Finland's Neighbour Debt Bubble...

“Swedish households today are among the most indebted in Europe and we cannot have household lending that spirals out of control,” Martin Andersson, the director general of the Financial Supervisory Authority, said in an interview in Stockholm. 

The FSA is ready to enforce a cap limiting home loans relative to property values to less than the 85 percent allowed today, Andersson said 

“What we saw in the 1990s crisis was that if you bought a home with a 90 percent debt ratio in 1991, it took about six or seven yearsuntil you were back at a level where you had a property that was worth more than your mortgage,” Andersson said in the Feb. 13 interview. “That is a very long time.” 

“One should be prepared for a downturn,” Andersson at the FSA said. “House prices cannot just continue upwards in eternity.” source 

Some charts ...

Significant milestone...

I think it is significant... Household income (first pillar) growth was a potential explanation for the housing rise (combine with faltering interest rates (second pillar)). So the first pillar is gone, and the second is lurking in the horizon (i.e. raise in interest rates) ...

Short Status...

Short status on a pretty peculiar Finnish housing bubble:

Interest rates, especially the 12 month Euribor (for which 98% of the Finnish population have locked their housing mortgage rate), have gone down from a high of 5% beginning of the decade to reach almost the zero level in 2012 as shown in the chart above.

 Central banks have been fighting deflation since the crisis started in 2008, lowering rates to unchartered level. The effect was to support artificially all asset prices.

In Finland, as highlighted earlier, the housing market is hugely sensitive to short term interest rates(Euribor) , and the collapse of the Euribor to almost "Zero" helped avoid a readjustment in the short run.

 This has renewed optimism in the Finnish housing market and induce the belief that the housing market is sound - a very dangerous dangerous asumption.

 In addition, this optimism in the market has led housing builders to ramp up their production after a freeze in 2009 (at the peak of the crisis). Eventually, housing stocks are accumulating as more and more housing are being put in the market without finding any buyers (even though interest rates are at level not seen since the creation of the republic of Finland).

 Also the economical outlook (see figure above) is deteriorating for an export oriented economy, added to that a ageing population with potentially (in the next decades) a shrinking population...all points to a scenario which tend to be similar to the Japanese experience.

And I let you compare it with the Finnish market, with a potential historical peak reach during 2010-2012:

Happy New Year 2013!!

Canary in the coal mine ...

The last time we saw the 2 Years government bond reaching the same historical low,was in 2 August.

It clearly shows that investors are looking for safety, ready to pay for keeping their money (albeit a low amount). Basically the government is playing the role of a safety box...

For some who are interested in the french market, a market that also behaved in the same way as in Finland (i.e. was not affected by the current crisis), You can find a report genereated by one branch of the french government. It has very good and credible argument, and actually I like the idea shown in the page 79: www.cgedd.developpement-durable.gouv.fr

Flying Piggies ...

"In a report titled: “Just don’t look down some house markets are flying again” Goldman Sachs argues easy money policies by the world’s major central banks has had a ripple effect on countries which have avoided the worst of the global financial crisis, boosting their house prices.
According to Goldman, there now exist housing “high-flyers” - countries that have experienced real house price increases and “low-lyers” - countries where the housing market downturn appears to be more protracted.
“High flyers” include Germany, Finland, Norway, France, Switzerland and Israel as well as Canada and Australia." Source: CNBC

"What goes up, goes down", ConfuciusHousingFinland

Nor"th"way

Norway’s Housing Boom Could Lead to Spain-Style Bust, Say Some

Norway’s housing sector, which has seen prices jump by almost 30 percent since 2006 — could end up replicating a pattern of housing booms and busts seen across the globe, from the U.S. to Japan to Spain and Ireland, according to a report by Bank of New York Mellon.

The rest of the article can be found here : http://www.cnbc.com/id/49443611

I wonder if Northern real estate is overheating...

Also it is interesting to see that Finnish mortgage rates are the lowest in Europe (since there all based roughly on variable interest rates based on 1 year Euribor)

http://www.hs.fi/english/article/Finland’s+housing+loans+cheapest+in+euro+area/1329104949177

No Comments...

"Buzz" Game: Find the mistakes...

Lance and Neil Armstrong: a Fraud ?

Wiki: In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual;

KTI : "Increased uncertainty related to housing prices”

"Regarding the outlook for housing prices, some differing views have been presented recently. 


According to some specialists, housing prices are likely to decrease due to the worsening economic outlook and tight financial markets. 



Some others, however, estimate a clear increase in prices in the growth cities, due to the strong demand and continuous internal migration (1). 


According to the forecasts of Pellervo Economic Research PTT, housing prices will decline by 1.8% in 2012. 


The housing market is supported by the healthy Finnish banks as well as slight increase in household income (2). 


However, there is a lot of uncertainty related to the outlook after 2012 (3). 


If the euro area’s crisis will be solved efficiently,that might stimulate the housing markets markedly (4). 


However, some specialists have stated that housing prices are not sustainable and thus include risks. (5)"


I extracted this text from a study done by "KTI - High Quality Property Information" , an interesting and professionally made report on the housing market in Finland. Not sure how long the report will stay  and be accessible online, anyway,  I extracted the housing part related to residential.

In addition, I "colorised" the text above, to put emphasis on what one can call a politician talk... providing both positive and negative views hence pleasing both parties but most importantly not scaring customers of this report (the sponsors, which I extracted a list of it see - Ref 1- below ).

Anyway some comments:
(1) Demand has started to flatten during amid record housing price and historically generous housing financing (very low interests rates) - migration will continue if employment rises and also if housing is affordable and attractive - which is not granted currently.

(2) Increase in household income? I have some doubt...

(3) Uncertainty not only after 2012 but also in 2012... we had few tremors that were swiftly handled by the ECB, each time showing the fragility and gravity of the situation.

(4) If the situation was solved efficiently in the euro zone, interests rates will normalised which will send a shockwave to indebted Finnish household (98% have housing loan with variable interest rates). So housing price will also normalised downward...

(5) "Some specialists", too bad there is no mention of who they are and also what are those risks and what are the triggers for it to materialise.


Ref 1: The sponsoring companies include CapMan Real Estate, Helaba, HYY Real Estate, IVG Polar, KIINKO Real Estate Education, NCC, Newsec, Ovenia, Sato Corporation, SEB Merchant Banking and Skanska. Also, RAKLI – the Finnish Association for Property Owners and Construction Clients, the City of Helsinki, as well as Invest in Finland, have provided financial support for this report. KTI wishes to thank the sponsors.

"Central bank governor Erkki Liikanen said that Finnish authorities should consider granting housing loans for only part of the value of a property.

He pointed out that Spain should provide a warning as to what can happen when borrowers become over indebted. “A rapid increase in housing prices is a recipe for a crisis, which always follows when prices fall sharply. Ordinary people, the economy and the banks suffer,” Liikanen said in an MTV3 interview on Friday.

Liikanen said that the crisis has taught that banks should be supervised as an entire sector, so that risks faced by the sector could be detected."

Source: Liikanen

As far as remember, Mr Liikanen has been warning over housing debt in the past few years. This is not a surprise as household debt is at record level (supported by historically low interest rates).

But would authorities listen to liikanen? There are far too many interests (conflict of interests also?) for many players...so be it, let it all rise...

Negative 2Y Government Bonds

Source: Bloomberg

Now the Finnish government is being paid to borrow ... that's not a joke(r)!

Looks like some investors are extremely scared on where to put their money (whether is it banks, stocks or other investments). They rather choose to lend that money to the government and pay a small interest in return of it to act as a safety box.

I could keep their money under my mattresses :-), although I suppose I don't have enough of them since there are plenty of wealthy distress savers...

For sure, they (investors, some wealthy well advised) see it coming and they invested in Gold (hence the record level), they also invested in real estate, commodities etc... now they are to scared as it could reverse faster than they will have time to recall their investment...

I suggest them, especially in Finland to continue putting their money in real estate (since bank only guarantee about 100 000 eur )...the wealthy (i.e  saving greater than 0.5 million euro) should prop up the housing price to level that can be recorded in the Guinness record book for the housing price in Finland.

Unless everybody is right, investors are foreseeing financial armageddon in the next 2 years. Wouldthe depositor be ripped off in the same manner as they did during ex-ante Germany WWII... the answer in the hand of Mr Draghi... by an unfortunate (?) combination of events, central banks holds the key to this crisis - so Draghi, Bernanke  will have to act right and fast.

Exclusivity: Housing Price Will Fall ...

Sources: dwellings and earning levels & real price index of dwellings old flat blocks

Finnish Housing prices will go down, it is a certainty, but by how much and until when?

Let's try to answer those questions by looking at the behavior between wages and housing prices in the past half century and let's try to envision potential scenario.

The top chart above shows clearly that when the wage line (level) goes above the prices of dwelling lines , a correction is due. The correction is severe when the wage level stays above the house price level for a long period (e.g. 1973-1979, 1989-1993, 2008).

Scenario 1: "Crash Begins"

Wages are sticky, they follow the inflation rates - no wage deflation in sight (Unions will always negotiate wages inline with or higher than inflation). Housing prices will have to decline drastically few consecutive months or year, in order to bring new buyers and make the price rise again (usually pretty fast, when both the economy start to grow and price are relatively cheap).

Also see related link to this scenario: -22%

Scenario 2: "The Dark Night"

At first housing price correct and wages stay sticky, but union power weakens and the industry manage to reduce the rate of wage inflation to even bring it negative. Housing does not grow, or painfully decrease slowly, very slowly year after year ... the housing market go through a long and painful dark period of stagnation with no growth or below inflation for few years.

Scenario 3: "The boring bat"

No comment: Wage and housing price follow the inflation rates which hoover near record low (but not negative)