ECB Covers while Consumers run naked...

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

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

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)

"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

“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?

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?).