Finnish Housing Bubble

Statistic Finland has published the latest dwelling price for the third quarter. It is worth to understand that those prices just reflect a trend not necessarly the reality as experienced and observed on the ground since Prices are overly underestimated by Statistics Finland (even if this institution is transparent on its methodology and how it gets the data).

As expected, it shows higher prices compared to the previous quarter however still lower than the peak reached in 2007. I

The following picture shows the forecasted trend before statistics Finland published its data and provided some analysis see post "Housing Price : Warming Up Exercise".

Now what can explain the latest rise?

You must understand that the last leg up is not due to fundamentals and it is not coming from an healthy market. Distortion are hapenning at many levels and are pushing prices into a very dangerous and worrying path that could destabilize the economy as a whole and in particular the banking sector.

Now the facts:

1- Interest rates for housing purchase
As you can see in the figure above, interest rates are historically low. This is giving temporarly some oxygene to people who heavely borrowed at variable interest rates in the past few years. Lower interest rates is as well distorting the market as it is bringing into the market buyers that would otherwise not be elligible to borrow large sums for housing purchase, especially the young buyers.

Now, I would say that if Finland had its own currency and interest rates setting, I would then say that interest rates could stay low for a prolonged period but it is not the case. It is the European Central Bank that control Finland monetary faith. Indeed, the ECB will have to raise interest rates even before inflation shows its head and that could then be highly inadequate for Finland economical situation. It could be earlier than people would think.

2- State Sponsored Speculation

The government has still maintained interest rates subsidies even after IMF recommendation to phase them out. This has contributed over other elements, to an overheating of the housing market in the past few years.

In addition, the state in conjonction with banks is "lurring" the young to acquire price inflated flat, here is what YLE reported (full article here):

"Special bank accounts intended to help young adults get home loans are growing in popularity. Since July, customers of these so-called ASP accounts are eligible for a 3,000 euro bonus from the state.

OP Bank Group, Sampo Bank and Nordea Bank have all reported an increase in ASP account holders."

and from the Nordea site :

"If you start saving right away, you can have the necessary 8 deposit lots saved and buy a home before the payment period of the state home saving bonus of 3,000 euros ends on 31 December 2011."

3- Finland Economical Situation

It is pretty disastrous , just have a look the latest GDP figures, it is even worse than the 1990 recession. In 1990 we had the beginning of globalization and the birth of a giant Nokia. Today we have curretnly emerging markets overheating by ill designed stimulus that are putting at risk their economical stability - those stimulus and interest cuts were put in place due to economical distress. Moreover the Finnish giant industry are all but struggling.

Finland cannot devalue its currency which was the ultimate solution to bring back competitiveness and boost the export market. The Euro is too strong for an economy that mainly rely on export.

4- Finland DebtNow there was some talk that Finland will borrow huge amount next year (around 10 billion euro). I'm just wondering if it is a way for the country to lose its credit rating .

One explanation would be that it's better to borrow before it gets too expensive. Finland need to borrow is massive since it need to fund projects in order to limit unemployement from reaching scary figures. There are as well massive needs to fund a growing and worrying amount of retiree.

Of course, it is hapenning at a time of political elections hence no risk to see tax rise around this time hence the need to borrow...

Indeed there is nothing as a free lunch what is borrowed today will have to be repaid so expect higher tax down the line. It is sad that money being used today will mainly go to banks and builders, one that enjoyed an easy ride over the decade.

Let's see what "Bank of finland" had to say about that debt:

"As in other countries, the accumulation of debt by the public sector in Finland is justified. It has made it possible to soften the impact of the recession. Fortunately, the financial position of general government in Finland at the beginning of the recession was strong, at least relative to many other countries.

A continuing trend of increasing indebtedness is, however, not sustainable. Before long it will be necessary to reach a level at which the debt ratio can be stabilised. The higher the debt ratio, the larger the primary surplus will need to be in the future. The primary surplus is the difference between public income and expenditure, excluding interest expenditure. Rising interest expenditure must then be financed by tax increases or by cutting other expenditure."

legal note: whatever it is said in this article is not of the responsability of the author , any reference to any entities may be accidental. Anything said above may not be true and may be removed at any stage, at anytime (you like it or not).

And again I warn people by the media (lobby driven) that distort or try influence people mind - as an example see YLE (which is one the cheerleaders) and refer to the post : "...get some fresh air"

Switch-off Your TV/Newspaper and Get Fresh Air...

As I have been repeating limit your exposure to news or media in general as without much notice your way of thinking will be out of your control, on the way , the vision of the world will undoubetdly be distorted.

Take for example the free newspaper "METRO" that can be found in metro or train station. Every morning while sitting in the train, in the way to work, and I shortly observe people around me, one will be amazed by the amount of people reading this newspaper as addicts in need of their morning information. At the arrival, the target is achieved, most will probably have the same view of the world ...

TV can be put on the same level and it gets people scared!
Here is an example:

Finns perceive more threats around them now than during the cold war. According to an expert from the Finnish National Defence University, politicians are largely to blame for creating new threats.

Another outrageous subject grossly abused by the Media and the politicians ... the "SWINE" or "H1N1" or "SIKA" or "PIG" Flue ... I wonder who come up with those names...

So the Piggy Flue have killed so far .....1 - one - Yksi person...

Yet it is considered as very dangerous disease while on the other hand more than 1000 - thousands are dying regularly from the same desease year after year, as shown in the following table while at the same time the bigger seller of alcohol is not behind bars (just kidding (see foot note)):

So my advise keep your mind "independant" and most importantly your judgement intact and not biased by the daily media calculated information coverage...

Footnote and legal note: whatever it is said in this article is not of the responsability of the author , any reference to any entities may be accidental. Anything said above may not be true and may be removed at any stage, at anytime (you like it or not).

...Next the ECB rate increase?

In yesterday's article I wrote the following:

"... In fact, price will correct due to the forced exit strategy by central banks that will led them into increasing interest rates to avert twin bubbles as already observed in the stock market and housing market."

So today we have the following headline news:

Oct. 28 (Bloomberg) -- Norges Bank raised its key interest rate a quarter point from a record low and signaled steeper increases than it previously forecast over the next three years as inflation accelerates and unemployment remains low.

So should the ECB follow the same path, we will enter a zone of turbulence with regard to the housing market.The dices are thrown ...

Housing Price : Warming Up Exercise

This is my baseline scenario reviewed based on the current interest rates and bank lending behaviour.

I will come back to the housing price trend on the 30 of October, when "Statistics Finland" will publish 3rd quarter dwellings price.

It gives me an opportunity to prepare the ground before the data is released and try to make an analysis to explain the current situation. The economy is in bad shape, there is no doubt about that however the central banks and government have flushed the market with easy credit (historically low interest rates).

This will probably push any asset price even higher and make the current bubble even bigger and quite dangerous. So in order to avert the current financial crisis they have put the seed of an even bigger financial monster.

Having said that, the outcome of my baseline scenario is still valid, but instead the correction could be more severe and more violent on the economy. In fact, price will correct due to the forced exit strategy by central banks that will led them into increasing interest rates to avert twin bubbles as already observed in the stock market and housing market.

The other intersting piece of data that puzzle me is the consumer confidence component "Finland economy in 12 month" which is at record high, even greater than the dot com bubble...

Finnish Housing Indebtdness (Updated)

By looking at the data provided by "Statistic Finland" (see reference) , one will not be surprised to learn that Finnish exponential indebtdness growth is behind the phenomenal surge in housing witnessed since 2000.

The following charts will try to demonstrate that we are currently walking on thin ice... It underlines the country's politicians and/or economists inability to oversee a situation that went out of control in the past 10 years.


Since the data has been gathered by "Statistics Finland", income has always been greater than credit, however since 2008 the situation dramatically changed...

In order to compensate for the difference between the income growth (linear) and asset price growth (asset inflation : housing, food, land, rent, etc...), credit was used to fill the gap hence the exponential growth witnessed.

Now Nordic banks are extremely nervous to see the unemployment growing since the amount of debt hold by private household is worryingly large. Should the deleveraging of the household happen, the consequence in the economy will be felt for many years to come, in particular the housing market will be greatly impacted.

Now, let's go back in the past and try to underdstand the root cause of this housing bubble. So, in order to have a housing bubble, you need to have more demand than supply. In order to have more demand, bank only need to provide more credit in order to boost the amount of transactions, and indeed this is what they have done, reckless lending, non regulated financial market that went "nuts"...Where investors were purely driven by greed and where consumers were viewed as a possible channel for reaching quick profits or high bonuses.

This is what the following chart demonstrates. The number of transactions for housing purchase have been multiplied by more than 3 in ten years (1998-2008). The same phenomenon was observed during the previous reported and well publicized bubble (1981-1991).



It is true that since 2009 the situation has reversed (unfortunately the data is not available from statistics finland database). The number of transaction has collapsed and the interest rates on housing loan has fallen markedly. The latter will probably affect/distort temporarly the indebtdness level and allow a "temporary" window of transaction growth. I insist this is temporary, and it is a side effect of the central bankers to deal with very severe economical conditions.

In addition, the Loans for house purchasing growth (year-on-year % change) shows clearly a continous weakness since the peak reached in 2006 (Reference : http://www.ecb.int):



Builders have understood that the market has turned and have drastically slowed their contruction ambition, as demonstrated by the evolution of the number of building permit granted. So on the one hand the professional have understood that the market has turned while on the other hand the media is pushing into believing that the housing price (in nominal or real term) will continue to grow and that it is sustainable.

See below the evolution of the number of building permit granted (reference : http://www.stat.fi) :
To conclude, I will say that we have had a credit bubble that fueled the housing and stock market. In the past 12 month, the economical situation went to an abrupt change and pushed central bankers to take incredible measure to stop the global economy from falling a cliff and overall sustain social stability more than wealth preservation.

I'm still convinced that the housing correction is overdue and a low will be reach in between 2010-2014 which was my baseline scenario since end of 2007 before the financial crisis was starting to be the main headline... however we are in a very unusual situation where past economical and political model have been damaged, and to that extend we will see the emergence of a new economical paradigm and see the emergence of new leaders. It will take time and the impact will be unknown, hence the need to adapt one's view with regard to possible economical development in general and to the housing and stock market in general.

Guess ... (The Answer)

Guess what it is? ... answer in 5 days ... and its implication.

I have had very interesting comments...let's dissect first the answers provided by "Island Crow" and "Eric".

"Island Crow" : Unemployment rates?

Well, the trend is similar however in the opposite direction.

If we look at "statistics finland" last unemployment release data, We can construct the following chart, of which I have taken the pleasure to extrapolate a possible trend:

We are currently in phase (1), unemployement is growing as the demand is faltering and the excess capacity removed. Phase (2) is a stabilization of the unemployment growth due to low interest rates and government spending especially in the construction sector (Roads, Metro, Opera and all the possible way to keep afloat the construction sector with the tax payer money and supporting companies such as Lemminkainen and YIT to name few). In addition, as rightly highlighted by "Island Crow", there will be a wave of retiree that will, in some cases, be replaced by potential unemployed. However, as shown in phase (3), when all the stimulus bullets will be shot and when the european growth will resume its downward trend the unemployment will resume higher as witnessed during the early 90's.

Now, it is worth to notice that female unemployment is lower than the male unemployment during the bad time which usually reflect the contraction of the construction and heavy industry.

Talking about female and contraction. There was another interesting comment:

Eric : "HousingFinland's sperm count..."

Well, the trend may be similar however statitically it does not reflect the male sperm count in general. After some "theoretical" and "practical" research, it is known that the sperm count will decline overtime however you only need to have 1 to 2 successfull sperm hit on the ovary egg to fulfil your family ambition. What has to be remembered is "Quality over quantity" ;->, the picture below show probable evolution on "the count" overtime (note the statistics start just after the 1929 crisis to the next mild one of the 1990...in line with housingFinland spirit...).

So the man fertility in general is pretty strong...statistically.


Now how about the initial picture?

The picture reflect the "MFI loans to households in the euro area", (Chart 5, "Monetary policy, credit flows" by Bini Smaghi), and it is contracting very substantially and in a robust manner, not even reflecting the fact that government have flooded the market with tax payer money and the ECB interest rates are at all time low.

So no sign whatsoever of a consumer back to frenzy spending. Household seem not interested in contracting credit for large purchase. Something opposite of what happened during 2003 which had led to asset inflation.

So this chart is very important to follow, should it stay under the zero level, which mean contraction, then the deflationnary trend will be triggered and anchored.

Thou shalt not covet thy neighbor's house

"Signs of optimism are emerging in the Finnish real estate market. However, buyers say they're confused about where the market is heading.", YLE, 12 LocaKulta 2009

So here is my message to the confused "buyers" : "Don't be"

Historically, housing price has never grown while unemployment is heading higher.
Think about the fact that interest rates are historically low, yet Bank lending for housing purchase has collapsed from a year ago and no sign whatsoever of a recovery...except based on "cheap talk" from real estate agents amplified by some media and crook economists.

So I would rectify the YLE statement by saying "Sellers are confused, some are scared and others worried".

As I said there has been a little bit of euphoria as if the economy has recovered..It has not. It's all about government stimulus and ECB interest rates forced generosity.

The cure that have been administered in order to solve the current crisis has not treated the root cause but instead delayed (by 6-18 months) the outcome of 20 years of credit binge.

Takling about credit recklessness, Nordea comes straight to my mind.

Nordea for example is trying to use "the fire to fight the fire"; Using bad credit style to fight bad credit past behaviour is a bad principle in itself and it won't work but it shows you clearly another sign that this bank is trying to fight for its survival. They clearly made mistakes by overexposing itself in the baltics which are at the bring a regional tsunami....and they will pay a heavy price for that...and hopefully they won't pass their pain to the "consumer" or "buyers" by overshooting their base rates or margin...I bet there are capable.

Here is a statement from Nordes taken from their web site :

"The loan interest it tax-deductible if the loan is

• a loan taken out to acquire income which is considered debt taken to acquire taxable income, for example, loans taken out to acquire listed shares or rental income."

Amazing, but it is taken as is...re-read it... "loans taken out to acquire listed shares"

That's crazy...they want people to speculate on stock market...while abusing rules on tax deduction. So the government has put in place a flawed system - the regulators are somewhat hibernating and Nordea like a vampire tries despereatly to fool badly the last "buyer"

Legal Note: Ignore what has been said above it all incorrect and wrong and does not reflect the author writing, thinking, dreams or aspiration. by reading the above line you are binding by the above legal note. Any idea, statement or implication that could be derived, inspired or suggested by the article have no foundation, no ground to make investment or anything else.

Nordea ... Lesson "Not" Learned

So Nordea is fighting deflation with its own tools - rather limited though.

Credit is faltering and consumption is sluggish...so how do deal with that? well use the bad behaviour that was the cause root of the current crisis - as if the crisis happen for nothing and give you the sense that institutions, banks do not learn a nickel out of that.

Let me be more clear...and point to what make Nordea, not an example to follow...

Make use of your home equity

"Would you like to utilise the assets tied to your home to realise your plans?

Does your home need improvement or would you like to buy a summer cottage? Is the block of flats you live in going to have pipe renovation or other repairs? Are you interested in investing? Would you like to give your children or grandchildren a nest egg to get them started in life?
Benefits of HomeFlex

* The interest you pay on your loan equals the interest the bank pays on the deposit on your account.
* You can deduct the loan interest in taxation. Read more
* You can use the loan in the way you want and the account is used as any ordinary bank account.
* The loan period is ten years. During this time you don't have to amortise your loan - you just pay the interest. After ten years we will agree with you on how to continue."

Read again the first and last sentence :
- Would you like to utilise the assets tied to your home to realise your plans
- The loan period is ten years. During this time ... you just pay the interest

I thought that this crisis was all about reforming a failing financial regulatory system...looks like nothing happen. This is the reciped that put the American financial system on it knee that ultimately had to be rescued with public fund.

Today Nordea has been hit by the "I-Dont-Get-It*I'M-Not-Listening" syndrome...and yet, regulators are still fighting the last battle , most probably analysing what went wrong and allowing in real time such development...

Legal Note: The information contained on the Site or in the above story or article is not under any circumstances be considered as a true story, real information or based on any real facts. Any mention of specific legal entities is purely fortuit or is purely accidental...ultimately this story most probably was written by a passer by whose identity could not be identified...the blog author is not responsible for any of these content. etc.. etc.. anything missing in this legal note can be added anytime...

Poor, Bumpy and Placebo

"Our staff told us this month that the real economy could be a little bit better, in average, in 2009 and 2010 than what had been projected three months ago – 0.5 % higher for each year.

1- But is means that 2009 will remain very negative and 2010 perhaps only very slightly positive, as an average. I don’t exclude that we could observe positive growth, quarter on quarter, at the level of the euro area as a whole, before mid 2010. But this doesn’t change our main message.

2- Namely, that we have a bumpy road ahead and that the level of uncertainty remains exceptionally high and therefore that prudence and caution are of essence.

3- Now much depend on us, on our capacity to reintroduce confidence in the financial and real economy decision making processes, in the households as well as in the corporate sector. It is what the ECB and the Eurosystem want to do: preserve confidence, inspire confidence, remain a solid anchor of confidence. "

So that was the message from the ECB president, Mr Trichet...the only person that has good track record and inspire confidence...

So the message is clear, we averted a total collapse (by firing up the whole set of measure and stimulus) in order to have a disastrous 2009 and a no growth scenario for 2010.

After that it is X, the unknown ... no possibility to launch any measures and just wait.

At the same time, cross fingers, touch wood and optionnaly read kauppalehti for subliminal messages...

Having said that...at some point there will be a price to pay for saving the financial system (that was past feed by greed)...like the Incas..one will need to be sacrificed ...the poor, the young and the ederly through a ravaging inflation/stagflation..but that is tomorrow battle..maybe in 3-5 years time...in the meantime, deflation is advancing and getting stronger day by day