Katainen Tax Cut Proposal, What Impact?

House Prices Stagnating, What Next? Who Is Buying?

As during the technology bubble, people were buying stocks that were clearly overvalued. Why was it? psychology and banks. Too many years of rising price and massive profit that led some to fall in euphoria and created a belief of a sure investment, an investment that will grow double digit for many years to come...In fact the reality was different, the Helsinki stock hexchange index never recovered from it's high after 10 years and it won't for at least another decade.

Today the same has happened for housing, people are currently buying an overvalued asset, why is that? same arguments as any bubble: psychology and banks. It seems today that the same idea of sure investment is clearly anchored in people belief, they cannot imagine prices going down even unthinkable that prices could head lower for another half, decade or two to come.

Nevertheless today chart, kindly copied from Statistics Finland Web Site, clearly show the start of a downturn. When housing correct, it is a slow and long process. It doesn't correct overnight as do stocks. On the other hand it's not that easy to sale as stocks : not as liquid.

Technically it will take about 6 years of decline to reach a stable ground to either plunge further or start rising, all depending on the competitiveness of the country and its ability to attract more foreigners. If one parameter is against rising housing price in the long term is the ageing of the population. As Katainen, "Uusimaa" Finance Minister, said after 2010, Finland's GDP will grow to 1-2% as opposed to an average of 3% in the past 100 years (I'm wondering how they did come with those figures, maybe the wars were compensated by phenomenal growth).

I like to depict the Finnish economy or housing price momentum as a heavy train that has been propulsed by lower interest rates and a good global economy. But beginning of January 2008, the Engine was cut... the train seems, for now, moving at a good rate, mainly due to it's past acquired velocity..but slowly it's losing power until it finally stop...restarting it needs lot of energy and time and might never regain the same performance as in the past...

That said, who is buying? I suppose, if you dig further you will notice that small flats are the one that have pushed price the highest, something last to fall in a faltering market. There was as well unusual transactions, such as the one Bank of Finland did in the second quarter, selling a vast amount of flat to a rental company. Indeed rental companies had still the capability to borrow to buy housing stocks from building company, I wonder which bank/mutual fund was dumd to lend, as it will surely byte them back.

Anyway I'm more enclined to think that prices will be in between Low1 and low2, the timing is the most difficult part here, it could be reach fast as seen in Ireland, U.S. , U.K., Spain or could be a slow process as in Japan so another 20 years (it's worth to note that Japan had the same ageing problem as do Germany).

Katainen: Inflation Back to Target within 12 Months?

"The Ministry of Finance expects the growth in consumer prices to show a clear slowdown next year. Projections released on Tuesday envisage a rate of inflation in 2009 of around 2.8%."

"We have probably seen the peak of the inflationary spike in food and oil prices, and it will ease during the year, Of course, no one knows for certain, but it could be that by the end of 2009 the rise in prices will have come so far down that we'll be close to two percent." said Finance Minister Katainen.

Have you ever though how inflation is calculated? it's a year on year increase so if the petrol price is hovering at around 120 dollar/baril by next year at the same period, then oil price will not affect inflation figures directly as no increase has occured.

The same scenario apply to food.

So if the producers/market participants don't pass past increase to the consumer, then inflation will fall sharply.

It will fall irrevoquably since the housing market would have already been on its own downturn, pushing some prices lower (any buiding materials, cement etc...).

Another point to make regarding a falling inflation, is about interest rates. If inflation is falling and second round effects are not happenning while The Euro Economy is slowing sharply then indeed Interest rates will start falling pushing debt servicing lower thu affecting some part of the inflation figures.

Now this scenario (sharp fall in inflation) contains some risks, and is link to a sharp fall of the Euro (it's fine as long as commodities are falling too), U.S. slowing less than planned and emerging market recovering from the slowdown there are witnessing: commodities could then rally and oil could reach 200 dollars/baril as some have put forward. Lots of if, so a falling inflation looks more likely.

I'm convinced that inflation will fall, no doubt about it as banks are going to tighten credit standard, less money available will push some key asset lower (housing, cars, electronic, house appliance, construction material...and land prices). The U.S., U.K. and many other countries will tighten their belt for a few years to come that will slow down the global economy pushing a very modest growth for European countries at best. Slow growth would mean lower inflation...

Obviously if growth is stronger and more resilient than planned, and if the 4th oil shock happen (oil over 200$/baril), then the income tax cut and vat cut would be an historical mistake from katainen, that would be remembered as the one who pushed finland in its second biggest depression of the 21th century...

Golden Corruption and Uncompetence

Many time in this blog I have been highliting the fact that municipalities have been one of the root cause of this housing bubble-by forcing real estate companies and individuals to become land speculators- The housing minister shouted out loud that land tax reforms will happen...so far nothing...but the problem is that this housing minister has only been shouting therfore nobody is paying attention since no action has been triggered on that area...

Today was reported that large sum (tax payer money) has been lost into gambling into the stock market beginning of the year. I'm not sure what kind of adviser they had, but they have been surely fooled as it was very clear that the stock market was about sink in the turn of the year and it did, eating millions of euro worth many paivakotis, better health care systems etc... this money maybe went to the money of the advisors, I'm really hoping that corruption was not involved as such large some always attract corrupt behaviour. What's done is done, now they need to replenish their coffers, are they going to raise property tax?

"Local government authorities have lost hundreds of millions of euros on investment markets this year.

Planning Manager Reijo Vuorento of the Association of Finnish Local and Regional Authorities told the newspaper Helsingin Sanomat the value of their investments has dropped by around 300 to 400 million euros since the beginning of this year.

Municipalities had investments totalling one-and-a-half million euros at the turn of the year. A fall in their value has led to a drop in revenue. Usually municipalities use investment dividends to pay off debts or to invest. "

Corruption, let's talk about it...I have heard many times CEOs getting golden handshake while leaving a company sometime sinking and in the red...but a mayor, you know the guy that is elected by the honest hard working citizen to manage their tax money, yeah..a mayor to get a golden handshake...if i was sitting at the board, i would given him a golden kick ...Nevertheless i really do hope that justice will block that otherwise, the anticorrupt label that Finland has been flagging will be lost forever...

"The Jyväskylä city council decided Monday to lodge an appeal with Finland's supreme administrative court (KHO) in the case of former mayor Pekka's 200,000 euro golden handshake.

In June 2008 the Hämeenlinna administrative court overturned a decision made by the Jyväskylä city council in January 2007 not to demand the return of Mr Kettunen's severance money."

Consumer Economic Expectation Worst Since 1990

"Consumers' confidence in all four components of the consumer confidence indicator weakened from the previous month in July. Consumers' expectations concerning Finland's economy were the gloomiest since the year 1990.

Views on the development of unemployment also darkened in July. Consumers' expectations about their own economic situation, too, were the most cautious since 1996. Nevertheless, consumers continued to regard their own employment prospects and saving possibilities as good.

July was not regarded a favourable time for making major purchases or for raising a loan, in particular. In addition, inflation was predicted to continue at its fast rate." said Statistics Finland

Let's look at some major index component :

1- Favourable time to raise a loan at present (index) :
20.0(average since 95) 42.0(max) -21.8(min) -20.8 (june) -21.8 (July)

Never seen so sharp decline and at this speed. The statistics unfortunatelly doesn't show the period 91-93, but I guess we are falling with this range...this is a very bad news for Finnish banks indeed and retailers, I'm wondering how they are going to survive...

2- Finland's economic situation in 12 months time :
5.2 (average) 21.7 (max) -20.8 (min) -17.0 (June) -20.8 (July)

Unbelievable, another record....we are now clearly in an unchartered territory...I'm questionning if this is real or just temporarly affected by high oil price and inflation... At least one thing is sure is that Finnish households are holding record debt thanks to subsidized housing interest rates, lack of land municipalities reforms and of course irrealistic/unsustainable low interest rates for the Finnish economy in the previous 8 years...

Back in February I did some kind of technical analysis on the consumer confidence and lay some hypothesis. Let's have a look at it: (See as well link Consumer Confidence or its Ability to Predict the Future... )

From the analysis below, the first scenario is out , we are now clearly into a recession area, so maybe we started the recession, usually the recession perception will be felt when the recession is ending, at it lowest point....

From the 12.02.2008:
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...

Finnish May building permit volume plunge 27 pct yr/yr

"In May 2008, building permits were granted for a total of 4.6 million cubic metres, which is a good one-fourth less than one year ago. Cubic volumes went down in all building types. Building permits were granted for a good 3,000 new dwellings, which is 13 per cent less than in May 2007.

In January to May 2008, new building permits were granted for a total of 20.5 million cubic metres, which is 13 per cent less than in the corresponding period of the year before. A good one-fifth fewer building permits were granted for residential as well as business and office construction." Statistics Finland (SF) said in a statement Friday.

It seems that there are no signs of relief ahead. Housing Permits are a forward looking indicator, most of the time prices correct with a lag and when it starts it takes about 2-4 years for prices to find a bottom.

The point to be made here is that banks real estate business model will change.

When the housing prices boom, banks are willing to lend 100%, with little or weak collateral and very low margin.

In the opposite direction, when house prices start their downward correction , banks lend less, increase their margin and require rock solid collateral.

The consequence of that is a drying up of the housing loan stock, thus the demand collapse while the offer stay put, or even increase which result in a sharp price reduction.

This is a typical scenario after the housing price peak ...

Finnish Ministry Of Finance: Economic Review

1- The Finnish economy is slipping into a downturn

To date, Finland has held up well in the midst of a weakening international economy. However, the strong economic upswing is now levelling off and starting to slip. Employment will continue to strengthen while cost and price pressure has mounted considerably.

Higher inflation and weaker competitiveness are now the main threats to sustained stable economic growth.

2- From Construction to Renovation

Construction is still operating at maximum capacity, as the drop in new building has been replaced with renovation activities. Nearly a half of all the hours worked in construction went into renovation activities. The volume of new building construction grew by nearly 10% between January and March on the year before, with residential construction down by 10% and other construction up by 30%.

However, the number of construction permissions granted was over one tenth less than last year and building starts are also decreasing. Overall construction this year will increase as forecast in March but will level off in the course of next year.

3- HouseHold Situation:

Household consumption is still growing robustly, up by 3% this year, but the volume of new house purchases is already decreasing. Higher employment and wage increases are perking household disposable income, but inflation is eroding a substantial part of the improvement in purchasing power.

As in 2007, purchasing power will increase by a mere 2½%. The household savings ratio has been dropping in the past few years and will remain highly negative.

Households have run into debt at a fast pace too, and their financial sustainability is declining while household asset values are no longer increasing.

Assets and liabilities are not evenly distributed, though, as nearly one half of all households have no debt at all. Households with the heaviest debt burden will probably cut consumption as interest rates continue to rise.

4- Interest, Loan and Housing price

Short-term interest rates have soared to 5% on the past few months. Mortgage interest rates have also risen to 5%. The number of new housing loans has continued to grow considerably but house prices have stopping rising.

In Q1 of this year, the price of secondhand flats rose by 0.6% on Q4 of last year both in metropolitan Helsinki and the rest of the country.

But with consumer price inflation having accelerated, the real prices of houses have already started dropping.

The Ministry of Finance's Economics department has shown clearly, in its june report, that real house price growth have started to decelerate since 2005, to show no growth or slight decline beginning of this year.

They are still pretty optimistic on the outlook for growth in the next 2 year to come albeit at a lower level (2%). If you go back in 1989, the similar forecast was done, growth was on the card, albeit a slowdown or a soft landing. So history tells us that no knows what is going to happen.

We understand that the global economy is holding up because of a still resilient emerging market growth. The question would be for how long? usually it's always the last to fall.

Even the U.S. through his strongest economic voice, Mr Bernanke, Chairman of the Federal Reserve, sounds pretty bearish, during a testimony before U.S. lawmakers in Washington, he said there are "significant downside risks to the outlook for growth" and "upside risks to the inflation outlook have intensified."

The U.K housing market is on free fall, their economy is on the brink of a recession. So what do British politicians think about the situation :
"The effect of what has happened is going to be far more profound than people predicted even at the turn of this year," Darling, English Chancellor of the Exchequer, said in an interview

While back Home, the situation doesn't look any better...
"During the past quarter, the economic outlook has deteriorated in the Nordic and Baltic countries, especially as a result of inflation, higher interest rate levels and weakened consumer confidence," Kesko said in a statement.

All the supports are slowly but surely melting....

ECB's new headquarter: Too costly, a message?

"THE EUROPEAN Central Bank's plans for a new 43-floor headquarters have hit a snag -- finding a contractor to build it.

The bank officially closed a public tender it opened in August for a general contractor for the building, saying the "the ECB's estimated budget was considerably exceeded." In March, the ECB said it aimed for construction costs of around €500 million, or about $780 million.

The ECB said that as a result of its "resolute commitment to the responsible use of resources," it has put the project on hold and will now analyze its options. The work on the new headquarters, to be built in Frankfurt's Ostend district, had been scheduled to begin in October, with completion due before the end of 2011."

Here is what ECB president Trichet had to say:

Q: You shelved plans for the ECB headquarters. Your budget was 500 million euro, but the promoter wanted 1,2 billion. What are the plans ahead: will you increase the budget – and who decides that – will you start a new plan or stay in the current premises?

A: We are responsible for public money. The Governing Council is the body which decides on the proposal made by the Executive Board. We are examining the situation in view of optimizing the present situation without altering our cost estimates.

That reminded the Opera building that the government finally accepted to build for the need of 0.001% of the population while housing is getting out of control to most Finnish citizens. I would not add more as I think entertaining the elite should be put last in the list instead of focusing "fat" price increase on päiväkoti/kindengarten fee (a 30% increase year on year)...

Inflation Back to Target within 18 Months

That is to say, inflation will be around or close to 2%...




"We are there to tell households as well as enterprises, all social partners, that we will maintain price stability less than 2 percent, close to 2 percent — in the medium term," Trichet, the European Central Bank president, said in the interview.

"Today, price setters and social partners must take into account that we will be back to price stability — in line with our definition — say over 18 months," he added.

So for the one who thought that inflation will "eat your debt", they got it wrong, as inflation will vanish gradually.

Companies or individuals that build up debt thinking that a 70's scenario was on the card, are condemned to pay debt all the rest of their life, restricting any further moves or investment.

For companies that have sharply increase their price (e.g M-Real, by 10%), in order to pass their high cost to consumers or client, will be uncompetitive and most probably will go bust sooner rather then later.

Food inflation is clearly a temporary as already highlighted in this blog, as price soar, more production is put forward attracted by high profit. An oversupply is then created, plummeting those prices (this can already be witnessed with Rice , Eggs etc...). Now if price don't fall in Finland, then you could clearly suspect, price fixing, cartels or some kind of fuzzy indexation - a socialist type of price regulation ...

Oil has been overextended, and has shown all the characteristics of a bubble. It went up to high and too fast, the reverse will happen the same way. Although i agree on the long term price could be higher than there are today...but the same was said in the 70's...they were right, indeed after three decades...

I think the threat that could be on the card is more a deflation threat on the medium term as Housing deflate and banks deleverage at a time of a severe global correction. Households already fully loaded with debt will buy the strict minimum or the cheapest products around pushing prices even lower...at the end cash looks like king and its purchasing value will increase as time goes.

Inflation is a short term threats, most probably in the headlines up to 2009 then will vanish for at least a decade as banks lend less to rebuild their balance sheets... or do you have any other opinion?

A Reliable Economic Indicator? : Summer Baby Boom

"The trend is seen to reflect an increasing popularity in family planning. Many couples want to time the birth of their children so that the mother's maternity leave coincides with the father's summer holiday."

If they were planning their finance the same way as they "Design" their baby, maybe we would never have had a housing and credit bubble. Maybe more mothers should work in the government finance section. Too bad that we have Jan Vapaavuori, alas we would have had a better vision for housing planning...

"The trend is also seen to reflect the ongoing economic slowdown. Families, which focus on amassing money when times are good, often start having children when the economy takes a dip."

Amassing money? that's not what the debt level is showing... and usually when a family is being created, a house purchase follow suit...in fact data show that when the economy takes a dip then the divorce number soar due financial pressure as seen in 1989...so let's see if the same phenomenon appears in 2009, that is, when the economy will really take a dip, a real one...

Housing bubble - Asuntokupla: Q&A

Q. The term “bubble” is used frequently in discussing the housing market—did we have a bubble, and what does that really mean?

A. Yes, we did. A “bubble” is created when many people believe that an asset’s price, which has already greatly increased, must keep on rising, and that it therefore makes sense to borrow in order to buy it—for example, to buy a house with no down payment. Speculators acquire loans that can be repaid only if the asset is sold for a higher price, temporarily driving up prices and debt; lenders grow confident that it is attractive to make such loans. As long as the prices rise, borrowers, lenders, and investors all make money. But bubbles, by definition, come to a sad end, with defaults, failures, dispossessions, scandals, and late-cycle political and regulatory reactions and often overreactions.


Q. Are bubbles just caused by stupidity?

A. No. They look stupid in retrospect, but when a bubble collapses many intelligent people get caught. Brilliant model builders and articulate Wall Street bankers helped create the most recent bubble. Economist Walter Bagehot’s 1873 observation remains true: “The period of rising prices…naturally excites the sanguine and the ardent…and the ablest and the cleverest the most…. Every great crisis reveals the excessive speculations of many houses which no one before suspected.” Isaac Newton, possibly the greatest genius in history, invested in the bubble of the early 1700s, the South Sea Company, selling at a large profit. But when the price continued to rise, he bought back in—and then was stuck with a large loss when the bubble turned to panic. Disgusted, Newton wrote, “I can calculate the motions of the heavenly bodies, but not the madness of people.”

Q. Why is a bubble so hard to control?

A. Bubbles are notoriously difficult to control because so many people are making money from them while they last. Also, this one made politicians of both parties happy because it was increasing home ownership.

Q. How big was the recent bubble in the U.S. housing market?

A. This time we had the greatest house price inflation in U.S. history. The value of U.S. residential real estate almost doubled between 1999 and 2006 (I believe that in Finland asset have a little bit more than doubled, especially when switching from Markka to Euro...). The U.S. residential mortgage market was already the biggest credit market in the world, and it grew to have total loans of over $10 trillion. Securitized prime and subprime mortgages were purchased by investors around the world.

A financial crisis occurs about once a decade, with markets relearning the same lessons and then forgetting them.

One Danish Bank Collapse, Who's Next?

"Danish bank Roskilde Bank said on Friday it had requested and received 750 million Danish crowns ($158 million) in liquidity guarantees from Denmark's central bank, sending its shares down more than 50 percent.

Roskilde said it had realised it would have to take significantly bigger writedowns than expected in real estate loans and had put itself up for sale. The amount of writedowns was not disclosed.

The central bank said it consulted with the government, the Danish Financial Supervisory Authority and the Danish Bankers' Associations to get their support before offering the guarantee."

Danish bank are now being hit...it doesn't come at a surprise, after all their housing market is one that show the biggest bubble characteristics.

Now in Finland, let's not forget that Sampo an ex-Finnish bank has been bought by Danske Bank. Most probably a move that was required in order to absorbs more savings basically more capital...or would it be the next one to fall??

I would not be surprised to see a Finnish Bank or two, sometime next year to fall, a small one, maybe Aktia, Tapiola or others...You have to understand that the housing market should have slowdown or even fallen in 2003 but instead it carried its way up thanks to an exceptionnaly low interest rates or let's call an amazingly high policy central bank mistake.

Now, one need to sort out this mess. it's automatic with free markets through its boom and bust cycles..but this time we are seeing a lot more interventionism, especially in the US : Institution Bail-out, tax rebate etc ... the consequence are therefore unknown, the "wizards" are experimenting in an unknown field in a similar situation as the one passes the knot: for the best or the worse...

It's worth to note that U.K. "Nothern Rock" bank was nationalized after depositor run last year, it's now the turn of IndyMac BanCorp, a mortgage lender that is being taken over, today, by the U.S. regulators after a similar bank run. So the financial crisis that started last year seem to show no sign of abating, on the contrary it seems to get worse and out of control....

"U.S. banking regulators swooped in to seize mortgage lender IndyMac Bancorp Inc on Friday after withdrawals by panicked depositors led to the third-largest banking failure in U.S. history"

Alea iacta est

Consumers are still borrowing for housing purchase, and so are the banks opening the coffers wide open. No sign whatsoever of a credit slowdown which seems to be in sharp contradiction with the consumer confidence survey.

"The amount of housing loans raised increased further in May

In May 2008, households raised new housing loans to a total value of EUR 2.3 billion compared to EUR 2.1 billion in April. The average interest rate on new housing loans was 5.00% in May, up 0.12 percentage point on April. " Bank Of Finland

At the end, this wall of money flooding the consumer space is pushing prices higher in all fields. Inflation is outrageously high, shops are passing cost to the consumers (let's call them "lamb"). Indeed lambs are purchasing without questionning excessive prices set by retailers such as electronics (com'on lambs, purchase online from German shops, it will save you hundreds of bucks) and food. Indeed Finland is where you find the most expensive ... well you name it.

Hidden cartels, Financial regulators asleep and lack of competitions (or municipalities pressures not to have such thing and let some "families" or business group to rip thousands of profit on the back of the "lambs") are making this economy unprepared for what could be the worse economical storm since 1990...

"Finns and Danes share the dubious honour of having to pay the most for their consumer electronics in the EU, according to data released by Statistics Finland on Tuesday."

"Finnish food prices are among the highest in Europe at double those in Germany, Finnish regional daily Aamulehti reported Friday."

Talking about Sleepy Financial regulators, how many time warning were raise in this blog, concerning easy credit, especially Flash credit (or obtained through mobile SMS). The regulator have only spoken but not acted...therefore have been completely useless if not uncompetent....

"Veli-Pekka needed cash in a hurry to pay off gambling debts. So he started texting.

The Zamboni ice-resurfacing machine driver used his mobile phone to contact Finland's text-message lenders. The only catch was he had to pay fees equivalent to an annual interest rate of as much as 1,600 percent."


Since banks open wide open coffers at a time of unprecedented credit crisis in the US (the worse since the 30's), and with Europe at the brink of a recession, Finnish economy continue blindly to ignore the impact it will have. Commercial realestate are mushrooming all around the places, same for Shopping malls, so no wonder why construction cost doesn't fall...

"Building costs rose by 4.5 per cent from June 2007 to June 2008. Labour costs in construction went up by 4.4 per cent, prices of materials by 4.1 per cent and those of other inputs by 5.8 per cent year-on-year."

A sharp contrast with Spain, Ireland and U.K. where salaries in the contruction sector have been slashed by more than 10%, while the number of layoff in this sectors is the amount of hundreds of thousands...

Never mind, signal are gathering pace. The economy is now sharply slowing down, no doubt about it....

"According to Statistics Finland, the volume of new orders in manufacturing was 23.2 per cent lower in May 2008 than in May 2007. In the January to May period, new orders in manufacturing decreased by 2.4 per cent year-on-year."


The problem with that, is the Finnish economy should have had higher interest rates much earlier and even now they are too low. The economy should have been allowed to slow in order to allow comsumer deleveraging few years ago. Instead you have massive indebtedness....

"Households' financial position remained in deficit in 2007. Debts continued to grow briskly and indebtedness, i.e. proportion of loans relative to disposable income, rose to 103 per cent. Debts went up by EUR 9 billion during the year." Statistics Finland

So what to think about all that? well 2009 is going to be a very hard time for the Finish households ...and the economy. Should unemployement rates increase, the effect will be devastating.

Quite many companies have already deserted the Finnish housing market and heading to places where growth has not yet fallen from a cliff...

" Sponda aims to finance the company's growth in Russia by selling some of its property in Finland."

Housing prices will go lower no doubt about it, by a mere few percent (5-6%) next year unless the worst happen..the economy slow much more than anticipated and unemployement pick up much more than Bank of Finland models are telling us...a dark reminder of 1989...

...the dice has been thrown....