US Federal reserve: The Mess

"Ben Bernanke put the Federal Reserve on a path towards a December rate cut in a speech on Thursday night in which he said the relapse in financial markets had resulted in a “tightening in financial conditions” that had the potential to harm the real economy." Financial Times, 30 Nov. 2007

What a mess!, so the Banks went in the past 20 years and in particular in the last 4 years in reckless lending, saw huge profits and huge bonuses. Now they are crying and call for the Federal reserve to come to the rescue. Right, the Fed has no choice as those *** can hurt the real economy and the "real" people too like you and me.

The Fed will cut the interest rate aggressively , make again the money cheap and on the way will hurt the savers. Most probably, they will promote "Moral Hazard" and reward the frauders and people that sees stock market, housing market, oil market, gold market and currency market as nothing than a casino where easy money can be made.

The ECB will follow suit most probably next summer otherwise the Euro will shoot up to 1.60 euro to the dollar and on the way putting all exporters to their knee and the economy with....

Finland suffers wave of strikes

"Finland is experiencing its worst outbreak of industrial unrest for a generation after relations between the right-leaning government coalition and powerful trade unions collapsed over wage negotiations."

"Finland’s political situation shifted to the right in elections last March, after the conservative National Coalition party, led by Jyrki Katainen, formed a coalition government with the Centre party of Matti Vanhanen, the prime minister."

"Guy Ahonen, a professor at Helsinki’s School of Economics and an expert on the labour market, attributed the outbreak of unrest to the new government’s alterations to the way wages are negotiated."

Todays strikes:

-Finnish dispensers' strike to expand : "Talks between the Finnish Pharmacists' Association and the Association of Finnish Pharmacies (AFP) over pay and conditions broke down on Friday."

-Aker metalworkers will stage a one-day strike in Turku: "Metalworkers at the Turku yard of Norwegian shipbuilder Aker Yards will begin a one-day strike next Monday morning.The labour dispute involves labour conditions applied to new workers.

-Finnish unions declare boycott on S-Bank: "Two Finnish unions on Wednesday declared a boycott on S-Bank, a branch of cooperative S-Group, saying it had refused to apply the finance sector's collective labour agreement."

-Alko Strike : "Most outlets of the Finnish state's alcohol retail monopoly Alko are to close on Saturday if an agreement is not reached in pay and conditions talks this week."

Inflation Rate in Europe Soars to Six-Year High

"The inflation rate in the 13-nation euro area rose to 3 percent this month from 2.6 percent in October, the European Union's statistics office in Luxembourg said today."

"An index of executive and consumer sentiment fell to a 20-month low of 104.8 from 106 in October, according to a separate report."

We hope that it is just related to the surge of oil price and food in the past few months. No Worries as long as it is a temporary phenomenon and not a structural one otherwise the ECB credibility will be impaired.

Revisiting 1990

Article published in the US in 1990

A Decade of Flat Prices?

"Still, there are signs in previously hot markets that the psychology of real estate is starting to change. Homeowners who counted on selling their houses at big profits are forced to scale back their expectations, economists say. People who would previously have scrimped to buy a home as soon as possible, before prices rose further, are now taking a harder look at whether it is worth it to buy. Sometimes they are deciding to wait longer, which leaves sellers facing long delays and forces them to mark down their prices."

''We don't have the appreciation rates we had before and we're unlikely to have them again for some time,'' said Susan Wachter, an economist at the Wharton Real Estate Center at the University of Pennsylvania. ''People correctly perceive this and are adjusting their economic behavior accordingly, in part by postponing home ownership.'' Is Renting Better? One example is Carl Spiegler, a 37-year-old salesman for a legal publisher in Chicago. He thinks that renting makes more sense in an uncertain housing market. ''I'm afraid of the 'last fool' rule,'' he said. ''Home prices have skyrocketed. My concern is that I will buy and they will stop going up.''

Caught Between Two Homes

"The owners of the Melville house put it on the market more than a year ago at $270,000. It had come down to $220,000 when the Gagliardis saw it. They talked the owners down to $215,000 and had agreed to buy it, but had to pull out when they could not sell their own place. The Melville house remains on the market at a price too high for most first-time buyers, and even a stretch for many homeowners looking to trade up."

It's interesting to notice how familiar is the situation depicted in this article.

Source: New York Times

Government Incompetence and EU

"Tax exemptions granted by the Finnish government to some employees of the Helsinki-based EU chemicals agency drew flak in Finland's Parliament on Wednesday."

"Staff recruited by the agency from abroad are allowed to buy a tax-free car every three years and benefit from a VAT exemption on purchases exceeding 170 euros for a limited period of time."

This concerns the EU Chemical Agency Employees (450). I would like to remind that in general the salary of the EU personnels are higher than average Finnish salary but the most outrageous point is the fact that the income TAX of EU employee is about 18% (which is over 35% for Finnish workers.).

That is just unacceptable... EU and Finnish politicians are here promoting inequality, a wrong message...

U.K. Home Prices Drop Most Since 1995

The cost of a home fell 0.8 percent from October, the biggest monthly decline since June 1995, to 184,099 pounds ($381,000), Britain's fourth-largest mortgage lender said today. Annual house-price increases slowed to 6.9 percent from 9.7 percent in the previous month, the report showed. So we have reached a peak this summer as did the US last summer, most probably Finland has currently peaked this autumn too...

"Growth does now seem to be slowing,'' central bank policy maker Rachel Lomax said Nov. 23. "There are clearer signs that the slowdown in the housing market is gathering pace.''

Hometrack Ltd., Rightmove Plc, HBOS Plc and the Royal Institution of Chartered Surveyors have all said house prices fell in November. Sellers shouldn't hesitate to lower the asking price because a more protracted slowdown is on the way, Rightmove, the U.K.'s most-used property Web site, said Nov. 19.

I'm pretty sure in about one quarter or two, this article will be valid just by replacing the UK word by Finland. Probabilities are high and the assumption realistic based on data coming from construction builders, statistics Finland, current credit crisis and inflationary environments. Now all point to a gentle correction. Of course, it all depend on the job situation, if the economy deteriorate more than forecasted and the job market reverses trend then the correction could prove more painful.

Deposit Guarantee Fund: 25,000 Euro Max

"Deposit banks authorised to operate in Finland must be members of the Deposit Guarantee Fund, which is responsible for safeguarding depositor assets in the event of a single bank's insolvency."

"In such a case, the Deposit Guarantee Fund will pay a maximum compensation of EUR 25,000. When calculating the compensation payable to a depositor, the depositor's assets on various deposit accounts with the same bank will be added up and protected up to a sum of EUR 25,000."

"If the same depositor has deposits with different banks, the protection will be provided in respect of each bank."

"An exception to this bank-specific protection is the amalgamation of cooperative banks OP-yhteenliittymä. Its member deposit banks are deemed as constituting a single bank upon payment of compensation, ie if a saver has accounts with two different member deposit banks, the deposit guarantee will be a total maximum amount of EUR 25,000. (members are Aktia Savings Bank plc, the savings banks Helmi Säästöpankki and Nooa Säästöpankki and Skärgårdsbanken Ab)"

"Banks also falling within the scope of the Finnish deposit guarantee scheme are:

eQ Bank Ltd
Evli Bank plc
Glitnir Bank Ltd
Kaupthing Bank plc
Nordea Bank Finland plc
S-Pankki / S-Banken
Sampo Bank plc
SEB Gyllenberg Private Bank Ltd
The Mortgage Society of Finland Ltd
Tapiola Bank Ltd
Bank of Åland plc"

No panic for the moment but the 3 month Euribor is highlighting some stress in the banking sector.

If you believe that some banks are running the risk of insolvency (how would you know it ;->) then do no put more than 25,000 euro in a single bank especially in the cooperative banks.

Sampo is a good example of a Bank to be worried about as in March 2008, it will not be any more a Finnish bank but instead a Danish branch of Danske Bank.

I believe the debt (credit, house loan) on the contrary will stay whatever happen... They never fully lose...

Source: FSA
Useful information: talletussuojarahasto

German Inflation Accelerates; Fastest Since 1996

"German inflation accelerated in November to the fastest pace since records began in January 1996, led by surging oil and food costs. "

"Today's inflation figures are catastrophic, putting upward pressure on euro-region data,'' said Karsten Junius, an economist at Dekabank in Frankfurt. "Nobody expected them to be like this.''

"Workers across the euro region are already pressing for more pay, threatening to unleash a price spiral. Deutsche Bahn AG, Germany's state-owned railway, on Nov. 24 proposed a pay increase of as much as 13 percent after nationwide strikes."

"What will certainly hold our attention the most is whether these rising oil prices lead to secondary effects,'' Mersch, head of Luxembourg's central bank, said. "That would then trigger a monetary response.''

"Money-supply growth in the euro region accelerated more than economists forecast in October to the fastest pace in more than 28 years, adding to the European Central Bank's inflation concerns. "

German inflation data is very important for the whole Eurozone as Germany is the biggest economy in Europe. For some economists, the ECB seems to have failed in its mandate and is starting to lose credibility.
However the ECB is in a very difficult position, on one hand they have to deal with a credit crisis that has the potential of slowing down sharply the Eurozone economy and the other a rising inflation that is reducing the purchasing power of its 350 Millions citizens.

Another problem is that nowadays inflation is mainly coming from outside (oil, food, clothing etc...), the ECB has no control of that. China moved from deflation importer to inflation creator. The Chinese don't want to reevaluate their currency, creating an overheating economy and triggering a boom in commodities price. The artificially weak currency is now triggering a trade war that is pushing the US and the EU to pressure the Chinese.

The EU should have raise the interest rates in September, they announced it back in June and roll it back after the crisis started in the summer. They are now in the "wait and see" mode ready to "pull the plug" . There is a chance that an increase of interest rates is in the card next year if the inflation is not abating.

In Finland, we are already seeing the "second round" effect (strikes, higher pay and company passing their cost to consumers...). Interests for Finland should have been higher in order to cool down the demand, unfortunately Finland cannot decide its interest rates...

Finnish Consumer Confidence Plummeting

This statistics were released today by "statistics Finland" describing the low consumer confidence that has been falling since summer 2007.

"Consumers' confidence in the economy weakened in November."

"Of the four components of the consumer confidence indicator, expectations concerning Finland's economy and development of unemployment weakened in November from the previous month."

"Consumers regarded saving especially worthwhile in November, in contrast to their views on raising a loan or purchasing durable goods. Consumers expected inflation to accelerate in the coming months"

I would like to highlight the weakness of "raising a loan" component which after all is the pillar of the housing market stability. It has been falling in the past few months and is approaching an all time low. My guess is that this will continue to deteriorate at least for another 6 to 12 months, something not seen since 1995.

"In November, eight per cent of households were thinking about purchasing a dwelling within a year."
If I decrypt that I would say that 92% of household don't think they will buy a dwelling in the next 12 month ... I think it's pretty wise considering rising uncertainties in the interest rates and economical fronts.

"Saving was considered worthwhile by a record 81 per cent of consumers in November."
People start to be cautious, not good for an economy that is based and fuelled by spending and consumer debt...

Sato Cancels OMX Listing

"Finnish housing investor and developer Sato said it has cancelled a planned initial public offering on the Helsinki stock exchange, citing the recent market downturn and growing investor uncertainty."

'The market situation has not been favourable to a listing, but we will continue to develop Sato according to the current growth strategy,' said chairman Juha Laaksonen.

"The company had intended to raise up to 100 mln eur in the IPO to help grow its domestic business and expand its start-up operation in St Petersburg."

SATO is a private company providing housing solutions with two business areas: investment in housing, and housing development and construction. Its major owners are Finnish pension insurers, banks and insurance companies, and corporations operating in the wholesale and retail sector and industry.


SATO can't raise the money, why is that? Investors are seeing better opportunities elsewhere.
You just wonder as well why SATO didn't list last year, the timing would have been better. They did it in the wrong possible time, when a credit crisis was abating and housing prices appreciation slowing sharply.

Joke of the Day

"Sirkka-Liisa Anttila (centre), the Finnish agriculture minister, said in Brussels on Monday that the government would no longer pursue the status of a winemaking country at the EU."

Sometime you wonder where the policy maker will bring us... same ideas can be extrapolated to housing policies taken in the past decade (for example Housing Interest Rates deduction fuelling housing price, Municipalities land planning monopoly etc..)

Euribor 3 month: "Fear Index"

As everybody should know or must know, a Credit Crisis started in the US in August 2007. It quickly spread to European Markets. In the past month, there was hope that the crisis was losing momentum and the situation was improving. Unfortunately, it's not the case as shown by the 3 month Euribor highlighting the stress in the banking sector and the massive intervention by the ECB to defuse tensions in short-term money markets.

Investors are anxious, Banks are nervous. What does that mean for the housing sector? not good at all. Banks will tighten their credit standard, lend less as they need to have cash reserves to prepare covering up for future losses bound to happen...

What we are witnessing or will see in the coming months (if not years), is a U-turn in the balance between the housing supply and demand. The demand was strong, mainly pushed by banks (offering mortgage at record pace, to anybody who wanted it.), and the supply was above or on an average level. Now, the demand has sharply contracted, vanished overnight and stocks are pilling up, the housing inventory is increasing and sellers still sticking to their price.

Sellers are currently wondering why they can't sell their asset within days, since it was not long ago (6-12 months ago) , any type of housing were sold within a week or two, in some cases even before the visit....
Sellers are waking up to the hard reality: in order to sell they will have to bring the price down, something not seen in that scale since 1996.

Greenspan: Global Housing Bubble

"Markets are becoming aware of the fact that the decline in house prices (in the US) is not stopping. It is at an unprecedented pace compared to the last 50 years,'' Greenspan told a financial audience in the Norwegian capital.

He said the housing bubble had burst and the market was "a good deal away" from its selling climax -- a point at which sellers ultimately lower their prices to match lower bids.

"I have no particular regrets. The housing bubble is not a reflection of what we did, as it is a global phenomenon.''

Alan Greenspan, is an American economist and was Chairman of the Board of Governors of the Federal Reserve of the United States from 1987 to 2006. In a nutshell, he is the equivalent of Trichet of the ECB in Europe, the one that set the interest rates.

Municipalities Land Planning Gamble

The OECD back in 2006, was sending some recommendation and warning regarding the land planning:

• "Tax subsidies to housing may largely be capitalised in higher land prices"
• "Slow planning procedures and municipalities’ unwillingness to provide building land have limited the growth of the housing stock in growth regions."
• "This would argue for improving municipalities’ incentives to provide building land, speeding up planning procedures and a phased removal of the tax advantage associated with housing."

In the autumn 2007, it seems that the government, in particular the Housing ministry is sending clear messages to the municipalities. Here is the housing minister, Jan Vapaavuori , message:

"Suurin hidaste hänen (Jan Vapaavuori, Housing Minister ) mielestään on kuntien kaavoitusmonopoli. Pääkaupunkiseudun kunnat pelkäävät veropohjan rapautumista eivätkä halua kaavoittaa tarpeeksi maata kohtuuhintaista asumista varten. Kunnat odottavat muiden kuntien tekevän aloitteen."

The biggest hindrance is the monopole of land planning. The communities in the Helsinki area are afraid to lose big income revenue if the price of the land is falling. There are basically manipulating the supply to keep artificially high price level of Land therefore housing. This distortion is putting pressure on prices and future construction.

The municipalities are waiting for the other municipalities to make the move. (or are we seeing a new cartel?)

"Eikö asian voisi ratkaista pakkolailla, joka heikentäisi kuntien kaavoitusmonopolia?"

This issue can be solved by introducing a new law that will break the land planning monopoly.

"Uskon jo viran puolesta, että asunto-ongelma ratkeaa nykyistä paremmalla kuntien välisellä yhteistyöllä. Jää nähtäväksi, onnistutaanko. Mutta jos ei onnistuta, palataan teemoihin, jotka mainitsit."

The ministry will work with municipalities to solve this current issue. If it doesn't succeed then the law will be introduced.

"Vapaavuori väläytti jo aiemmin tänä vuonna, että jos kunnat eivät kaavoita niin sitten ne itkevät ja kaavoittavat."

Vapaavuoru already said it beginning of the year, if municipalities don't speed up the land planning procedures , they will be more pain later when they will be forced to do it.

So when the law will be introduced or when the municipalities are pushed to speed up the land planning process, then the pressure on land price will fall bringing the housing price down. This is always happenning when all the majority of citizen have already purchase a home. We witnessed a similar situation in the Car tax reform. It was introduced when the Car industry had problem and was technically in a "recession"and again most have already made a car purchase therefore being robbed 10 of thousands of euro of purchasing power through custom and car tax.

Source: talouselama

Housing shortage?

"The population growth is 650 persons more than compared to the same period one year ago."
which represent about 19 320 net growth.

"Some 10,700 people have moved to Finland from abroad this year, which is 1,900 more people than in 2006, reports Statistics Finland."

"Births however declined throughout the country. By the end of October 49,550 babies were born, a figure which is 150 less than at the same time last year."

"Meanwhile, more persons died this year. Some 40,950 people passed away this year, which is 1,100 more than in 2006."

So the population growth is growing at a slow pace albeit still growing. We know as well that in the next 10 years there will be a massive number of people going to retirement. That doens't support very much the current housing boom going forward. Are we going to have a Japan type housing price deflation? if so is it just worth to buy an asset that will be bound to lose value over time (Germany is another good example).

YIT: The Rescue Plan

"Finland's YIT sold its network business to Relacom Finland.", "The network business consist of 1,000 people and the transaction is valued at 25 million euros in cash ."

"Relacom owner is Altor ,a private equity firm focusing on investments in Nordic-based companies." I'm wondering what will happen to the network business employee, does YIT care? I guess not they got cash in exchange...

"The builder added the sale would leave its full-year outlook unchanged."

So YIT is in free fall, surprising? NO. The market participants are just reflecting their view on the real estate market down the road.

If you own YIT shares, then if it breaks the critical value of 15.90 euro, then selling is your best option as the share will head toward the 3 euro mark within 6-12 month... It's a bearish call but a reality on a market founded on high return 'illusion' and greed.

Nordea: Housing affordability weakening

"Housing affordability weakened in the third quarter throughout Finland."

"When the loan period can be even several decades (why not several generations?), there will certainly be both ups and downs in the economic situation during the period. People can balance the fluctuations of their own financial situation by putting money into savings whenever possible, in addition to repaying their housing loans (yeah save money, but don't forget to pay your loan, so pay your loan, save and optionally enjoy your life). These buffers can be used when needed, advises Tarja Svartström, Private Economist."

Nordea is now recommending to save, maybe they start to get scared that the "subprime" phenomenon start to spread to the Nordic and Baltic area. They could then see huge mortgage losses comparable to the one in the US. Nordic and Baltic house price have risen far above the one in the US, so let's review the situation in about 6 month time...

Joke of the Day

"In the interests of our economy it would be prudent to use precious electricity to power the industry rather than to heat houses," Mr Jan Vapaavuori (cons), the Finnish housing minister, said.

So to heat a house, it's better to use petrol, wood or coal?

Some seem to live in another planet...

Or should we be forced to use municipality heating system which price sky rocket year after year? is there "nurse type" law being written, in hurry, to force people for such scheme?

ECB: "Asset quality could start to deteriorate"

"The gradual stabilisation or slowdown in lending growth to households and non-financial corporations, as well as signs of tightening lending standards, support the view that EU banks’ asset quality could start to deteriorate from the currently very high levels in the foreseeable future. Pockets of vulnerability among highly indebted, low-income households and highly leveraged, non-listed firms have become particularly relevant, and banks’ exposures to such borrowers warrant close monitoring."

Source: ECB (p57)

ECB: "Banks...inflating house prices"

"...the extent to which surging houseprices have more generally been driven by an increase in credit availability or leveraged mortgage lending as financial liberalisation,deepening and innovation progressed throughout the EU is relevant from a macro-prudential perspective."

"Undoubtedly, banks have to a certain degree contributed to inflating house prices as they stimulated housing demand through two channels:
-first, by easing credit rationing as they increasingly transferred the corresponding credit risk in itself entailing arisk of moral hazard – which both freed liquidity for renewed lending and probably triggered an erosion of credit standards, and,
-second, by having tended, in many jurisdictions, to ease credit standards directly in an attempt to maintain or gain market share in response to rising competitive pressures in mortgage markets, which – through improved housing financing conditions and, hence, affordability –added to housing demand"

Source: ECB (p44)

Strike and Inflation

You know when things hit the roof when the state-owned alcohol retail monopoly goes on strike... At the same time more industrial actions were recently or are taken by the Nurses, Telecom sector, Dispensers, Pharmacist etc..

I will not argue against those industrial actions, when you know that :
-Food prices rise is just accelerating
-Housing price have risen over 100% in the past 10 years
-Energy prices is at record high
-Rents are going ridiculously high (remember house/land doesn't produce anything)
-Tax is everywhere : Income, VAT, Custom, Municipal tax, oil tax, etc...

Right some wealthy person lately on TV or newspaper recommended and highlighted that pay rise and strikes damage future competitiveness etc... Right, One would like to remind them that their income is 10 to 1000 time bigger than the middle class one. The gap is just growing bigger and bigger. So it's easier to have this "clever" stance when you are on the right side ...

Some Headlines:

"Talks between Finnish state-owned alcohol retail monopoly Alko and its workers broke down late on Wednesday over a dispute over pay and working hours."

"Qualified dispensers and head dispensers in the Finnish capital region walked out on Thursday afternoon in an effort to speed up talks over pay."

"A number of Tehy nurses had staged a walkout in the province of Uusimaa, including Helsinki, the day before. Thousands of members of Tehy are to start a mass resignation campaign later next week."

"Around 600 pharmacists and qualified chemists will stage a twelve hour strike in Helsinki on Thursday.Pharmacists are seeking, on average, a 500 euro pay increase over a period of two years..."

Oh Dear, Inflation is back

Inflation 2.7 per cent in October

"The year-on-year change in consumer prices, i.e. inflation, calculated by Statistics Finland was 2.7 per cent in October. In September it stood at 2.6 per cent"

"Consumer prices were again pushed up most in the year by increased cost of housing. Housing prices were pushed up primarily by risen housing loan interest rates, higher prices of owner-occupied flats and real estate, as well as rent increases."

No wonder why we are seeing so much social protest, strikes... When inflation shows its "head", tension rises.

"Risen running costs of vehicles and phone call charges, higher interest rates on consumer credits, as well as increases in food prices and restaurant and café prices also had an impact on inflation."

"By contrast, the rise in consumer prices was curbed most in October by fallen prices of entertainment electronics, computers and used passenger cars."

That's one of the reason why the government decided to reduce the car tax by 10%. That was clearly a move to impact inflation figures, nothing to do about the environment as it implied.

Again and Again it's the poor, the retired and the savers that we feel first the burden. The very rich can talk "smooth" about non sense about those strikes but at the end they don't have income issues and they will profit most...

Liikanen : "CHALLENGING SITUATION"

ECB Credibility?:

"Inflation expectations are on the upside," Liikanen said in a Finnish television interview.

"He cited oil and food prices as well as tax increases and high wage deals as contributing to inflation risks, and said the ECB now faces 'a challenging situation'."

"Above all (it is important) that inflation expectations are anchored at close to but below 2 percent. The central bank will stick to this," Liikanen said.

Stagflation?:

"The ECB faces conflicting pressures in the form of rising inflation and a deteriorating picture for economic growth, which has been hurt by the credit crunch that hit financial markets over the summer."

"Higher market interest rates after a global credit squeeze are lowering consumption and investment," Liikanen said.

Source: Guardian

Housing Slump, What Could Trigger It?... UK

Mervin King , the governor of the Bank of England (Equivalent of Trichet for the ECB) is hinting at at a rate cut sometime next year as the UK Housing Market might turn sour...

"The central projection is for growth to slow sharply in the next year,'' Bank of England Governor Mervyn King said at a press conference in London today. "There has been some tightening of credit. Residential and commercial property investment are likely to moderate, possibly quite sharply.''

source: Bloomberg

Housing Slump, What Could Trigger It?..The Baltics

The Baltic from overheating to Hard landing

Latvia `Hard Landing' May Cause Baltic, Balkan Economic Tremors

The fastest-growing economy in the European Union is most at risk of a "hard landing'' among 15 emerging-market nations, according to Standard & Poor's. Analysts at Goldman Sachs Group Inc. predict "the adjustment is likely to be painful and to start soon.''

The impact threatens to extend beyond the Baltic region at a time when global markets are reeling from a credit collapse.

"Any turbulence in the Baltic countries would likely have a contagion effect on other emerging-market economies that rely on debt financing,'' according to Goldman analysts.

Finland highly coupled with the Baltic, Domino effect?

"Finland's economy is more dependent on the Baltic Sea region than Denmark's and Sweden's, according to a study made public Monday."

"In comparison to the other Nordic countries, foreign investments to and from Finland, in particular, have a more definite emphasis on the Baltic Sea states. As the economic focus of the Baltic Sea region is shifting further east, Finland's economic contacts in the area are estimated to strengthen even more," the Finnish government said

The housing market is highly sensitive to economic downturn. Could this be the trigger? or would it come from Spain, UK or China?

Housing Slump, What Could Trigger It?...Spain

Spanish firms and households are some of the most indebted in Europe and economists have slashed 2008 growth outlooks on concerns the country is exposed to the global credit crunch.

Economists do not rule out a recession in Spain from 2009-2010 as one of Europe's most unproductive and inflexible economies struggles to shift away from a construction and consumer based model.

"We have a latent mortgage crisis in Spain owing to the enormous volume of loans handed out," said Manuel Pardos, chairman of Spanish banking and Insurance consumer rights

Commercial Real Estate Bubble?

Construction of new commercial properties growing

According to Statistics Finland, the construction of new commercial properties has been active in the first half of 2007.
Compared to the previous year, there was a 34% growth in started retail and office building projects during H1, in terms of cubic meters.

The construction of industrial and warehouse properties increased by 36%, while in residential properties the starts decreased by 11%.

Just drive around Helsinki area you will see lots of new offices being build, at the same time the number of offices being vacant is increasing. Where is the logic? too much money went into real estate in the past 5 years....

Aktia Bank view in 2004...

Finland's stellar housing prices poised to fall -Aktia

"Rising interest rates will next year lead to a decrease in Finland's astronomical housing prices, says an Aktia Bank economic outlook, released on Monday 20 Sept. 2004."

"As housing loan interest rates rise, the quantity of money moving about in housing markets decreases, sale times lengthen and sellers have to cut asking prices. First the housing price increase will peter out and then prices will turn to the descent next year," says Aktia chief economist Timo Tyrväinen.

"A housing price crash is however not in the cards, but the downward check will probably remain in the 5-10 per cent range - slightly more in the capital region", Mr Tyrväinen added.

That was back in 2004...
What is the situation now? price have risen in a frentic way, almost 20%-40% during that period. I guess Central bankers have been astonished by the unprecedented housing price rise. No wonder, after the stock market crash of 2001, money was redirected in "hard" assets, out of stocks; thus inflating and distorting the housing price growth.

source: Aktia

OP Bank Group View In 2004 ...

"Although housing prices rose on average by 5.5 per cent in 2004, they remained moderate compared with consumers’ income and debt. There were signs of a tapering off in housing price development, especially in the Greater Helsinki area, but in many other growth centres prices appeared to be still on the rise."

"Because the low level of interest rates seems likely to hold steady in 2005, no significant change in the housing market is expected. The prevailing view, however, is that housing price development will taper off (less active or contract) in 2005."

So should we roll back all the gain (less inflation) that we got from 2005? It should be noted that in 2004-2005, Interest rates were at record low, so the debt burden was low compared to today as rate climbed 100% from that period.

source: OP

Nordea View In Late 2003...

"Even though housing prices in Finland have risen at a faster rate than people's earnings, a possible price reduction seems very unlikely, surmises the Nordea banking group. Housing prices are rather expected to continue on their upward trend. The longer the interest level remains low, the greater is the risk of overpricing and a bubble in the residential market, ", Nordea economists have warned in 2003.

source: hs

Soft Landing..For Europe?

"The European Commission cut its forecast for economic growth next year and said inflation may accelerate faster than previously anticipated as energy and food costs soar."

"European Central Bank council member Axel Weber today said there is a risk the ECB will fail to meet its price-stability objective for another two years."

"'Clouds have clearly gathered on the horizon,' EU Economic and Monetary Affairs Commission Joaquin Almunia said in a statement today. 'Economic growth is becoming more moderate and the downside risks have clearly increased.' "

"Still, recent data indicate growth in the euro-area economy is cooling. Manufacturing grew at the slowest pace in more than two years in October, and business and consumer confidence declined for a fifth straight month."

House Price Correction Threatens EU Growth

"An unexpectedly sharp correction in house prices resulting from the global credit squeeze poses a significant risk to growth in Europe, according to the European Commission."

"Among the threats it identifies is a worsening of the financial turmoil that could hit housing markets in Europe as well as the US 'thereby deepening and prolonging the ongoing corrections'."

"So far, those European countries that saw the fastest growth in house prices, such as the UK, Spain, Ireland and France (-obviously they always talk about the biggest economy-), have generally seen an orderly slowdown this year.
But the Commission's latest EU economic forecast hinted at policymakers' fears of a sharper adjustment. A special section on past house price cycles warned that while other regions were sometimes more volatile, 'the historical experience suggests that major housing downturns have also had a substantial macroeconomic impact'. "

"Joaquín Almunia, the EU's monetary affairs commissioner, said: 'We consider that investment will continue to contribute positively to growth, but less than in this year or 2006. And in particular, residential construction investment will have a significant correction, and will contribute much less than in the previous periods to our growth.' "

So Finally it's coming and it's set for 2008 ...

Sweden House price falling...Finland Next?

"The cost of apartments in Sweden fell during the third quarter while house prices remained unchanged, according to statistics released by state-owned mortgage lender SBAB."

"It is the first time since SBAB introduced its 'estate agency barometer' in 2005 that prices are reported to have dropped"

"SBAB said the dip in the market had been surprisingly sudden, with fewer people bidding on properties leading to prices that were lower than anticipated."

"Estate agents were predicting that the slump would continue into the fourth quarter, further driving down the cost of apartments and houses."

"'Estate agents are saying that the credit market crisis has had a certain negative effect on the housing market. But the main reason for the drop we are currently seeing is probably that people are feeling the pinch from higher interest rates,' said Tomas Pousette, SBAB's chief economist, in a statement"

Would Finnish house price fall? Time will tell. One thing is sure, the pshychology has changed. More news are coming day after day showing a slow down in the construction industry and housing price.

Most of all, Housing affordability has never been so low since 1990.

UK House price Falling...Finland Next?

In October, house prices were 8.9 per cent higher than a year earlier, a fall in the inflation rate from 9.2 per cent in September and a high of 10.1 per cent in June. The annualised rate of growth over the past three months is even lower at 6.1 per cent, suggesting house price inflation will continue on a downward path.

The question that few are willing to forecast with any certainty is how far and how quickly the market will slow. “What we are witnessing is a market in transition - albeit at this stage it is hard to predict where it might settle,” Mr Williams added.

The slowdown in demand appears to have multiple causes. First-time buyers have increasingly been priced out of the market, both by rising house prices and higher interest rates. Investors seeking a buy-to-let property have become more cautious as the market peaked. And those with patchy credit histories can expect to have much more difficulty in finding a low-cost mortgage as lenders have sharply increased the cost of their subprime mortgages.

Bank Of Finland 3rd Quarter Bulletin

"Housing prices generally react fairly sensitively to fluctuations in interest rates. The recent uncertainty on the international financial markets has increased the Euribor rates on noncollateralised interbank loans in the euro area."

"This affects the interest rates on the housing loans of Finnish households, since the Euribor rates are quite commonly used as their reference rates."

"According to the forecast assumptions based on market expectations, short-term interest rates will in the next few years be higher than in recent years on average, and the growth rate of housing prices is forecast to slow further, from about 6% this year to around 2-3% in 2008-2009."

"A further rise in house prices is nevertheless suggested by continued favourable development of household income and employment."

Let's put that sentence into context. As I heard this argument coming from some real estate agents and economists. A rise of 6%/year (or more) on a 200.000 euro house is equivalent to 12.000 euro/year which mean a 33% increase on a average 40.000 euro salary /year. So income had not followed this pace and will not. The mismatch will be resolved by either having prices stabilizing for a decade and the income catching up or housing price correcting over the next few years and income rising to a level compatible with price stability...

So if you haven't read my article regarding "the prophet of the past", you should.

"The great prophets of the past"

This appellative is obviously not intended to be a compliment but rather a criticism for not being able to predict the future.

Some background:
-1929: The Great Depression (also known in the U.K. as the Great Slump) was a dramatic, worldwide economic downturn beginning in some countries as early as 1928

-2001-2002: Finland plunge into a recession. Technology shares slumped.

-2007: US Housing Slump, the real estate bubble burst. Interest rate were 5.25% in August 2007.

-2007: Euro interest rates rose from 2% (December 2005) to 4% (November 2007).

Some predictions:
"There is no Bubble to burst (US)" - Jim Folkman, Vice President Home Builders Association of Central New Mexico, 23 Sept. 2005

"An actual price bubble cannot be seen on the Finnish housing market, and sudden changes on the price level are not in sight." - Tapiola Group Senior Economist Jari Järvinen, 22 Jun.2005

"The idea that we are going to see a collapse in the housing market seem improbable (US)" - John Snow, US Treasury secretary, 20 Sept. 2005

"US FED continues to increase the interest rates gradually towards a “neutral” level... 3.5 percent." - Tapiola Group Senior Economist Jari Järvinen, 22 Jun.2005

"At present, there are no grounds (For the ECB) either to raise or lower the interest rates." - Tapiola Group Senior Economist Jari Järvinen, 22 Jun.2005

"...a serious depression seems improbable (US)" - Harvard Economic Society, 10 Nov. 1929

"For the immediate future, at least, the outlook is bright (US)", Irving Fisher, Ph.D. in Economics, early 1930

"The Research Institute of the Finnish Economy, or ETLA, sees the next five years in Finland as a period of continued economic growth.", ETLA, 06 Jun. 2000

"The fundamental point is that the British economy is strong..." -Alistair Darling, UK Treasury chief, 05 Nov. 2007

"Housing is still the best investment, without questions (US)"- Stan Sieron, Illinois Association of Realtors, 29 jul. 2006