Housing Home Price Situation Update

"According to preliminary data, the fall in the prices of dwellings in old blocks of flats and in terraced houses accelerated in the last quarter of 2008.

Compared to the previous quarter, dwelling prices fell by 3.8 per cent in the whole country, by 3.5 per cent in Greater Helsinki and by 4.0 per cent elsewhere in the country. The number of dwelling transactions diminished clearly toward the end of the year.

Compared to the corresponding period of the year before, the number of transactions fell by 40 per cent in the whole country and by some 50 per cent in Greater Helsinki.", Statistics Finland, 30 January 2009.


Price downturn has accelerated which should not be a surprise. My baseline scenario is still valid, see this link HousinK.

Housing deterioration has always been during an economical deterioration and rising unemployment.

I will just want to highlight the fact that psychology will play a big role at some point. We haven't yet reach this level.

Some Empirical Analysis

Prices have build some premium during the past 10 years amid ever rising prices which I will call Euphoria premium which range from 5%-10%, then price should reflect the current and forward economical and demographic environment which is about 15% to 20% lower and can be tagged as economical premium, finally the psychological premium which will add a downward pressure of about 5%-10%.

Overall, a correction due to the following empirical formula :
Euphoria premium+Economical Impact+Psychological Premium = (min=25%, max=40%)

This will bring us from Top to Down in the "Housing Statistic Finland" chart from Top=180 to DownMin=145 , DownMax= 110.

The lower minimum will bring us to level of 2000, but there is a risk that housing price could go to 1997 level which is as well the level reach in 1987.

Updated Analysis

(Click To Zoom)

One has to remember that we are witnessing an global economic deterioration that is worse than the two recent recession of 2001 and 1990.

When housing prices correction starts, it does so in a very slow motion. Usually it takes between 3-5 years to end the correction (based in past correction, and which is somehow what is observed in the U.S.), but in some cases, mainly Japan and Germany, it can take more than 15 years. So 25% in period of 4 years means about 6% per year which is 1.5% per quarter. Of course at the beginning of the correction, the downward correction is fast, which is what we observe in the past quarter - a 4% correction.

This correction can be accelerated if price fall and inflation surge, which is not my scenario. House price falling has been associated with deflation or disenflation.

Conclusion

Buyer are in a stronger position than in the past decade. They have time to choose and strenght to negotiate good prices.

Buyer will have to buy with in mind that inflation in the next decade could quite easely be over 8%, so debt should take that into account as well as trying to reduce the length of the loan to around 15 years.

Buyer should wait, if possible, and enter in the market from 2011. There is a rational behind this date. First, in 2 years time we will know clearly if government and policy actions have succeeded. Second house price will approach their bottom.

Buyer situation has to be taken into account. If you have a good financial position, then today is already a good time for finding good opportunity and negotiate good prices.

Seller will change their attitude slowly, an almost two decade growth have anchored so strongly expectation of growth. So change of attitude will be slow but will happen. This will mean that the downward correction won't be linear as some resistance will be expected.

Federal Reserve Statement

"The Federal Open Market Committee decided today to keep its target range for the federal funds rate of 0 to 1/4 percent.

The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending.

Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight.

The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters.

Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."

So their scenario is that a gradual recovery (not a full one!) might start end of the year BUT the risks that the scenario will not happen are significant.

So, basically, they have no clue whatsoever about the future outlook, all they can do is to avoid being negative.

No signs of inflation in the quarters ahead - read it as at least a good year. On the contrary they are highlighting the fact that deflation could be a threat: "inflation could persist for a time below rates", a nice way to talk about deflation.

Regarding the stock market, be carefully no to be drag in this "sucker rally", as possibly between now and March there will be a significant correction. We are very far from an economical recovery...

Jumping from a central bank to another, Jean-Claude Trichet , the ECB president, has signaled that he will not cut interests rate in February but most probably in March...signaling still weakness ahead.

California Home Prices : "Hasta la vista, Baby"

"California home prices plunged 42 percent last month as the U.S. housing slump deepened and foreclosures hit record levels.

The median price for a single-family home in the most populous U.S. state dropped to $281,100 from $480,820 a year earlier, the California Association of Realtors said. "

That's about 210.000 euro for a family house in California, not bad? and if you are (un)lucky you could have Schwarzy as a neighbor or having David if you feel like californicating...

Putin: "light at the end of the tunnel"

"Russian Prime Minister Vladimir Putin said he sees “light at the end of the tunnel” for the economy by the middle of the year and called for global rules to avert a repeat of the current crisis.

Some industries may begin to recover by the second half and the Russian economy, which the government forecasts will contract 0.2 percent in 2009, should start to experience “positive trends” this year or in early 2010"

Well if Mr Putin start to become optimist, maybe it's about time to change the baseline scenario or is it? others, mainly governments argue for a recovery mid 2009 with substantial export growth...

In fact there is far too many "IF", and at the same time world class companies are shedding job at the fastest pace since 2001 (Caterpillar, Intel, IBM, Microsoft etc...). Are they wrong?

So who is right? I think it's too early to have a good judgement...

A Fake Interview With Mr Katainen...

(...that's coffee which make me nervous...)

Heipa, Mr Finance Minister.
How are you?

Well, hard to evaluate. Uncertainty is high.
(someone whispering at his ear)...
Humm... I'm very fine, thanks. (*)

I heard that you went into a communication exercise lately, what it is about?

People are getting too negative. So we thought it will be good to change attitudes. (*)

How did you do that?

First in coordination with statistics Finland, we decided to change the sample people we use to get the confidence data. They were too negative. We might as well review the way we calculate our inflation data, it's getting too negative too... (*)

So we could indirectly influence people by providing them better number. That's the message we want to send. (*)

A message? or a try to massage the figures??

What do you mean?

Nothing...Back in September, you put a report that forecasted a 1% growth in 2009 and stable unemployment level. Now, here is what you have to say:

"Katainen put forward three possible scenarios. In the likeliest of these, Finland’s GDP will shrink this year by more than two per cent and the unemployment rate will rise to eight or nine per cent. In the worst possible case, GDP could decline by four per cent."

Why this U-Turn?

Our models are not working. They all broke back in Mid-September. The "Lehman" butterfly effect hit our mathematical formulas right in the face. Our mathematical team has thrown their old formula and broken models and are now following stars and moon to predict where the global economy is going. (*)

Global Economy, how about Finnish Economy?

"Comparing the current situation with the previous recession, the crisis this time as being the result more of cyclical than structural reasons.

Finland is in trouble because the activities of Finnish companies are affected by factors from outside the country. This means that the recession will not turn around through actions taken by Finland itself."

It doesn't sound very good, doesn't it?

The economy is "sound" and our finances in good shape...relative to other. (*)

Everything is "sound", so why do you look nervous?

I 'm drinking too much coffee lately... (*)

(whispering something in my ear: it's all about psychology, the situation is not good... and we have no clue whatsoever how it will evolve. ...sniff, sniff...) (*)

"Finland will not make it through the slump if Finns themselves do not believe in themselves, and in the possibilities afforded by the Finnish economy"

Ok, so a Placebo strategy?

"These actions will not change the cyclical picture, but we can alleviate the symptoms of the disease, and build a bridge over the worst period"

Building a bridge?, you mean a real one?

Yes. Highway too, that can bypass at very high speed the economical problems. (*)

So you don't try to cure the disease, but you put a bandage? Curing the private debt disease by taking more public debt? is it not dangerous in the long term?

"With the additional loan, state debt will rise to 45 per cent of Finnish GDP. This is not nearly as high as in the depths of the recession of the 1990s, when the state debt peaked at 67 per cent of GDP."

Dangerous if a recovery does not happen quickly. But I agree what is the other alternative.

Thanks, and good luck.

(*) fake answer, you would have guessed :->, the rest taken from HS article.

Building Permits: No Improvement Ahead

Building permits have been plummeting 25% compared to the same period of last year. Undoubtedly, it clearly points to further deterioration ahead for residential and commercial markets.

Unless there is a significant pick up of those figures, I will advise to stay away from any investment in any related sectors (housing, furniture business, lift business, materials etc...).

"With the crash of the housing and construction boom, unemployment skyrocketed between December 2007 and November 2008, from 5.7 percent to 9 percent for Latvia, 4.3 percent to 7 percent for Lithuania and 4.1 percent to 8.3 percent for Estonia.

The financial crisis in the Baltics now threatens to spread to the main source of most of the foreign capital in the region: the Scandinavian Banks."

To just highlight that a key market that has grown tremendously in the past 5 years is now clearly slowing to levels not observed since 1992.

Inflation or deflation? Can Policy Makers Affect The Outcome?

I'm rebounding (in the literal way) to what Andrew said in one comment which I though was interesting as it raised major questions.

"If we just want to have a sound monetary policy after the madness of the last years then most surely we will have global implosion and chaos...

If money is devalued then people will tend to move out of cash and into assets. And importantly if money is devalued then debt will be eroded.

Savers are now the governments enemy as much as they are the banks friends. The bank guarantees were not wholey good ideas.

The government risks saving its friends to destroy itself and ultimately everybody else.

If inflation spikes higher then the money borrowed from the future can be returned to the past by destroying it.

This seems to be the plan so far.", Andrew

The strategy you described is the one adopted in the 70's and that has been clearly condemned by the ECB and highlighted as being one of the root cause of the high unemployement figure in the 90's and beginning of this decade.

Just look at Finland, we are now at 6% while we have had a phenomenal global growth in the past two decades. I'm not even talking about competitiveness loss and the disastrous effect of high inflation that can have on economy.

People have to undestand that now we have shifted to a new phase in the economical cycle. Saving is more than ever needed for industrialised world for a major reason: arrival of a massive retirement wave. I'm not even talking about the surealist expectation that some have, the belief that you can spend more than you earn- and that is the current reality.

So the industrialized world will have to save more while the emerging markets will be asked to spend more, basically correcting the global imbalance.

In Finland, government pensions have promised a certain level of income for retiree. As you know we will have more people retiring than people entering the active life, and that is the issue that will change the type of economy we have known until now.

An interesting thought here, with regard to nominal interest rate: "The short-term nominal interest rate, however, cannot be less than zero, based on a basic arbitrage argument: no one will lend 100 dollars unless she gets at least 100 dollars back.", Eggertson, on Liquidity Trap.

Regarding interest being "negative", here is what the last nobel laureate in economics had to say , (please refer to the article picture):

"In 1982, interest rates — elevated in part thanks to high expected inflation, in part because a tight-money policy was what caused the recession — were high. This meant that conventional monetary policy had plenty of room for action, and thus offered an adequate response to the slump.

Today, however, with expected inflation roughly zero and a recession that is the fruit of past irrational exuberance, conventional monetary policy has run out of room. That’s the point of the Goldman Sachs exercise, shown below, which asks what the familiar Taylor rule would prescribe for monetary policy over the next few years; the answer is a Fed funds rate of -6, which isn’t possible.", Krugman.

So actual rate should be around -5%, according to the taylor rule, which is not possible as they are actually in the range [0, 0.25%], to take the example of the U.S. .

Nevertheless I stick to the deflationnary scenario, not that it's best or the worse, but simply because that's what we actually have- you can't fight the market forces. As a result you will stay in cash and avoid losing massive amount of money in stock market, credit market and in housing since a sharp correction can be expected.

So to answer the main question, I think, policy makers (Government and Central bankers) can only soften the correction we are currently witnessing but cannot avoid the outcome (asset deflation). By softening, I mean an orderly unwinding of the imbalances , orderly in the social, economical and political dimension.

Add1: Deflation is here and will last until the system - the banking system - is rescued and safe. The deflation will end at some point and most probably be followed by an explosive inflation - thanks to government and policy makers. As in the late 80's, interest rates will most probably reach double digit and prices in almost all commodities will reach record level.

When this time has arrived, the deflation strategy i.e staying in cash will not work but instead investing in commodities or related company will pay off. The idea being , to get out from cash as it will lose value, but only at the right time

Now countries that have still wage indexed to inflation could be for a big ride, if government doesn't put a cap or will see its sompetitiveness deteriorate.

The main question is when does deflation end? (Although Trichet is talking about disinflation and do not want to hear about the Deflation word.) - to my opinion : [1-5 years]

What to do? [gold] or [commodities]

How about housing? its value will be eroded by inflation, if you are protected agains inflation then it will get cheaper.

Any view on those questions??

Roubini: "US and Europe Banking System is Bankrupt"

"“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

“The problems of Citi, Bank of America and others suggest the system is bankrupt,” Roubini said. “In Europe, it’s the same thing.”"

No wonder why the ECB, Nordea etc... are trying to give positive messages through media as time is running out, any delay of the banking system collapse(?) is needed to prepare for its recovery.

"Yes we can", can have what? a banking collapse?

STT vs Self : Nordea Economical View

It's sometime interesting to see how news can be threated ...

An example of that is a news from the Global Chief economist Nordea, released today (the news not the economist...)

Here is what STT has to say:

"Nordic bank Nordea said in a statement Tuesday its economists saw light at the end of the tunnel and expected a gradual recovery of the global economy in the second half of this year.

"The main reason why we expect a reversal as early as this year is the fast political response in most countries to counter the effects of the crisis - eg, in the US where the new president, Barack Obama, is inaugurated today," said in the statement Helge Pedersen, Nordea's chief economist.

Nordea added it expected the steep downturn on export markets to send the Finnish economy into recession."

And here is the way I would approach it, having read the full release from Nordea:

"The steep downturn in the export markets will send the Finnish economy into recession.

After several years of substantial growth, the economy will hardly grow at all over the next couple of years on average.

Unemployment will increase quite markedly, even though the labour force will shrink exceptionally as a large number of people will retire.

The actual contraction phase will probably be over in the summer, but the labour market will not rebound during the forecast period.",Helge J. Pedersen, Nordea Global Chief Economist

So that is the kind of "filtering", I have been talking all the way long in this blog. That Editor, can decide to censure the good or bad news, making the news appear the way they want for political, economical or social reason. Distortion exists at all levels, my blog included.

Bottom line, cross check your reference and don't be a passif reader but instead dig the information...

Here is the full release : Pedersen Economical View

Jim Rogers: U.K. Pound Is Finished

"“I would urge you to sell any sterling you might have,” said Jim Rogers, chairman of Singapore-based Rogers Holdings, in an interview with Bloomberg Television. “It’s finished. I hate to say it, but I would not put any money in the U.K.”

Rogers correctly predicted the start of the commodities rally in 1999. In January 2008, he advised investors to sell the U.S. currency. The Dollar Index traded on ICE futures, which tracks the greenback against six major trading partners, rose 6 percent last year.", Jim Rogers, 20 January 2009.

Would the UK move toward the Euro? it appears quite difficult after Central bank, Government action on the U.K. Financial System.

Warren Buffet: "U.S. in Economical Pearl Harbour"

"Buffett declined to predict how long the economy will remain under duress, except to say that he doesn’t expect a recovery to take five years.

He contrasted the current economic crisis with the period “three or four years ago,” when “everybody lent you more and more on a house that kept going up, and you could keep spending money you didn’t have.”"

"Buffett said the economic slump is the worst since World War II, though not as severe as the Great Depression.

He said “it’s never paid to bet against America,” and that the country would come through the crisis. “But it’s not always a smooth ride.” "

Warren is a little bit more bearish compare to the view it took back in October 2008. I suppose no-one could have predicted the force of this financial crisis.

Money, Unemployment and Politicians...

"The gold standard is the only method we have yet found to place a discipline on government, and government will behave reasonably only if it is forced to do so.

I am afraid I am convinced that the hope of ever again placing on government this discipline is gone.

The public at large have learned to understand, and I am afraid a whole generation of economists have been teaching, that government has the power in the short run by increasing the quantity of money rapidly to relieve all kinds of economic evils, especially to reduce unemployment.

Unfortunately this is true so far as the short run is concerned. The fact is, that such expansions of the quantity of money which seems to have a short run beneficial effect, become in the long run the cause of a much greater unemployment.

But what politician can possibly care about long run effects if in the short run he buys support?", Friedrich A. Hayek, 1974 Nobel Prize in Economics.

Interesting to read what Mr Hayek visionary writing (or symply describing a cyclical phenomenon) had to say 30 years ago and put it in perspective into today economical situation amid growing political "short viewed" intervention...

Coming back to home seasoned politician:

"The Prime Minister also said that he hoped investors will look to the example of the state, which does not expect any dividends at all.

"The state issued a directive already last autumn that it does not expect dividends from listed companies. It was intended as a signal to other investors, as well."

I think it's about time to layoff some politicians for few weeks to have a break in the stream of hypocritical, socialist oriented remarks usually eagerly echoed by the media...

Investors put money in what they think is a sound company that will make the right decision at the right time. So the question is, is it better to sacrifice the investors or keep a company from readjusting itself? shortly the employee or the investor?

Stock Price versus Housing Price

"However, bad news keeps coming day after day. If and when massive layoffs start translating into lost jobs, even tougher action will be needed. At least on the basis of stock market prices, investors do not yet see any brighter prospects on the horizon." , Matti Vanhanen, Finnish Prime Minister, 15 January 2009.

One difference about Stocks and Housing, one could say, is that the Stock market is mainly priced by investors. Investors always try to figure out the outlook in term of profit and economical environment, in order to make sound and stable profit.

As of today, the stock market has been correcting by more than 50%. It has and is clearly indicated that the general economical situation has deteriorated.

On the contrary, the housing market is a market that is mainly priced by households and few speculators. Households tend to have a lagging view on the economy. They only react after the event or long after. The core issue could be due to information asymmetry. The only source of information that people tend to get are from the media that tend to react or distort informations and usually do not lead it.

Household, as well, tend to live in continuity, extrapolating the future based on very near past. "If the economy is booming today, it will tomorrow", that's the kind of attitude that push people to take unwise decision in term of investment i.e investing in housing in the worst moment and avoid it during the best time.

When the stock market recovers, the economy will follow suit in general with a lag of 6-18 months. The housing market tend to have a psychological component in it and its recovery will lag many years even after the economy start to pick up.

One thing is sure, if you are an investor, the first opportunity will be in stock market then in housing unless we are in a Japanese type deflation where none are good, that is to say, a situation where the monetary policy fall into the "liquidity trap" :

"A liquidity trap is a situation in monetary economics in which a country's nominal interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy", Wikipedia

Warning that house prices may fall by 80% ...

"IRELAND WILL see more demolition than construction of houses over the next decade, as the economy struggles to recover from the collapse of the housing market and the emergence of “zombie” banks, UCD economist Morgan Kelly told the conference.

In a presentation that drew several collective intakes of breath, Mr Kelly predicted that house prices would fall by 80 per cent from peak to trough in real terms."

Recovery will be slow: “It has taken us 10 years to get into this situation – it will in all likelihood take us 10 years to get out of it.”

80% loss in real term...who said that housing was a safe investment?

Paradox Of Thrift

So what does this paradox mean?

"The paradox states that if everyone saves more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population.", according to the economist John Maynard Keynes, writing in the midst of the Great Depression in the 1930s.

That's somehow what we will be witnessing in the months ahead especially as unemployment rise globally.

So who will be replacing the consumers? the government.

The government will build bridges (in Oulu), highway (anywhere), metro etc... So if you are in the construction building thing, you could be OK as the government will try to do anything to fulfill the statistical requirements : The GDP, employment stabilization or growth, in the Keynesian way.
Now the rest, the "service" people, in the best case, if in a well managed company (it's only during hard time when we recognize the competent from the incompetent managers), you will be happy to have your job. in the worst case, the builders will fund your unemployment benefits- it's like a vicious circle that could carry on up to a point.

So it's all about the length -as the feminist movement will tell you.
If the recovery doesn't come quickly, any improvement or government effort will be crushed by another crunch - a bit like a earthquake, the first shock is always followed by a second one, any weak structure will fall afterward.

Right I may sound "doom", fair enough, point taken, but I have to say what we are witnessing is the build-up of 20 years of accumulated issues- like a steamer being heated continuously until it's ready to explode.
After that we will grow in a very "sound" ((c) katainen) basis since the excess, the cheaters, the irrational behaviors will have all but disappeared, the system somehow will have a better foundation - at least in the western world...

How about investment? I think you will be able to invest blindly in almost all sectors as you will be in a position similar to 1932 in the US, or 1992 in Finland. As long as you have been enough "doom" by avoiding to invest in those euphoric times, and not "dumb" to be over-optimistic while the financial world was collapsing in front of your eyes.

I see some ears rising, people wondering about the government actions regarding the amount of fund thrown to the problems - which will undoubtedly increase deficits in the years to come.
So either you will get sharp increase of interest rates on government debts (which will push higher taxes in the future) or higher inflation that will derail the economical recovery.

The idea is that there is nothing such as a free lunch. Same idea as the smiling banker, nothing is coming for free: the population will have to pay sooner than later either in higher indirect taxes or higher interest rates- thus having a variable rate in your housing loan is like having a variable heartbeat -good luck ! (sorry couldn't help my bearishness, somehow it's build-in, I can't disable that ;->)

Ireland Housing: The First Time Buyer In The Front Line

"At least 140,000 homeowners have fallen into negative equity, with this figure expected to rise to 200,000 by the end of next year, it was warned last night.

Jim Power, chief economist with Friends First, said: "I reckon the majority of first-time buyers who bought into the market over the last three years are in negative equity."

Analysing the gains made up to the peak of the housing boom, and the losses since, Mr Power said negative equity was affecting "at least 140,000 people and that's rising by the day".

He warned that, in terms of the recession, "we haven't seen anything yet" and predicted the numbers in negative equity could reach 200,000 by the end of 2009.

Latest Census figures show there were 570,000 residential mortgage holders in 2006, with tens of thousands of new mortgages taken out since.

So the continuing decline in house prices means that one in three mortgage holders are likely find themselves trapped in a home worth less than the loan they took out to pay for it."

while there was a catchup phenomenon at the beginning -joining the EU, end of the conflict with IRA, and enjoying a booming economie-, that would have explained some part of the explosive growth in the housing market up to a point.

As in all boom, euphoria tend to take over and people extrapolate the future (would average citizen has other than a "line" as a model of prediction?, how about "-(x+2007)^2" model?).

Of course, the Irish first time buyer didn't use common sense from the 2005-2007 period in Ireland and will pay a heavy price, most probably a decision that will follow them all their adult life.

"Temporary" Lay-offs Sky Rocketting

"Over 10,000 employees have received notice or a warning of possible lay-offs since the turn of the year, says the blue collar union federation SAK. The rate of lay-off or redundancy notices has accelerated especially during the past week.

On Tuesday, engineering consultancy firm Pöyry, Sunila Pulp Mill and paper producer Myllykoski announced they were initiating consultative talks on possible staff cuts.

They join a long list of firms including M-Real, Hankkija, Onninen, Sandvik and Cargotec.

The SAK union federation says the number of actual job losses has also clearly increased. Some 5,000 employees lost their jobs in the final quarter of 2008. This is four times more than in the same period a year ago"

Temporary layoff is a way to improve company balance sheet as banks have stopped short of giving easy financing. In 2008, the growth for short term financing have risen in the magnitude of 20% year on year, clear unsustainable, showing that company had already difficulty raising money...

I'm just wondering who will pay those temporary layoffs, is it the state? in that sense, is it right to say that the tax payer money is being used while at the same time the company executive and some non-temporary lay-offs employees (directors and "snow" white collars) will still enjoy bonuses, stock options and very elevated salaries.

Is that right? At the end we have a form a socialism coupled with "free-risk" capitalism. So no wonder you have seen company rushing for executing (in process term) temporary layoffs. I wonder if this system is flawed.

On the other hand, the other alternative is quite ugly. would it be good for the society to have a sharp rise in unemployment? maybe not.

The Rich, The Euro and The Assets

"Luxury home values in central London fell in 2008 by the most in more than three decades as the worst banking crisis since World War I decimated demand from the city's financial professionals.

The average value of a house or apartment in London's nine most expensive neighborhoods fell almost 17 percent last year, according to Knight Frank LLP, which tracks prices dating back to 1976"

From a Euro perspective, the UK housing price have lost about 50% of their value in 6 months. 20% in housing price and another 30% in currency as the pound has been somehow devalued.

Regarding currencies, the "English" or even the "Russians" are now out of the equation in maintaining rising price as their currency lost about 30% in a matter of just few months. In reality European assets (Housing, Stocks, Bonds etc...) are too expensive relative to the US, UK and co. So either asset price will have to readjust or currency to plummet to see foreign demand coming back.

Beautiful India? Satyam, the devil is in the detail...

"It’s tempting to make that mental leap amid Satyam Computer Services Ltd.’s book-cooking scandal. Ramalinga Raju is no longer the entrepreneur who built India’s fourth-biggest software maker. He’s now allegedly the nation’s answer to Jeffrey Skilling, the former Enron Corp. chief executive officer serving a 24-year prison term.

Satyam’s crisis may be more jaw-dropping than Enron’s in 2001. It’s not just the magnitude of the scam -- 53,000 employees may lose jobs compared with 5,000 at Enron -- but the simplicity.

Enron’s fraud was conducted through a labyrinth of off- balance-sheet deals and other accounting gimmicks. Accounting firm Arthur Andersen approved the company’s financial creativity and collapsed in 2002. Enron didn’t make it easy for the auditor.

Satyam’s con was impossibly transparent: The Hyderabad-based company said it had $1 billion in the bank that it didn’t."

Greed and corruption has no borders. I think this could be the worse event that India has ever known in term of social, political and economical implication in the past two decades.

"Katainen Warns"

(Doctor checking if everything is still functionning ...)

"Katainen sees no good signs in economic trends yet. If the situation is extended over a few years, growth in state debt could prove to be very steep.

"We have budgeted for an increase in indebtedness of two billion this year. it is nothing compared to what we could well face later", Katainen warns.

However, he also points out that the state needs to be very careful in assessing how much debt to take on, and now to use it."

Welcome to the reality Mr President! oops Mr Kookomus finance "Cinderella" minister.

At least, one has started to reveal to the citizen the extend of what we could possibly face if the situation continues at this current pace...

He also warned that benefits that some fatty executive are enjoying ,through stock options and other forms, amid company profit deterioration, should clearly cease.

“I hope that corporate managers would sense the need for a spirit of cohesion. Some people might lose their jobs, while others get an extra bonus for past years, for instance”, Katainen says

Can they stop buying SUVs, Yatch, going to Opera (one is being build by this government in the level of millions of Euro or more) while the unemployment goes toward the double digits level?

Here I'm thinking about bankers and affiliate- that have deceive the responsabilities given to them, as well as state owned company executive that are seeing bonuses while assuming a non risky position (state safe), here I will think about Fortum, Neste and co...

Are they Dumb?

"The Finnish finance and employment and economy ministries together with the National Consumer Research Centre, a government agency, have launched a project of unprecedented scale to establish whether supermarkets deliver on their promises to pass on the forthcoming food VAT cut to shoppers, Finnish business daily Kauppalehti reported on its website on Sunday."

Are they really serious? a VAT reduction can only be effective if implemented very quickly, the way the UK did. You cannot pre-announce that you are going to reduce the VAT a year in advance. This is total nonsense has resulted in generalized price increase throughout all year long.

Actually even now you are hearing food producer giving the old argument that energy and food raw material are very elevated in order to justify price increase...like no one is aware that those commodities simply crashed and were divided by 3 which has not been reflected in prices so far, on the contrary...

On the same line:

"Despite the economic downturn, the average wage-earner's purchasing power will grow sharply this year, says the Taxpayers' Association of Finland."

For whom?

As unemployement rises, some will see their purchasing power decrease maybe by 20%-80%, other will start to see bonus and benefits "collapse" (I like this word).

So I think it's about time for the taxpayer to get out of their office and check the real world, unstick their head out of their formulas, flawed models and generation old computers...

Clearly NO to Inflation pressure

It's just an anecdote but worth to mention. The idea is that certain price can be sustain only if there is a demand for it, or an expectation that the price is right or will rise further.

Today I received a phone call from a nice lady (based on the voice) working for Welho, a cable TV operator.

-She told me that the TV package I'm using will be phased out. I have been using this package for the past 5 years and I have been paying 20 euro/month.

-So I ask, what was the alternative in order to keep at least 2 channels, the one I was interested in.

-She proposes me one package with a price tag of 30 euro/month.

-First I made her notice that it is a 50% rise in price. Second hinted that most probably she will lose a customer if she didn't find an alternative as the price rise was absurd. So I change the roles, I gave her the alternative of either keeping me as a paying customer or get a 100% drop in price.

-Since her voice seems to be nice, I kept polite. I told her , that it will be fine to automatically cancel my subscription at the end of the period.

Service or product producer have been thinking that customers have a static behavior and somehow are product "addicts" i.e cannot alter their consumption behavior. I think they will be surprised to see how wrong they are and will find that their assumptions are wrong as we are slowly moving from an inflationary behavior toward a deflationary one where excesses are being corrected in all product or assets classes.

In fact, during the period that we are know entering - a deflationary one - the pressure to lower prices are rational. As the demand has literally collapsed, shops, producer have not choice but to try to get rid of the production as fast as possible as storing is expensive and capacity too great. So in order to fulfill that, they need to lower prices and lower capacities. Usually the latter will be done first, the second is always lagging...

But it is true that Finland has a strong wage bargaining structure that allow wage to follow rising price but not the reverse - price could fall but not salary. I think this flawed system (which was sometime praised by Finnish politicians), will prove disastrous for this small economy, as it will prevent it to readjust. The outcome will be seen in higher unemployment and bankruptcies since company will struggle to meet their wage obligation while selling services or products that will fall in price.

Finnish Manufacturing Activity In Free Fall

Some coud argue that the media has been spreading bad news about the economy, maybe even exagerating the problem. But It seems, according to the data published by Statistics Finland, that the indicators are all pointing to the red. The data keep coming , getting from bad to worse.

The metal industry has seen its orders falling by almost 50%, I think this is a record deterioration. The manufacturing as a whole is contracting a record pace.

Obviously another important factor is the amount of temporary layoffs locally and worldwide (car industry for example) that has occurred during that period which undoubtedly has an impact on output.

Wealth, What's That?

Our politicians and economists are correlating the fact that GDP growth is equivalent to well being and wealth creation. How about if they got it wrong and have a total misunderstanding on that essential question?

One will say, hey you getting old fashion? you are not going to tell me that saying "when I was young life was better and family was important", do you?

Today is all about "what kind of car do you have", "Do you own a house?", "what's your salary", "I'm working very hard, but I have good responsibility", "I'm playing golf!" , "I have good networking connections" etc...

So how can you measure wealth? at least the European commission through the French presidency is going to the right direction:

"The Commission on the measurement of economic performance and social progress has been created at the beginning of 2008 on French government's initiative.

Increasing concerns have been raised since a long time about the adequacy of current measures of economic performance, in particular those based on GDP figures. Moreover, there are broader concerns about the relevance of these figures as measures of societal well-being, as well as measures of economic, environmental, and social sustainability."

Guess who is responsible to conduct those research? Mr Professor Joseph E. Stiglitz .

Alas, real competencies are back. Too long, people have been seen as numbers or "Consumers"...I suppose this is the model you are seeing around you being developped "the Jumbo, Iso Omena, Sello" etc... here is the recipe:

1-create a Mall
2-install there some Banks
3-surround the mall by habitations
4-add offices and gym
5-(Optional) build retirement houses
6-(Optional) move the Tax office department in the supermarket
7-make the mall investor rich
8-(mandatory) pass a law that says that housing should only be build near railway and highway not far (100m max) from a Mall -make some politicians "indirectly" shareholders since bribery is now not possible since 1 year ago.

Business As Unusual?

Just a short thought, regarding business and consumer conditions.

For some, what we are currently witnessing, this is just a normal slowdown happening at the end of a business cycle. For others, consumer are being scared by the media, to a level unjustified with the reality on the ground.

What to believe?, where is the truth? who is providing accurate and real information?

At some point, the information used to be concentrated in few hands, and propagated according to state or personal interest, there was only one truth, and it was the one in power or the wealthiest.

Today, it's different, internet, up to now, has allowed a diversity of sources allowing people to get different point of view - some time the difference is shockingly wide.

In today's world, gullibility is unforgivable.

When you hear Comrade Jan Vapavuori, telling that unemployed people will be helped by the state and banks to overcome mortgage difficulties, You have to clearly understand what is at stake. Banks are the focus of the message, and that they cannot fail, now or tomorrow. It tells you as well the degree of deterioration we could endure in the quarters ahead.

The state will do whatever is in his power to maintain those institutions whether or not they had sound lending practice (wait to see how sound and foolish they behaved in the Baltics, and locally). No risk management, fatty bonus, uncorrelated executive pay and gigantic overconfidence could clearly summarize the mis-behavior of those "unsound" institutions for which the state will hand , as a ransom for failure, tax payer money.

So business as "unusual"; time has changed but merely noticeable for the common mortal as its thinking is better structured to extrapolate past information. When times are good they borrow , over borrow and forget about saving. When time get sour, they clearly worry, but still consume as they cannot extrapolate something that has not yet happened. But when the shoe start to drop and unemployment start to rise, housing start to fall and stock market crash...they extrapolate and stop consuming, bringing the economy on its knee whatever the try to revive it, whatever the level of state stimulus.

U.S. Housing Market : 1890-2006 vs Finnish Housing Market

This chart show the price evolution in the US from 1890. If one lesson should be taken from this chart, is that the price, overtime, is stable adjusted to inflation.

Although it is clear that we have episode of boom and bust, which always bring the value back to the average level (100-120 in this index).

The only period where house price were relatively cheap was between first and second world war. Even during the depression, house were rising, albeit at an historical low.

Conclusion:
-Price stability is of the essence for housing. It's is a target for speculation during only short time (10 years) then goes back to average. This has a very similar pattern with the Finnish housing market.

-It's quite impressing to see that we have not yet seen the bottom in the U.S. Housing Market since its peak of 2006. Most probably a "bottom" will happen, maybe in 2010-2011, so 4-5 years at best.

Translating that to the Finnish market, we will probably see a bottom in 2008+(3-4 years) = [2011-2012] which is the period I would recommend people to purchase a house (according to today analysis, which might still change (due to political intervention-non-sense law, self interest, greed, corruption or sharper than expected correction in 2009-2010 )

2009, What Year Would It Be?

Let's try to make some predictions on what we will see in 2009 in Finland.

1- The economy will probably enter into recession from 1st or 2nd quarter amid rising unemployment. Today unemployment is about 6%, it will most probably rise to 11%. Although we won't reach levels of the 1990's of 25%, for technical reason: the number of employed, the working force, will drop dramatically as the massive retirement forces start to kick in.

2- The Finnish Stock market will go side ways during the first half of 2009, in trying to assess the extent of the damage done to the real economy due to the credit crunch. Should a hint of recovery appear to be on the agenda from 2010, then we will see the stock market pointing it -rising- during the second half of 2009. I think we could have a growing optimism during the second half of 2009 only be watered out in the first 2010.

3- The Finnish has transformed itself, thanks to globalization, into an export economy. Relying mainly on the external demand, its strength of the past 10 years as become its weakness. The first sign of Finland recovery will be seen when Russia, Baltics and China start to recover...I do not see that until, maybe, end of 2010 at the earliest.
Regarding the domestic economy, it was a factor of internal growth, partly due to an unprecedented credit growth, due to cheap credit and reckless lending. This will vanish too as consumer will start saving amid witnessing their principal source of wealth - housing- shrinking.

4- Eastern Europe will see a major downturn that will put a very high pressures on Nordic and western exposed banks. Merging to survive could be a possible event as credit growth velocity will slow dramatically questioning the necessity of having a fragmented banking sector. The same will apply to the construction sector as well as satellite activities (real estate agents merger or disappearance could be on the agenda too)

5- Housing price downward spiral had started end of 2008, and will accelerate on the first half of 2009. a 10-20% drop during 2009 cannot be ruled out. 2010 will see the same phenomenon or worse if a recovery is not at the end of the tunnel.

6-Current politicians will still get the same support as they have enjoyed during 2008. During crisis, citizens tend to be conservative. History has shown that the same political group or figures are reelected. Matti Vanhanen could resign or be ousted from his party after failing to stop the decrease of popularity of his party.

7-Deflation will be pointing its noise during the first half of 2009 with all asset/product prices going downward - all prices set by the market. On the contrary, prices set by government will rise, which can be seen as a form of taxation (Train tickets , Alcohol ,Electricity ....). Second half will see a pick up of inflation, although as for the first half, it will be mainly technical and short lived.

8- Interest rates will first stabilize at 2%, and depending if a recovery is on sight or if the deterioration is dramatic, they will fall to an unprecedented 1% or lower, clearly signaling that the deflation threat is real.

9- Rent will start falling from the second half, synchronizing with the unemployment growth. That will add to the deflationary threat.

10- This blog will slowly but surely disappear as the sole existence of it was to express the risks of a dramatic fall of housing price, something which was viewed as improbable, especially by figures such as the Bank of Finland, IMF, politicians and economists: they misunderstood, deliberately or mistakenly, the impact of the financial crisis, the leverage build-in in the past 20 years and its impact on the real economy.

This predictions could be seen gloomy by some, but it's unlikely to see 2009 as a good year as any policy decisions will take time to propagate to the real economy. I'd rather prefer to be ready for the worse than listening to the "out of touch" economists that predicted that the stock market will gain 10% in 2008 when it lost 50%, or some that said that house price will rise 3%/year at the time when the price downward motion started.