Housing Market : The Bank Of Finland Viewpoint

House price in selected cities

A- On the Housing Market:

I think it is clear for all that the housing market peaked in 2008 and started its long and slow correction since then. Statistically based on the data provided by Statistics Finland and on the two previous downturn, it takes about four years for the adjustment to end. This time won't be an exception amid the fact that we are witnessing the worst slump since the second world war.

But let's look at what Bank of Finland has to say:


"Housing and property prices started to decline in 2008. Growth in the stock of housing loans has slowed. Office property prices will also probably decline. Real estate investment trusts’ share prices fell in the second half of 2008."

"According to preliminary data from Statistics Finland, nominal prices of old flats and row houses peaked in the second quarter of 2008, after which they fell by nearly 5% by the fourth quarter of 2008."

Nominal and real housing price since 1988

"The decline in prices has so far been modest, compared to the persistent price rises of previous years. If nominal housing prices are converted to real prices, using Statistics Finland’s cost-of-living index, housing prices are approximately as high as in the housing market upswing of the late 1980s."

B- On the Rent:

"Developments in rents are mixed. According to a recent survey by the Finnish Association of Building Owners and Construction Clients, the rents on small dwellings are expected to rise further, whereas in many cities, the supply of large rented dwellings exceeds demand."

So rent for large dwelling might decrease since there is a supply glut and it could be historical... A troubling sign of the deflation at work.

In Helsinki region the supply of small dwelling are shooting up as well, as many unsold flat are coming later in 2009, and in 2010.

At the same time, the number of student in Helsinki region is declining and should the trend be confirmed next year it will certainly put further pressure on rent.

In addition, unemployment especially for the young will deteriorate further thus the internal migration toward the Helsinki region from different region should slow drastically (this point could be checked later on based on data from Statistics Finland)

On the Magical Visible Hand of the Government:

"The supplementary budget presented by the Government to Parliament includes measures that will stimulate construction.

In 2009 and 2010, loans granted for the construction of rental flats will be supported with an interest subsidy and a deficiency guarantee.

In addition, subsidies will be granted for redevelopment projects on residential buildings initiated between the start of February and end of December 2009"

On the one hand the government want to put a cap on unemployment figures by stimulating construction on the rental market but on the other hand the risk to put even more pressure on the rental market (since the supply will increase) will increase further.

C- A Technical Analysis: The tennis ball and the dolphin

I cannot produce an article about statistics without providing my own infamous technical analysis.

So let's try to figure out what is the equilibrium of the market but first let's imagine a tennis ball falling in the middle of one the millions lake in Finland. What would happen?

1-First the tennis ball cannot stay up in the air...'cause law of gravitation.
2-So the ball fall and hit the surface of the lake. The Kinetic energy or the energy of motion will push it through the surface.
3-Once inside the lake the ball will emerge up...the Archimedes law will be in action.
4-the ball will finally stabilise at the surface until another force push it up (a pike or a dolphin from the lake?)

Click to Zoom

The Eurovision of Media and Economical News

By reading the local and international press, it looks like that there has not been any financial crisis. All calling for a recovery and stating that the worse is behind us i.e now it's all fine.

Well, as usual, they think readers, the public or citizen at large, are simple fools. I suppose one can be fooled once but not twice, isn't it?

So in this flow of misinformation, distorting information, some have to sort out who is saying the truth?, who is doing "catch-the-fool" journalism? (to be polite, as I was thinking to write "rubbish economical journalism").

At least the economical oriented newspaper and website will try to lure people into thinking that we are in the same situation as in 2003 i.e stocks going north while housing price resuming their trend upward. How many can they fool?

Economist and politicians have been caught back in September, "fooling" in daylight...now they are more cautious as their credibility is at stakes (one I have in mind is the financial arm in the government lead by Katainen, and plenty of Nordic banks head...when they predicted their famous GDP of +0.5% to 1% i.e the economy will not contract...to comeback,3month after to announce a contraction of over 4%

But in this crowd of messages you can find glimpses of truth hidden under tons of nonsense news.

Here are some, and let's play the EuroVision type game and reward the one that are showing honesty and realism..:

1o points goes for China:

“We must be sober and prepare for greater difficulties over a longer period of time,” Wen said. “The deterioration of world economies is worse than expected and a global recovery may be a long and winding road.”

9 points goes for Israel:

"The report shows that we are coping relatively well with the economic crisis, but we still have not reached the end of the story," a statement from the president's office quoted Stanley Fischer, The Bank of Israel's governor, as saying.

8 points goes to the United States of America

"The damage from this turn in the credit cycle - in terms of lost wealth, lost homes, and blemished credit histories - is likely to be long-lasting,", Federal Reserve Chairman Ben Bernanke

7 points to Europe

"We are experiencing a market correction that is very large, very challenging and very turbulent. It is a process that is still under way.", 09 April 2009, Jean Claude Trichet, president of the ECB

1 point to Finland

"If you follow all the indicators, you see some stabilization, albeit at a low level," said European Central Bank Governing Council member Erkki Liikanen

Coming back to some statistics, it is interesting to note the sharp decline of student in Uusimaa (Capital region)

Uusimaa 6,023 in 2008 versus 7,683 in 2007 .

This are just year on year data, the trend need to be confirmed in 2009. If that continues, it will necessarly mean less stress for the rental of small appartment amid increadsing supply coming in 2009 and 2010. So you could easely expect a substantial drop in rent in small flat.

How long?

There was an interesting article in Bloomberg regarding the state of the Finnish construction industry:

Finland’s economic stimulus package may fail to prevent mass unemployment and cushion the collapse of the construction industry, said Tarmo Pipatti, managing director of Confederation of Finnish Construction Industries.

“We’re heading for mass unemployment in the building industry,” Pipatti said in a telephone interview out of Helsinki today. “Government demand can alleviate it, but it cannot stop the plunge, unfortunately.

“The government stimulus is probably not enough in view of how much private demand has fallen,” said Timo Vesala, an economist at Espoo-based Tapiola Asset Management Ltd. said.

“Recessions are for cutting the excess capacity that was built up during the boom,” Vesala said. “Even though construction was the first industry to start declining, it may not be the first to start recovering again. Its slump is going to be a long one.”

It does not mean as I said that the demand for housing and hunger for bigger loan is disappearing overnight. Finnish Banks, Real estate agents, government are relying on people taking more and more debt, thus they will push this system as much as they can.

The whole system is based on such foundation. At some point the system cannot take more debt and you have some sharp reversal. It clearly happenned in the U.S. , in Sweden, in the U.K. , in Eastern Europe and as usual the Fins are the last in the line.

There are clear warnings, the same condition as 1990 are being reproduced:

-Finland is running now a trade deficit, the highest since 1991.
-high indebtedness of public and private sector have sky rocketed in the past 5 years.
-unemployment is reversing the trend, from a low of 6.2% it is now steadily rising.
-unaffordable housing price calling for more and more debt especially in the younger generation.

So on the one hand you have deflationary threat where asset price are losing ground, and on the other hand so much stimulus are in the pipeline that it will undoubtedly generate a sudden "death of kiss" inflation that will instantaneously achieve what is left of the big housing debt owner (Why is that? well 98% of Finnish mortgage are based on variable rate...).