic banks are extremely nervous to see the unemployment growing since the amount of debt hold by private household is worryingly large. Should the deleveraging of the household happen, the consequence in the economy will be felt for many years to come, in particular the housing market will be greatly impacted.

Now, let's go back in the past and try to underdstand the root cause of this housing bubble. So, in order to have a housing bubble, you need to have more demand than supply. In order to have more demand, bank only need to provide more credit in order to boost the amount of transactions, and indeed this is what they have done, reckless lending, non regulated financial market that went "nuts"...Where investors were purely driven by greed and where consumers were viewed as a possible channel for reaching quick profits or high bonuses.

This is what the following chart demonstrates. The number of transactions for housing purchase have been multiplied by more than 3 in ten years (1998-2008). The same phenomenon was observed during the previous reported and well publicized bubble (1981-1991).

It is true that since 2009 the situation has reversed (unfortunately the data is not available from statistics finland database). The number of transaction has collapsed and the interest rates on housing loan has fallen markedly. The latter will probably affect/distort temporarly the indebtdness level and allow a "temporary" window of transaction growth. I insist this is temporary, and it is a side effect of the central bankers to deal with very severe economical conditions.

In addition, the Loans for house purchasing growth (year-on-year % change) shows clearly a continous weakness since the peak reached in 2006 (Reference : http://www.ecb.int):

Builders have understood that the market has turned and have drastically slowed their contruction ambition, as demonstrated by the evolution of the number of building permit granted. So on the one hand the professional have understood that the market has turned while on the other hand the media is pushing into believing that the housing price (in nominal or real term) will continue to grow and that it is sustainable.

See below the evolution of the number of building permit granted (reference : http://www.stat.fi) :
To conclude, I will say that we have had a credit bubble that fueled the housing and stock market. In the past 12 month, the economical situation went to an abrupt change and pushed central bankers to take incredible measure to stop the global economy from falling a cliff and overall sustain social stability more than wealth preservation.

I'm still convinced that the housing correction is overdue and a low will be reach in between 2010-2014 which was my baseline scenario since end of 2007 before the financial crisis was starting to be the main headline... however we are in a very unusual situation where past economical and political model have been damaged, and to that extend we will see the emergence of a new economical paradigm and see the emergence of new leaders. It will take time and the impact will be unknown, hence the need to adapt one's view with regard to possible economical development in general and to the housing and stock market in general.

Guess ... (The Answer)

2009-10-20T20:27:00.008+03:00

Guess what it is? ... answer in 5 days ... and its implication.

I have had very interesting comments...let's dissect first the answers provided by "Island Crow" and "Eric".

"Island Crow" : Unemployment rates?

Well, the trend is similar however in the opposite direction.

If we look at "statistics finland" last unemployment release data, We can construct the following chart, of which I have taken the pleasure to extrapolate a possible trend:

We are currently in phase (1), unemployement is growing as the demand is faltering and the excess capacity removed. Phase (2) is a stabilization of the unemployment growth due to low interest rates and government spending especially in the construction sector (Roads, Metro, Opera and all the possible way to keep afloat the construction sector with the tax payer money and supporting companies such as Lemminkainen and YIT to name few). In addition, as rightly highlighted by "Island Crow", there will be a wave of retiree that will, in some cases, be replaced by potential unemployed. However, as shown in phase (3), when all the stimulus bullets will be shot and when the european growth will resume its downward trend the unemployment will resume higher as witnessed during the early 90's.

Now, it is worth to notice that female unemployment is lower than the male unemployment during the bad time which usually reflect the contraction of the construction and heavy industry.

Talking about female and contraction. There was another interesting comment:

Eric : "HousingFinland's sperm count..."

Well, the trend may be similar however statitically it does not reflect the male sperm count in general. After some "theoretical" and "practical" research, it is known that the sperm count will decline overtime however you only need to have 1 to 2 successfull sperm hit on the ovary egg to fulfil your family ambition. What has to be remembered is "Quality over quantity" ;->, the picture below show probable evolution on "the count" overtime (note the statistics start just after the 1929 crisis to the next mild one of the 1990...in line with housingFinland spirit...).

So the man fertility in general is pretty strong...statistically.

Now how about the initial picture?

The picture reflect the "MFI loans to households in the euro area", (Chart 5, "Monetary policy, credit flows" by Bini Smaghi), and it is contracting very substantially and in a robust manner, not even reflecting the fact that government have flooded the market with tax payer money and the ECB interest rates are at all time low.

So no sign whatsoever of a consumer back to frenzy spending. Household seem not interested in contracting credit for large purchase. Something opposite of what happened during 2003 which had led to asset inflation.

So this chart is very important to follow, should it stay under the zero level, which mean contraction, then the deflationnary trend will be triggered and anchored.

Thou shalt not covet thy neighbor's house

2009-10-12T01:41:00.002+03:00

"Signs of optimism are emerging in the Finnish real estate market. However, buyers say they're confused about where the market is heading.", YLE, 12 LocaKulta 2009

So here is my message to the confused "buyers" : "Don't be"

Historically, housing price has never grown while unemployment is heading higher.
Think about the fact that interest rates are historically low, yet Bank lending for housing purchase has collapsed from a year ago and no sign whatsoever of a recovery...except based on "cheap talk" from real estate agents amplified by some media and crook economists.

So I would rectify the YLE statement by saying "Sellers are confused, some are scared and others worried".

As I said there has been a little bit of euphoria as if the economy has recovered..It has not. It's all about government stimulus and ECB interest rates forced generosity.

The cure that have been administered in order to solve the current crisis has not treated the root cause but instead delayed (by 6-18 months) the outcome of 20 years of credit binge.

Takling about credit recklessness, Nordea comes straight to my mind.

Nordea for example is trying to use "the fire to fight the fire"; Using bad credit style to fight bad credit past behaviour is a bad principle in itself and it won't work but it shows you clearly another sign that this bank is trying to fight for its survival. They clearly made mistakes by overexposing itself in the baltics which are at the bring a regional tsunami....and they will pay a heavy price for that...and hopefully they won't pass their pain to the "consumer" or "buyers" by overshooting their base rates or margin...I bet there are capable.

Here is a statement from Nordes taken from their web site :

"The loan interest it tax-deductible if the loan is

a loan taken out to acquire income which is considered debt taken to acquire taxable income, for example, loans taken out to acquire listed shares or rental income."

Amazing, but it is taken as is...re-read it... "loans taken out to acquire listed shares"

That's crazy...they want people to speculate on stock market...while abusing rules on tax deduction. So the government has put in place a flawed system - the regulators are somewhat hibernating and Nordea like a vampire tries despereatly to fool badly the last "buyer"

Legal Note: Ignore what has been said above it all incorrect and wrong and does not reflect the author writing, thinking, dreams or aspiration. by reading the above line you are binding by the above legal note. Any idea, statement or implication that could be derived, inspired or suggested by the article have no foundation, no ground to make investment or anything else.

Nordea ... Lesson "Not" Learned

2009-10-06T01:16:00.001+03:00

So Nordea is fighting deflation with its own tools - rather limited though.

Credit is faltering and consumption is sluggish...so how do deal with that? well use the bad behaviour that was the cause root of the current crisis - as if the crisis happen for nothing and give you the sense that institutions, banks do not learn a nickel out of that.

Let me be more clear...and point to what make Nordea, not an example to follow...

Make use of your home equity

"Would you like to utilise the assets tied to your home to realise your plans?

Does your home need improvement or would you like to buy a summer cottage? Is the block of flats you live in going to have pipe renovation or other repairs? Are you interested in investing? Would you like to give your children or grandchildren a nest egg to get them started in life?
Benefits of HomeFlex

* The interest you pay on your loan equals the interest the bank pays on the deposit on your account.
* You can deduct the loan interest in taxation. Read more
* You can use the loan in the way you want and the account is used as any ordinary bank account.
* The loan period is ten years. During this time you don't have to amortise your loan - you just pay the interest. After ten years we will agree with you on how to continue."

Read again the first and last sentence :
- Would you like to utilise the assets tied to your home to realise your plans
- The loan period is ten years. During this time ... you just pay the interest

I thought that this crisis was all about reforming a failing financial regulatory system...looks like nothing happen. This is the reciped that put the American financial system on it knee that ultimately had to be rescued with public fund.

Today Nordea has been hit by the "I-Dont-Get-It*I'M-Not-Listening" syndrome...and yet, regulators are still fighting the last battle , most probably analysing what went wrong and allowing in real time such development...

Legal Note: The information contained on the Site or in the above story or article is not under any circumstances be considered as a true story, real information or based on any real facts. Any mention of specific legal entities is purely fortuit or is purely accidental...ultimately this story most probably was written by a passer by whose identity could not be identified...the blog author is not responsible for any of these content. etc.. etc.. anything missing in this legal note can be added anytime...

Poor, Bumpy and Placebo

2009-10-02T03:30:00.000+03:00

"Our staff told us this month that the real economy could be a little bit better, in average, in 2009 and 2010 than what had been projected three months ago – 0.5 % higher for each year.

1- But is means that 2009 will remain very negative and 2010 perhaps only very slightly positive, as an average. I don’t exclude that we could observe positive growth, quarter on quarter, at the level of the euro area as a whole, before mid 2010. But this doesn’t change our main message.

2- Namely, that we have a bumpy road ahead and that the level of uncertainty remains exceptionally high and therefore that prudence and caution are of essence.

3- Now much depend on us, on our capacity to reintroduce confidence in the financial and real economy decision making processes, in the households as well as in the corporate sector. It is what the ECB and the Eurosystem want to do: preserve confidence, inspire confidence, remain a solid anchor of confidence. "

So that was the message from the ECB president, Mr Trichet...the only person that has good track record and inspire confidence...

So the message is clear, we averted a total collapse (by firing up the whole set of measure and stimulus) in order to have a disastrous 2009 and a no growth scenario for 2010.

After that it is X, the unknown ... no possibility to launch any measures and just wait.

At the same time, cross fingers, touch wood and optionnaly read kauppalehti for subliminal messages...

Having said that...at some point there will be a price to pay for saving the financial system (that was past feed by greed)...like the Incas..one will need to be sacrificed ...the poor, the young and the ederly through a ravaging inflation/stagflation..but that is tomorrow battle..maybe in 3-5 years time...in the meantime, deflation is advancing and getting stronger day by day

So The ECB Has An Exit Strategy...

2009-09-28T01:33:00.000+03:00

"It would be premature to declare the crisis over,” Trichet said. “Now is not the time” for the ECB to unwind its stimulus measures. “However, at some point in time an exit strategy will have to be implemented. The ECB has an exit strategy and stands ready to put it into action when the time comes."

And so here is my scenario in few "silver" bullet point in a random fashion...

The stock market rally extend until end of the year.... to fall to an historical low within the 2010-2011
End of 2011 the ECB exibit its exit strategy by increasing its interest rates by 8 fold within the following 12 months
The housing market collapses and reach a low in 2012
The Finnish parliament is dissolved at the turn of next year ...not because of election corruption but of incompetence and inability to deal with the current situation.

"Home Ownership Obsession"

2009-09-25T03:30:00.000+03:00

"Ireland should end its obsession with home ownership and look at alternatives such as renting or leasing, a former housing adviser to Bill Clinton said today.

Speaking in Athlone today, Nic Retsinas, now a director at the Centre for Housing Studies at Harvard University, said in recent times homes had started to be viewed as an investment opportunity rather than a place to live and raise a family.

Mr Retsinas was addressing the biennial conference of the Irish Council for Social Housing.

“Over time a different vision crept in. There was conspicuous consumption and an environment of encouraging lending that wasn’t very prudent,” he said.

“People should not be obsessed with owning a property. Maybe the issue should not be about home ownership but about something such as making sure people live in decent homes,” he said."

A smart guy, pretty rare nowdays...and most probably he did not need any fund extorded, robbed from public funds...to come with this kind of analysis.

I keep the best for the end :

“Society almost demonised renting. You weren’t smart if you rented. But, as it turns out, those who rented could be said to be the smart ones now as property prices crash”, he said

We shall check that back in about 2-4 years time..nothing compare to a lifetime of being a borrower...

I see "corrupt" people... In your dreams?

2009-09-21T01:02:00.001+03:00

I have been looking at some news headlines and corruption news seem to erupt everyday, and touching all levels.

Yet most of the people involved are still in power or in their position ... it is very worisome as they are in command and have in their hand power that can shape the futur of this country.

One interesting question that one could raisewill be : "is the current political landscape legitimate and reflect the Finnish population choice"...no one has a clear answer sadly?

Nevertheless it remind me a movie, I let you guess it ...

Cole Sear: I see corrupt people.
Malcolm Crowe: In your dreams?
[Cole shakes his head no]
Malcolm Crowe: While you're awake?
[Cole nods]
Malcolm Crowe: Corrupt people like, in politics? In Nuorisosäätiö?
Cole Sear: Walking around like regular people. They don't see each other. They only see what they want to see. They don't know they're corrupt.
Malcolm Crowe: How often do you see them?
Cole Sear: All the time. They're everywhere.