Finnish Housing Bubble - April 2010

"Compared with the corresponding period of the year before, prices went up by 11.3 per cent in the whole country. In Greater Helsinki the growth amounted to 15.7 per cent and in the rest of the country to 7.7 per cent."Statistic Finland, 30 April 2010

The words of the eighteenth-century Anglo-Irish philosopher, Edmund Burke, set the context and put a parallel between 1990 and 2010:

“Those who don't know history are destined to repeat it.”


Let's try to evaluate the arguments that could support 1- the existence of an housing bubble or 2- on the contrary, arguments in favor of a correctly priced housing market.

1- Arguments for the Finnish Housing Bubble

First of all there are many compelling reason that we are currently witnessing a bubble of the same of bigger size that the one in the 1990's.

From an economical perspective

The reality was that in 1990, the economical prospect for the world economy was more brighter than it is today. The globalization was at its enfancy and the prospect were huge - it was the propeller for the "rich" country.

Today, the emerging markets - mainly China, India and Brasil are overheating and the risk of their economy to encounter a substantial recession is very high (see the following article demonstrating the irrational exuberance of the Chinese housing market that could hit substantially their financial system or internal consumption: Chinese Bubble about To Burst). India monetary policy has also been far to loose combine with massive capital inflow threaten to destabilize their economy (see article : India Capital Control) .

In the previous recession, Finland managed to get rapidly from its recession thanks to the vigour of the world economy as well as its tremendous positionning on the technology front. It was most probably not politically/policy driven but due to the know-how supported by strong enterprenorship that developped during the 80's.

Today, the same miracle try to be re engineeered by the state supported by policies toward the energy sector - the clean energy bet. In fact, it is mainly driven to rescue a dying forest industry that is shedding jobs at speed light. In any case, it is an overcrowded market where only few players will rip most of the benefits - it is no clear as of today, the outcome of those policies.

From a monetary perspective
Interests rates have been falling in the past 20 years, to record 1%, an all time low.
This has pushed asset price higher and higher as there was little incentive to save.

However, it is without doubt that we have at hand an historical low for the European interest rates and it is not hard to forecast that in the next few years, the probability to have higher interest rates is very high - one would not be surprised to see at least 8% at some point especially if the Euro weakens due to the current European crisis that has just started and that will most probably let long lasting scares from a monetary and economical view point.
The amount of drawdown for housing loan is far below the record reach in 2008 which coincidate with the first high before a correction took place. While the trend in price resumed higher, following an exponential growth similar to the one in the year 1990, it is not marked by a new high in loan drawdown- to me it looks like a speculative move, hence I urge to be very cautious as we may have reached an historical high (a muilti generation high?).

Other reasons could explain this sudden rise in housing price:
-fear of the banking system, investors with capital that exceed the guarantee feel safer to invest in housing than trusting the banking sector.
-fear of very high inflation due to an exceptionally accomodative monetary policy
-shift from pensionner toward small accomodation (1 room flat) - those quite easely push price per meter square very high. There are evidence that construction builders have been focusing on building very small dwellings.

From a population perspective

We are dealing with a completely different population characteristics that will be marked by huge amount of retiree that will in the years to come flood the market with housing whilst the population size is merely stabilizing (the birth rate being under 2).

In addition, rising unemployment and reduced immigration due to economical prospects can only worsen the situation.

From a consumer sentiment perspective


The consumer confidence is at level similar to the pre financial crisis - that is to say that confidence is again at almost record high for this decade.

From this point, it is easy to imagine that a reversal will happen - which obviously will be an indication of weakness either in the economy or housing market.

Conclusion:

We have had unprecedented fiscal and monetary stimulus in the past year which objective was to stabilize an economy that was contracting at a very rapide pace.

This resulted into distorting many asset markets (stock market , housing market). While in many advance economy the previous peak of 2008 has not been reached, Finland on the contrary has gone even higher - this is could be partly explained by the fact that 98% of Finnish mortgage rate are linked to variable rates.

2- Arguments in favor for the rational in the current price increase and level

One of the neighbourg, namely Russia, has tremendous economical potential that could boost the export industry and allow to keep employement in check. (however, demography is an issue in Russia, also the country is mainly energy dependent - if a shock were to happen in the global economy, then the Russian economy could do particularly badly as witnessed in 2008)

Wage have been growing steadly with the Union having negotiated high wage in the past 3 years (however, current negotiation clearly highlight a weakening position with very low wage growth for the next few years. In addition, due to the acceleratio of wage growth, the country has become uncompetitive, pushing further delocaliation in key sectors (IT, Forest, Shipping Industries etc..))

Interest rates could stay low for a longer period sutaining the current price.

Inflation could show is head especially in Finland if the European Central Bank focus its monetary policy tuned for the country in the South (Greece, Spain, Portugal) or the biggest economy such as Germany, French and Italy. (This will further hurt the Finnish competitiveness and could also result in higher than usual strikes combined with social tensions)