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.