Housing Price Monitor - 2011 Historical Turn?

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...

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

"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...

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?

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

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

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

Mr Liikanen on the Finnish Housing Bubble

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

"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"

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?

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?

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

"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)