Deep Impact: Demography and Housing Permit

Population by Age (Click for bigger picture)

This week has come with its lot of pretty exceptional news and data flow. One has to decipher them in order to understand its true impact.

Let's start with the population report.

1- Demography, toward an "inverted pyramid": More babies needed, please!

"Year 2008 was a historic one for Finnish population statistics.

For the first time ever the share of the population aged 65 and over exceeded that of the population aged under 15.

At the end of 2008, the number of persons under the age of 15 in the Finnish population was 891,162, which was the lowest since 1896.

The number of persons aged 65 and over in the population was 892,068 at the end of the year.

The largest age cohort in Finland’s population was persons born in 1948.

At the end of 2008, they numbered 83,361. Persons over 100 years of age numbered 514, of whom 77 were men and 437 women.

In the course of 2008 Finland’s population grew by 25,830 persons and the increase in the population was the largest since 1992.

For the second successive year and at the same time for the first time during Finland’s independent history migration gain from abroad contributed more to the increase of population than natural growth."

You could see that the tsunami of the baby-boomers, the one born just after the second world war, will cause a radical changes on government policy and economical landscape.

At the same time it appears that there won't be enough active people to support the retirees which will put massive pressure on the social security framework. Already there is a shortage of nurses while the need will be probably few folds in the years to come. A worrying situation that seem develop amid the incapacity of the government to take the right actions.

Associated to that, is the massive losses encountered by state pension fund especially due to losses in stock market and most probably in real estate. Added to that the clear incompetence of municipalities budget handling that will put even more pressure on the social front.

This is clearly very challenging and will require bold action from the government in many fronts, as it needs to attract more people in Finland while juggling with nationalist feelings.

Unfortunately, the current crisis could not have invited itself at the worst time. So after all, it is not in the hand of the government since a necessary condition to handle such process is to have a good and sound economy base which it has, honestly, no control. It finally depends on how the US, Russia, China, Europe handle this global economical crisis.

Now regarding the population increase, this is interesting to note that it is coming from two major groups : Russians and Estonian as the chart below highlights (Contrary to what YLE or HS seems to promote):

For the first few groups, it is clearly for economical reason: Russia and Estonian job market is deteriorating at record pace. Unfortunately from now on, the Finnish market will follow suit hence social tension that could arise against those communities, especially on the eastern and northern side of Finland (where you really have an economical depression ongoing).

let's go back to the housing market after all, some new data came this week.

2- Housing Permit: Do not buy until the trend resume upward... unless you have no choice.



Permit for building residential, commercial are clearly on a free fall. Construction builders have clearly understood since 2007, that the nature of the market has changed. So less people are buying structurally and fundamentally. This is certainly not because banks do not want to lend or have change their credit standard (which has been lose since 2003)... but simply either people cannot afford the current market prices or because the demand in the past few years was just phenomenal...

It's important to note that commercial building permit are slumping too. As I said few time they build far to many commercial buildings, that will clearly be another source of stress for the banking sector in the months to come.

And of course, the visible hand of the state in action, the only growth in permit has to be stamped on the public side. That's a kind of bail out with fresh tax payer money. Well, let's not be too bad, there is clearly a need for public building hospital, paivakoti (kindergarten) etc...

This can clearly be seen in the housing loan growth of the past few years as shown in this graph:

Since the last quarter the demand for housing purchase has sharply decreased to reach the 2005 level (it is in Billions of Euro, so it means far less draw down). I expect that trend to continue declining since unemployment and a psychologic change will be the main forces ahead amid deteriorating economical and political climate.

It's worth to note as well that the population in Uusima has increased by 15.000 in real term (removing count from merger such as sipoo or partial merger such as Vantaa), which in term of family (2 couple and 1 child) means at least about 3 000 housing need to at most 10.000 for 2008. I think here as well the supply far exceed the need especially as the job growth reverse trend and more supply is coming.

How about a quick technical analysis...

3- Technical Analysis, A Forecast : would it be 2012, the year of a possible housing market recovery?

Housing Permit Perspective:

Housing Permit versus Housing Price

One should take the Unemployment perspective and analyse its impact on the housing market.
It will be fool to think that housing price will hold or rise when unemployment rate is rising.

Here is the unemployment rate since 1990:


Unemployment Perspective:

A basic analysis will show you that housing price will fall until unemployment has peaked. According to the Bank of Finland and Finance ministry it will peak sometime in 2010 hence you can confidently bet it will peak in 2012.

Unemployment Rate versus Housing Price

Epilogue:

This are just interpretation and need to be reviewed as soon as new data emerges. The situation is changing very fast in both direction thus one has to readjust to any new realities and be pragmatic : not sticking to one view but be adaptable.

One thing is sure, should the crisis last longer than estimated, the consequence could be pretty dire as this government has embarked into taking a massive debt in the next few years.
Should the recovery come later than expected, the risks will materialise and the country will be plunged into a very difficult period.

Let's just hope that the recovery happens in 2010 as Bank of Finland, The European Central Bank and the US Federal reserve have been projecting.

In the meantime, you should be ready for both scenario.

Disclaimer: Investments or strategies mentioned on this website may not be suitable for you. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned on this website. Before acting on information on this website , you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser. All opinions expressed by this website do not reflect real opinions. Past performance is not indicative of future results. Anything missing in this disclaimer can be added unilaterally at any time ...

In "Central Bankers" I Trust

1- Do not forget Finland is part of the Eurozone :

"The European Central Bank will act quickly if the European policy response to the economic crisis becomes inflationary, ECB Governing Council Member Axel Weber said on Sunday. "I can promise you the European response to this crisis will not be inflationary -- that is why guys like me exist," Weber told a business conference."

First you will hear a lot of information flowing that will try to scare you about inflation and that central bankers are not any more in control (or sometime are part of some kind of malign association).

This could make you act and behave in an irrational way and could probably push you to buy overpriced assets, be it real estate, stocks or anything that has been inflated in the past 10 if not 20 years.

2- Independence underlined by serious bias for inflation fighting:

" "We are independent central banks and we know exactly when to start tightening balances. "What we see in the crisis response now is not inflationary," he said." But I can promise you once it starts looking inflationary we will tidy up the mess," he said. "

So here you will get a clear signal when inflation could become a threat. When the ECB will start tightening i.e start raising interest rates, it would mean that their indicators are showing that inflation is about to appear. At that moment, you would have to make very important decisions.

But for now, we are in the reverse situation, the ECB has not finish cutting rates and could in the year to come implement extraordinary measures to counter the existing threat and a real one: deflation.

3- Inflation, yes, but that is not today battle.

"Weber said that while he could not exclude the need for further policy measures to address the economic crisis if the situation were to deteriorate further, the focus should be on the already agreed steps, much of which were not implemented yet.

"I cannot rule out, if the situation deteriorates further, that there will be additional measures ... it is very hard to judge the overall impact this crisis has had on the economy," he said, and added: "Let's first implement all that has been decided.""

This crisis should not be underestimated. Lots of folks have been accustomed to have a quick recovery after 1-2 years of benign global recession. This time it could be worse, no one can predict now what, and how long it would take to have a global economy growing at sustainable levels .

But the transition will have a price...that is : asset deflation.

It doesn't mean that the world will go into the chaos but instead it would have readjusted itself toward a better foundation. A new financial framework is being put in place, that is robust (better regulation and supervision) and reliable (not going from one bubble to another, where greed is the prime factor).

So what we need is some lesson learned and the capacity from our financial and political leaders to look further away and have a vision for a better world.

The idea that the system can only be cured by debt is advising what has put the U.S. economy the way it is. Irresponsible creditors giving credits to irresponsible debtor.

Government, in a Keynesian way, will use debt to keep unemployment from catastrophic levels and put a floor to the exceptionally fast deteriorating GDP. I would like to note that the Finnish government has clearly chosen this path, albeit a measured one.

And then hearing that central bankers will "wiped out" debt by creating inflation is first, in total contradiction with their mandate and second will promote what is called "Moral Hazard" i.e rewarding the bad economical agents and punishing the responsible one, the good economical agent that do save before buying assets and do not buy or invest if they judge they cannot afford or think it would be a bad investment.

So "in Central Bankers I trust", would be my last word, since they have the power to put us in a stable, sustainable and responsible world. They can commit mistakes, they can underestimate a problem, but what we want from them is the capacity of acting at the most crucial and critical time, and today we are in such situation.

There is no alternative, since the other path will probably put us back few centuries ago.

The Finnish Niagara

Everything is falling and at record pace. Maybe one should list what is not falling as the list will surely be smaller.

So what's not falling?

1- My daughter since she knows how to walk and very well , alas now she learn quickly how to run and how to run fast...
2- Matti Vanhanen, still holding hard as a prime minister: his party is falling apart yet like a magnet he seems to defy gravity...
3- A post-it that is on my fridge that always remind me that I should not forget one important thing: " Is it time, today, to go around the world as an adventurer? "


Well what's falling? , let's try to be short

1- Not as a surprise, housing prices continue their downward trend (we are just at the beginning...)

Finnish detached house prices fell by an average 4.3 per cent in the last quarter of 2008 from the year-ago period, Statistics Finland (SF) said in a statement Friday.

Prices fell by about 5.1 per cent in the capital region and by some 4.2 per cent in the rest of the country.

The number of house transactions plummeted by 44 per cent year-on-year.

What is important to note is the total collapse of the demand. People are not interesting to buy at those prices and are keen to wait when normal prices or bargains starts. Of course the economical situation is playing a lot here amid rising unemployment and household limitation to take on more debt.

So if price continue at this pace : 5% per quarter, we will get 20% for this year and 40% by next year..hum nothing goes in straight line though...

2- Dramatic drop in new orders in manufacturing



Where are the trading partner?

Russia has shut is market, Sweden, UK, US are devaluating their money and their economies are on the brink of collapse i.e shifting from recession to depression hence the rush to cut interest rates to level not seen since the appearance of the "Homo Sapiens".

3- Where are the tourists? hey oh...it's shining, the temperature has risen to +3 degrees, it's almost summer..so where are they???


Indeed the number of tourists has fallen drastically: currency issues, change of consumption habits, economical issues, or just fed up to travel?

My hat to the Dutch, still bucking the trend.

An Update On Inflation And Economy

As I have been saying there is no risk of high inflation for at least two years. It does not mean that the situation will change after that but instead it will depend on whether or not the economy and financial systems have been stabilized.

Let's hear what Mr Jean-Claude Trichet, president of the European Central Bank, had to say, and he is the only banker that I think can be listened seriously - the other are just reckless and only aim to make a quick fortune, rip off investors and shift the risks to their client and finally to the taxpayer-.

So Coming back to Mr Trichet, - after a few seconds anti stress banker punching- ...

As you know, the ECB has reduced the interest rates to 1,5% which is historic, it has never been so low - that tells you how serious is the situation-. The ECB has as well hinted that they will continue decreasing the base rate: my guess is that they will push it to 1% this june and they will wait at this level for a quite long period.

Here is the fact that make think they have not yet finished with rate cuts:

"As I said, we did not decide ex-ante that we were at the lowest level. If justified by facts and figures, if some of the risks that I mentioned are materialising, I clearly won’t rule out the main policy rate being changed, indeed going down. That is clear."

Let's examine key points of the ECB statements:

"Overall, inflation rates have decreased significantly and are now expected to remain well below 2% over 2009 and 2010.

This outlook for inflation is due to the fall in commodity prices and diminishing domestic price and cost pressures, reflecting the severe downturn in economic activity."

So you can expect to have interest rates to stay at 1% for until at least end of 2010. They cannot add more debt on top of an ever growing debt burden in a deflationary environment.

"Looking ahead, the Governing Council expects that both global and domestic demand will decline in 2009 but thereafter recover gradually.

This assessment is also reflected in the March 2009 ECB staff macroeconomic projections for the euro area, which place annual real GDP growth in a range of -3.2% to -2.2% in 2009, and between -0.7% and +0.7% in 2010."

I suppose they ought to be optimistic for 2010. You cannot hide the fact that 2009 will be the worse economical episode witnessed since a very long time. They denied it last year, now they state the fact otherwise they will lose their credibility.

Having said that I have to highlight that the ECB has had a very good track record on their economical forecasting (contrary to the finance ministers around the world, which after all are political branches, that mislead openly their client i.e the citizens).

Of course it supposes that the measure they have taken and government stimulus around the world, are the right one and see their effect in 2010.

So 2010 will be a key year , such as was 1990, 1980, 1970 ... 1940, 1930 etc... looks like every decade the lesson learned vanish to be replace by greed and fanaticism...you can't help it, it is the human side.

Of course the ECB will fight hard the fact that they will achieve price stability, which in our context mean, the risk of deflation:

"We are looking very carefully and constantly at the possible risk of deflation.

The conclusion of the international institutions in general is that such risks are very minimal in our case.

And one of the reasons why they are very minimal is that, to substantiate deflation, not only inflation on the basis of the CPI observed during a sufficiently long period of time must be negative but must it must also drive inflation expectations themselves to be negative, so that you have the downward spiral that characterises deflation."

I still think that the risk of a deflation spiral is far bigger than the contrary hence the reason that central bank around the world have cut rates to around ZERO percent (UK,US,Japan, Canada, Switzerland etc...)

In such conditions, investing large amount of money in one asset is foolish, risky and could jeopardize your stress balance.

I would like to highlight that most probably, the stock market will start a rally (from Monday?) for few weeks if not months, so maybe there will be a good opportunity for small investment and make some small profits - not taking big risks. This is the opinion of an amateur and this is no way a recommendation to be followed (see you bank adviser...sorry, better to avoid them...maybe ask the taxi driver or the barber, they might not know more but at least they are honest and not interested in sucking your capital). It is just an idea, a speculative one.

But bear in mind, the stock market has not yet bottomed and who knows when it will. The stock market up to now has already priced a very bad 2009 amid massive deleveraging, and has price a bad 2010. So my guess , is that the stock market will rally with the view that 2010 will not be as bad...but to only to be deceived and will continue its bloody correction at some point..so the reversal could be quite fast so the risk in being in the stock market.

In any case, cash is king. Staying away from any investments is probably the best strategy for the time being if you are risk averse and do not understand the stock market. And personally I will never invest more than 30% of my savings in stocks or anything else.

This crisis is far from being finished and interest rates cut will not be the cure.

Disclaimer: Investments or strategies mentioned on this website may not be suitable for you. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned on this website. Before acting on information on this website , you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser. All opinions expressed by this website do not reflect real opinions. Past performance is not indicative of future results. Anything missing in this disclaimer can be added unilaterally at any time ...

The Broken Record

The US, an example of price correcting slowly the first year and then accelerating

"Nordic bank Nordea said in a statement Tuesday that its survey indicated that the Finnish public's housing purchasing power had improved markedly in the final quarter of last year on the back of falling house and flat prices and interest rates.

Nordea added that the average monthly cost of a 25-year mortgage covering 70 per cent of the price of a 77-square-metre dwelling in Helsinki had stood at 980 euros in the last quarter, down by 100 euros from the previous quarter."

I was waiting for such release either from our "sound" finance minister (by the way where is the housing minister?) or from real estate estate agent.

Finally it came from "the mouth of the lion", what else would you expect?

So price have corrected by a fraction of percent and yet, this bank is encouraging into making one of the biggest mistake of your life.

I have said all along this blog that at this juncture, considering the type of crisis we have in our hand, it is better to wait before buying a house.

First we have the worst crisis since at least the second world war. We have record high debt and an unprecedented synchronized global economical meltdown, something not observed even during the 1930 great depression or during the 1992 the "Mini&Short" Nordic depression.

Visibility, patience and making the right decision and choice are key in such very uncertain market. Today it is a time to concentrate on real values, real skills instead of giving your borrowed life and future in the hand of bankers.

A loan for 25 years is absurd by itself and the truth is that no bankers have asked the 30% deposits as Nordea claim in their statement, indeed what they asked is guaranty against some highly illiquid collateral (another house) or collapsing one (stocks) or worse a government guaranty (at the moment the liabilities of this government is growing exponential).

Regarding rent, I bet they will fall next year and it will be historic, as I repeat the crisis we are going to witness is going to be the worse that our generation has seen: it will be long, it will see many company going into bankruptcies and most probably will see one or two Nordic banks disappear or merge (due to their implication in the Nordic housing market, Baltic investments and companies exposed to the collapsing of the export market).

I have just highlighted the risks, maybe I will be completely wrong, yet the benefit for betting that the economy will recover quickly are far lower than its opposite. Cash has been king and will be for least 1-2 years but could be for 20 years if a Japanese style scenario was to appear.

Remember, You have been warned!...

Disclaimer: Whatever is said above is wrong and does not represent the thinking or the position of the writer. Most probably this article was written by a hacker and was published unintentionally. It is strongly known that Nordea is a great and trusted bank, maybe the best in the whole universe. The view express in this article and in the comments made following this unententionnaly published article, do no represent its authors. Anything forgotten in this disclaimer can be added any seconds. By reading this article you are abiding yourself to this disclaimer.