Consumer Confidence or its Ability to Predict the Future...

Here is the statement from the state statistic agency :

"Consumer confidence in the economy weakened further in February.
The consumer confidence indicator stood at 10.1 in February, having been 13.1 in January and 16.8 twelve months ago.
Confidence in the economy was also weaker than the long-term average in February.
The consumer confidence indicator last received a lower value than this in April 2006, when it stood at 9.4. "

I would like to highlight this particular sentence from their statement:

"Consumers predicted in February that consumer prices would go up by 3.7 per cent over the next 12 months. The long-term predicted average inflation rate is 2.1 per cent."

You wonder if they interviewed consumers or economist ... I think the consumer I have been talking to are more talking about 10% increase in consumer prices i.e Food, rent, oil... this 3.7% remind me the Ford (US president) campaign to fight inflation with his slogan W.I.N : 'Whip Inflation Now' that terribly failed...

What about a boom doom gloom technical analysis? :


In fact we have 3 scenarios:

1- The consumer confidence recovers from that point. We are just witnessing a mild slowdown. The US doesn't fall into a recession and Asia fully decouple from the rest of the world. Europe continue its record breaking growth. Everything is great and birds are still singing...

2- The consumer confidence fall to level seen in 2001. The U.S fall into a recession in the first half of 2008 and slowly recover through 2008 and beginning of 2009. We are witnessing a V shape recovery. Europe is growing albeit at a slower pace. Asia with China and India are still seeing good growth. Everything is fine and birds are still around...

3- The consumer confidence is on free fall, going much lower than the 2001 mild recession. Housing doesn't support any more economic growth instead become a drag. U.S. can't avert a recession and the Fed is struggling to stabilize the economy. It will take 3 years to start seeing good or near potential growth, it's a L shape recovery. Asia recouple with the economical issues seen in the US and Europe. Everything need to get worse before it gets better, bird flu is hitting again...

Greenspan: Next U.S. recession Worse than 1991 & 2001

"Former Federal Reserve Chairman Alan Greenspan said a possible recession in the U.S. this year may be deeper than the last two contractions."

"The existing financial problems are deeper than we've had for a while, so I wouldn't be surprised if this recession is deeper than the last two shallow recessions,''

Radiation Alert and It's Not a HOAX...

"The Radiation Nuclear Safety Authority says that 50,000 homes in Finland need to be checked for radon gas. Reducing radon gas in the home can usually be done through inexpensive and simple home improvements."

"The Radiation Nuclear Safety Authority is trying to get local governments to step up radon gas monitoring. The Authority says that radon causes 300 cases of lung cancer in Finland each year."

This issue has been known for very long... Looks like we could have the same law suits similar as for Abestos. i.e anyone including municipalities that have sold land or housing to private people without making the necessary health check should be sued... Just re-read the headlines..300 cases of lung cancer per year linked to the radon gas... This is unaceptable.

Rents : Breaking the Myth

So this week, the Finnish agency in charge of statistics released the year on year rent growth, the result is a staggering 3%.

Let's have a look of Rent in Helsinki throughout the past 30 years and let's provide a fast analysis, any other interpretation will be welcome as a comment... :

Here are the main highlights:

1- Rent growth has been on the down side in the past 30 years : it's getting cheaper and cheaper to rent... (well ... on average). At least for now buying a house and taking debt on a 30 years is equivalent as paying 2 rents during the same period... indeed buying at this price level is more expensive than renting whatever calculation you come up with ...

2- Rent growth has been under the magical 2% threshold in the past 4 years, the same inflation targeted by the ECB. Looks like the good "student" from this agency are able to "lay" "average" statistic that fall within the ECB "Master". Manipulation, luck? nobody will know...

3- While rent has gone downward since 1996, housing price has gone the reverse way: nothing surprising as buying became more popular than renting. So when the reverse happen i.e rent become more popular than buying then rent goes higher and housing price tumble especially if stock are important and interest rates "sticky" high...

4- It's interesting to see that over the past 30 years, rents tend to increase sharply during a recession or slightly ahead of it: Usually the economy tend to overheat before a recession pushing interest rates higher. As interest rates are high, housing affordability plummet pushing people to rent instead of buying. I think that is what we are currently witnessing...

5- It's important to notice that rent fluctuate almost synchronously with interest rates : When there are high so is rent, when there are low so is rent. Housing price tend to lag by a few years as the amount involved are on different scale , same could be said to the psychology and demography components.

Further analysis or charts to do would be :

- rents vs interest rates
- rents vs M3 (debt growth taken by households)
- rents vs housing price
- rents vs income
- rents vs baby boomers (The demographic "tsunami" wave created between 1945-1950), wave that has created shock throughout the economical timescale (that's the one who disrupted the 1990 boom) and the one that are causing issues with mass retirements...

Feel free to provide some charts, links or analysis....

Finnish and EU housing Market, Affordability, NonSenSe and Sex

This chart published in the ECB monthly bulletin shows clearly, as stated in early article, that the peak of the housing price was sometime in late 2005. At about the same time the ECB started to increase interest rates , house prices growth started to moderate.

Obviously there are disparities, for example Germany has not witnessed any growth at all , we could even talk about housing price decline. In the opposite, Ireland, Spain, UK, France and Belgium has seen double digits growth.

Finland has shown a single digit growth in the past few years, believe it or not. Those figures are calculated on prices for the whole country thus distorting the reality. As people might not know, the economical situation of the Lapland area, and east side of Finland is not in a great shape. The reality is that in the greater Helsinki area and in big cities , prices have grown in a double digit level in the same way as UK, Spain or France.

But the housing market in Finland is different to France, UK or Ireland but in fact tend to be more similar to Spain. Why? because housing loans granted by banks in Finland has been in 98% of the case settle on variable rates based on a 12 month Euribor...

Variable rate mortgage is a great tool for bankers to bring affordability down when interest rates are unusually low. This has happened during the 2002-2005 period. Now most household have seen their mortgage payment almost double.

That's clear that housing affordability has plummeted from year 2000 as housing price have kept on rising and interest rates came back to their more natural level.

According to the ECB the "Crude" affordability is at a decade low. The "crude" index is the ratio of households’ nominal disposable income to the residential property price index.

So the "interest rate adjusted" affordability has been mainly pushed higher in 2002-2005 due to low interest rates but since then plummeted to reach as well a decade low.

So affordability is at a decade low, can this situation persists? This blogs is all about that to denounce this situation and warn potential buyers to be cautious as we are on thin ice here. The housing market is vulnerable to any unforeseen shock albeit political, or economical ones.

Then there is this irrational supply of housing flooding everyday the net. Sellers taking buyer for dumb, and first time buyers behaving in an irrational way (by buying!) due to stress or social pressure. Here are some examples:

"A 'dilapidated' shed sandwiched between two large houses in an upmarket seaside resort in north Wales is up for sale with a price tag of £150,000. (198.000 €) " . Thanks to "IslandCrow" for the source.

or this one from Finland, a house from 1950 that is on sale for 295.000 €:

(click on the picture to see it bigger)

House being sold by incompetent real estate agency Kiinteistomaailma, the source is from oikotie. You can as well see from the second picture, the same house being shot in different angle and with different prices. The second one with a staggering 525.000€ for a faltering house: source.

Or worse in France, (thanks for Anton for the source), there is currently a scandal regarding student affordability, here we are not only talking of buying issues but as well renting as both become out of reach. Some students even prefer to study in different field that they originally wished for because they need to stay and live in their parent house thus chose a university that is not far from it.

Most dramatic some landlord are proposing low or free rent on exchange of services (read that as sex services.)

Inflation : 3.8%, an eight-year high

Consumer prices were pushed up most in the year by increases in the prices of food and liquid fuels. The cost of food went up mainly due to risen prices of milk and cereal products, and meat.

Risen interest rates, increases in the prices of restaurant and café services, and retail prices of alcoholic beverages, as well as higher prices of owner-occupied flats and real estate also had an impact on inflation.

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

So for the ones who got a 3% or less pay rise, it means that you just got poor by the time you are reading this article. But no worry, according to the ECB it's a "hump", so it should be temporary. Or is it going to be? I guess they thought that oil price would fall in the beginning of the year, after all, everybody planned that the U.S. slowdown will solve this situation ... but it's not happening (the U.S. is slowingdown but not the oil price, or wheat, gold etc... )

So what if the U.S. doesn't go into a recession and the emerging market start to re-accelerate..then a price of 150$ and gold over 1000 $ should not be a surprise to anybody.

This is not the ECB, BOE or the FED that is failing but the emerging central bankers that do not control their economical boom from going into an overheating situation that has implication for the entire world. But let's not put all the fault on the emerging market, there are as well those investors and banks that have pushed people consuming beyond their mean thus stimulating even greater the export from those countries.

Coming back to the Finnish inflation, It's just scary. Almost 4%, it would mean that if the ECB cut interest rates then indeed we will go back to the 90's type of inflation sooner than people will have forecasted.

At the end of the day, the ECB is failing its mandate for the Finnish citizens and that is unacceptable. The weak and the poor will have to pay the price, and that is not fair in this world where the gap between the rich and the poor keep increasing at an alarming rate.

"Massacre" In the Forest Industry : Kemijarvi, Stora Enso, UPM Kymenne

...And the words are not enough to explain what is currently happening in the Forest industry.

After Stora Enso, partly owned state company , announced mass lay off and the closure of the Kemijarvi Factory, few weeks ago.

"For his part, Matti Vanhanen (centre), the prime minister, said the government had been in talks with Stora Enso during its statutory cooperation procedure talks in order to find an alternative to closing the mills."

Now it's the turn of UPM-Kymmene to lay off 650 people across Finnish sawmills.

The kemijarvi economical balance has been "demolished" by a hand wave of the government and investors. Unfortunately, this region will bear the scare for generations to come ...

Sweden's Shock Interest Rates Increase

Sweden's central bankers know how to shock the market at a time of financial turmoil.

On Wednesday, they raised the key interest rate by 25 basis points, to 4.25%, defying the widely-held belief that rates would be kept on hold at 4%.

" Inflation has risen rapidly in Sweden in 2007, and will remain high over the coming year," said the Swedish central bank, known as the Riksbank. "The inflation rate has been pushed up by higher energy and food prices, but there are also high cost pressures in the background."

Looks like our neighbor country is serious about fighting inflation. It's an easier task for the Swedish central bankers than the ECB . The ECB has to deal with various economies. For example it will have to support growth for Italy, France and Germany while letting other country falling into an overheating mode like Spain and Finland. Indeed those last countries should have had higher interest rates at key times in order to cool credit and housing.

So the ECB is between the rock and the hard place, a situation that the Swedish central bank is not.

The morality of the story is that the ECB is having a hammer to deal with any situation while the Swedish bankers possess a Swiss knife ...

U.S. Housing Bubble? : 220.000 euro for a fully furnished and 120 m2 house...

"When Mary Kamanu paid $409,000 (274 000 euro) for a house in Folsom, California, she never imagined that three years later it would be worth about 20 percent less and she would have to pay the bank more than $80,000 just to sell the place."

"`I'm completely upside-down on my mortgage, like a lot of people,' said Kamanu, who wants to move 12 miles away to live with her fiancé in a suburb of Sacramento. `I know I'm going to have to come up with a big chunk of change.' "

Kamanu said she doesn't want to put her life on hold until the housing market improves. She's planning a sunset wedding later this year on the beach at Folsom Lake, about half a mile from her property, even as she waits for a buyer.

"She said she's willing to sell the three-bedroom, two-bath, 1,272-square (120 m2) foot house fully furnished and include two wide- screen televisions to entice a buyer. The home has a fireplace and a two-car garage."

"``I'm hearing it might be a year or two before the housing market comes back, and I can't wait that long,'' said Kamanu, 38. ``I'm relying on luck, hoping that someone will come along and fall in love with the house, like I did.' "


So this house on sale for 220.000 euro fully furnished and 120 m2... Who is saying that there is a housing bubble in the U.S.?

Source: Bloomberg

"Monopoly" Game : NCC, YIT and Finnish Government

NCC Q4 profits fall 17 pct on weakening demand

'During the fourth quarter, demand slackened in Finland and the Baltic region. Due to a more sluggish sales trend, NCC's proprietary housing starts decreased,' said the company, 'NCC is of the opinion that the Nordic housing market has peaked'.

The company said the 2008 outlook is 'favourable' for the markets in which it is active, but added that growth is expected to be lower than in 2007, and the Nordic and Baltic housing markets are 'subject to increasing uncertainty'.

No surprise to this NCC statement. We clearly know that the market peaked sometime in late 2006. The market is sluggish that's obvious. Are we going to see an acceleration of house price as in 2003 after a 2002 slowdown? I don't think so.

Now the question is about how far and fast will the prices fall? it's not up to Finland or Finnish policy makers. They had an opportunity 5 years ago to clean and adjust the housing policy. They have failed after receiving warnings from the OECD especially with regards to land tax and planning. At the end it's up to the health of the world economy, whether or not the US goes to a recession and if Europe follow suit...

You wonder where was the housing minister during all those years too. Unfortunately, you can't put all on incompetencies , it would be too easy. Otherwise by just changing the housing minister and you solve the issues... it's bigger than that, conflict of interests, municipalities unable to reform themselves setting short view goals...

Just notice that yesterday, YIT received a 80 millions Euro to build a "Tunnel" under Keha1 road/leppavaara... just estimate the number of housing that they could have created instead of creating a useless tunnel (common sens would have pushed them to build a new road instead). Now it's true that YIT outlook doesn't look good, a bit similar to NCC...So this tunnel is just a municipality and government sponsored bailout for YIT... corruption no, let's call it rescue process inline with EU competition framework...

Still the question is when would the first time buyers see the end of the tunnel, ;->...ask YIT , the municipalities and government... and just tell them it's not any more a "seller" market ... readjustment is coming be patient...

eSubPrime : "Living Beyond Your Mean"

"The number of bad debts referred to the courts for legal action grew by 25 percent last year. "

"During the course of 2007 some 194,000 bad debt matters were referred to district courts - that's 40,000 or 20 percent more than the previous year. "

"A report in the Savon Sanomat newspaper quotes the Justice Ministry as saying that the growth in bad debts is due in large part to borrowers defaulting on instant loans."

"Heikki Liljeroos, a Government Counsellor with the Justice Ministry says the dramatic growth in unpaid debts comes as little surprise to officials."

Some degree of officials' incompetence comes with no surprise too... Where is the FSA (Finnish Financial Surpervision Authority)? Why don't they act and stop those predatory lending? We have all witness the drama it has brought to distressed families in the U.S. . Are they going to act when the problem are deeply anchored and become irreversible?

You see the people that will use those kind of service are the people the less likely you want to lend. People that won't get a proper loan from the bank (although the standard had deteriorated in the past years), people that will use that money as bad investment or worse people using it for paying other debt... Basically central bankers, in the last leg of the boom have been heavely promoted "Moral Hazard"...

We all know that debt has been accumulated in an unreasonnable way for many households, allowing in the way to inflate various asset classes. Can that continue? NO. I don't think so.

Imagine, those people are defaulting at a time when the economy is booming (or has been) and at a time when the job rate is an historical low. So what would happen if the economy reverse gear and the job rate inch up?

After all the economy won't boom if you stop giving cheap credit, that's how the world economy has been engineered in the past 10 years...

Euribor , ECB , Recession and Housing Market

(Click to see bigger picture)

After the ECB press conference, it appears that not only Trichet , The ECB president, has soften its tone toward risk to inflation but seem to have given signals for probable rate cuts (probably April).

At the same time, the U.S. is or will be about to enter into a recession and with it, UK is following suit.

Europe starts to see some scary signs of a slowdowns. Usually it always starts in the periphery of Europe : Spain and Italy for the South and Sweden, Denmark, Norway and Finland for the Nordic area.

The Euribor will fall and fall throughout the year and most probably until mid next year. This should match falls in housing prices as Europe might experience a recession which we don't known yet its nature whether is a mild or severe one.

So the target could be 3% by mid next year, then we will enter in a completely different world where inflation is a constant threat as some commodities become scarce : oil, food as the global consumer pool is increasing at a rate ever seen. Rate will have to be higher much higher than the average we have witnessed in the past 20 years...

Today : ECB Decision Rate + Update

Today the ECB is expected to keep the interest steady at 4% while signaling that risk to growth is increasing.

Banks, businesses have been expressing their wish to have the ECB to lower the interest rates since too high , indeed 4% is restrictive to their view.

Such a move will exacerbate any asset bubble and could trigger bad investments on households side thus promoting "moral hazard".

Banks have shown a degree of incompetence in the past 5 years especially U.S. banks that now are beeing rescued by the Fed, the TAX payers and Sovereign Funds.

The question will be if the ECB acknowledge that the risk of a recession is greater than inflation. If so signaling to the market a rate reduction by year end. Indeed we could see a spike in prices as in 1989 since real estate and builders have set current prices at bubble level. The consequences could be disastrous for many families that have no knowledge of current economic situation and who are trusting real estate agents and medias.

If rate goes down then we might be heading to a recession by year end. Because in an environment where oil price is around 90 dollars, food prices, rent, service is all up, then deciding to slash interest rates is simply because the threat to the economy is serious...

Update: According to the ECB press conference, it seems that there are evidence that risk to growth have grown. It seems that they somehow open the door for interest rates cuts. Some market participant are predicting that we could see a rate cut as early as April with possible two further rate cut by year end bringing interest rates to 3.25%. That is the rate the 12 month Euribor will soon head too...

So the European interest rates and its economical growth won't support any more the Euro, and it's clearly shown in the intraday move :

These rates cuts will create the last rally of the housing market so materializing a peak or spike by year end. Could the same 1989 phenomenon could be witnessed in 2009? a spike and a slump?

Australia Raise Interest Rates to 7%

Australia's central bank raised its benchmark interest rate by a quarter point to an 11-year high, saying a ``significant slowing in demand'' is needed to cool the fastest inflation since 1991.

The Problem what we have is that Asia regions is on the brink of overheating: China, Australia, India , and at the same time the U.S. and Europe is slowing down.

Decoupling or Not , that's the 672 856.951 Euros (1 million Dollar) question.
If Asian central bankers don't tighten interest rates or commit a policy mistake then the consequences will be harsh... they will then engineer bubble economies that will have a deep impact on the rest of the world...

2003 - 2007 : Housing UP , Real Wage Down

Wage growth has been falling from 2003 until 2007 but during the same period housing price has been growing at a double digit rate (for the main growth area).

Affordability was artificially reach by historically low European interest rates. Most of the mortgage in the past 5 or more years have been approved with a variable rate.

Banks have lowered their credit standard to a level not seen since the late 80's.

So what we have been witnessing is a double digit inflation in housing price and at the same time the wage were unable to keep the same pace. I'm not even talking about rising import prices meaning that the last two decade of cheap import has come to an end, eroding further the house purchasing power.

Stagnating or even declining wages and purchasing power, at the same time double digit growth in housing prices, Oil, food and services rising at pace not seen since late 70's have dented seriously consumer confidence.

What has been the solution to solve this economical "equation" in the past ? High Wage growth or second round effect as refered by the ECB. How did the monetary policy handle such event? interest rate increase unless... a recession comes then asset price and wage growth collapse.

2005: U.S. Housing Bubble a Myth?

Economist's Corner: The Housing Bubble Myth

Issue: July 2005

By Carl Steidtmann, chief economist and director, Consumer Business, Deloitte Research

"Everywhere you turn these days the buzz is about soaring real estate prices. If you are lucky enough to be a homeowner in one of the hot markets like South Florida or New York City, owning real estate is almost as good as winning the lottery."

"When you strip away all of the white noise around a housing bubble, what you find is a robust market for housing that is undergoing several profound changes all of which manifest themselves in higher home price indexes, none of which adds up to a housing price bubble."

This "expert" was describing the housing market in the U.S. in 2005 .

As we know the housing bubble burst in the U.S. and is about to become the worst housing bubble since the depression of 1929.

Source : "Expert" article