"With government debt across the world soaring, the man who predicted the credit crunch is predicting a reckoning.
"The recent problems faced by Greece are only the tip of a sovereign-debt iceberg in many advanced economies,” Said Roubini, 27 April 2010
We know that Advance economies have been pilling up debt in the past 20 years - Finland is no exception with a blip in 1990 that just slowdown a phenomenal leveraging of the system where the debt burdened citizen was at its center and that is now shifting to states.
In the past few years, I have been asking myself, how would that end - as it is not clearly sustainable. The answer has never been clear as policy makers have always pushed the outcome - delaying and worsening the core issue and making it worse each time.
So now, not only the public but also states have unsustainable debt -especially when considering the economical outlook and retirement tsunami, when looking forward.
-Today we got a hint of what could happen-
Yet, there is a land on this planet where its citizen are either on pills or drawn into media disinformation - a kind of wonderland: Finland - just have a look to the following picture:
Consumers' expectations concerning their own and Finland's economy in 12 months' time 10/1995-4/2010It is either due to an ever growing irrational , exuberhant housing bubble that makes people feel wealthy associated by historically low interest rates that reinforce the impression of wealth - and of course supported by bankers that keep on adding fuel to the fire...
So we are not far from the beginning, where reality catch up and where we will suddenly realize that the current housing "ponzi" system is based on illusion and that in any months it could reverse for years or decade to come. - Any opinion on the reverse view, please give your aguments-
And let me finish with those words taken from a speech of Jean-Claude Trichet - ECB president :
At the outset of this quest, it is worth remembering the words of the eighteenth-century Anglo-Irish philosopher, Edmund Burke: “Those who don't know history are destined to repeat it.”
... people have already forgttent the outcome the financial crisis in 1990's in Finland where fast and massive credit expansition was allowed by banks and pushed household to very high debt burden that ultimately pushed the banking sector to its knees. Borrowing in foreign currencies was also one the recipient of disasters, have a look to that particular article published in the Financial Times...
11 comments:
The wife tells me that 400,000 Finns are on some kind of welfare and that a company in the west is about to let go 700 people from one town.
China I am told is going to launch another USD586B stimulus.
Just when you thought it was safe to go outside.........
What I heard of China is that the government is now dealing with the real-estate bubble with very heavy hand. The real-estate bubble there have become a mad wealth-sucker that preempts nearly all real consumption power of normal people severely. This crack-down would release a lot of money to the normal consumption side. Is this the USD586B you mentioned? I have not heard of any new stimulus from there though.
Oh, back to Finland, are we getting rich with the real-estate bubble or, actually, we are becoming much poor with the bubble.
Human? How much have we actually evolved from, say, 10000 years ago? I also believe the mistakes will be repeated again and again and, some people will be "meat" for others as always.
Thought you all might like a good laugh:
http://translate.googleusercontent.com/translate_c?hl=en&ie=UTF-8&oe=utf-8&sl=fi&tl=en&u=http://www.hs.fi/kaupunki/artikkeli/Helsingin%2Buusien%2Basuntojen%2Bhinnat%2Benn%25C3%25A4tyslukemissa/1135256489419&rurl=translate.google.com&twu=1&client=firefox-a&usg=ALkJrhhcrzzX_LUNRG739TQ-VQpUBEvH_w
That's the translated page, but here is the original:
http://www.hs.fi/kaupunki/artikkeli/Helsingin+uusien+asuntojen+hinnat+enn%C3%A4tyslukemissa/1135256489419
So basically if my Google Translator is working correctly the main reason they are saying the price has increased by 13% is there was a shortage of building in 2008 because of the recession.
And then with the next to 0% rates for a year people ran out to buy their dream homes with adjustable rates (what was it 98% of Finns have them?)
So, basically this article is telling me that this is really nothing more than what happened in the US where people bought "dirt cheap" because of the rates and easy loans, and once the rates adjust higher they are out on the street.
Also, I highly doubt Finns ran out and bought up tons of houses - most of the people I saw (warning anecdotal evidence) were Russians and they were buying up whole strips of apartments to rent/resell to Finns.
What are your thoughts?
Greetings from Finland.
First of all, I just received data from Q1/10 which is basically saying that in Helsinki the prices have been soaring up by even 16% y/y.
I'm worried though I don't have got personal debt at all. If you compare this madness e.g. with Spain until 2007 and look where it gotten I think it's very safe to say that in a couple of years Finland will get its burst.
Keeping comparing to the Spain if you like you can easily seek information how the Spain collapsed from well-balanced budget into "the problematic PIGS." And that's not the scene in Finland. Our country is already making up the decifit of € 11 bn and atop for it there will be most likely more net debt come due to Greece's crisis, leaving Finland's burden around € 550 mn - this year only.
This irresponsible pumping up the bubble is enabled by the banks, who else? Since the recession began the interest rates have been slumping down, even under 2% which has made people to overreact with the size of the loans for housing. I've heard numerous rumours that people is actually making sure they buy the house they are looking simply by paying extra over the price asked, but these are still only rumours.
Additionally, it's a main habit between Finns to start picking people who believe there is a housing bubble emerging.
To matching all this into one phrase would be: The more Finn needs to pay from his apartment the happier he is.
If you take me as an example i had money in Nordea after selling a house in England. Rightly or wrongly i was terrified the banks would collapse and i was committed via my Finnish wife to be in Finland.
We looked and could not find anything we particularly liked in our price range - very few seemed to be on the market in our price range. We saw a dump with a garden in a nice area and put in what we thought was a low offer which was taken. Some people later said we paid too much. But now we seem happier - the heating survived this winter, the roof did not collapse and our oil bill is manageable after all:-)
So shortages of property and demand for property and almost desparation to buy are part of the mix for us.
And if the latest figures can be believed we already have protection from a 15% fall in prices and we have done a bit of renovation at small cost.
There's nothing wrong to pay even twenty billion euros for a tiny shack if you've got the money. Home is home and not an investment.
What makes this dangerous is debt. I used Spain as an example, because Spain and Finland have many things in common, except the thing that Finland is already running with decifit. And sovereign debt is rising to alarming levels (Spain is better at that point, but not for long.)
People are purchasing property with debt. If we do face similiar collapse as Spain - and I believe we do - the eraser will be tough. It may sound doomsday saying to claim 80% rundowns, but on some occasions I have tried to "value" some houses of my own and the stupid ask prices are somewhat 75% overvalued, again according to my judgement.
http://kuluttaja.etuovi.com/crometapp/product/realties/common/public/search/item/item.jsp?portal=eo&.sid=1000.5E49D6B265D0973F97AA88BBE6E4811D&.sidc=1000&.rpkg=19653
E.g. this "idyllic" less than 60m² apartment does not have got land, stupid layout on bedroom (hard to fit double-bed into it) and only access to the bathroom is via bedroom.
If this asking price was half of what it is now I'd like to go ans see why is it so expensive, maybe the floors are made of platinium and windows are made of diamonds?
If you find such loans like this one (quarter of a million euros) and you default this thing to bank there will be high risk of what happened in US when the subprime crisis was shot. The values will drop. This "protection" the consumer thought to have will vanish and actually start to turn against him. Pressure to default it willingly increases.
There is already some worries about internal inflation when Finland's inflation grows faster than other euro-countries, mainly Germany, of course. Spain faced the same. Higher prices decreases competitiveness, leads to exporting problems, soon higher unemployment rates (exporting companies can't keep running), lowering domestic demand (which in turn will increase unemployment rate even more.)
i could not find this appartment using the link you provided. address please :-)
Oh, looks like they have made some changes on the layout. Sorry.
Here it is again:
http://kuluttaja.etuovi.com/crometapp/product/realties/common/public/search/item/item.jsp?portal=eo&list_id=12727996394680&itemcmd=move31&listSize=551&doListClickStat=false&itemgroup_id=50.1&itemgroup_id=50.7&item_id=41.1135804&.sid=FF07A01B6F9F1E1A7CC6F3CF70220F5C
That link does not work.
If i had the address of the property it would easier,
There is nothing wrong with debt, and its application in the purchase of an asset, as long as:
1) Your future cash flows will be high enough to service the borrowings. I.e. it's interest over the tenure of the borrowing and principle in a "timely" manner.
2) The lender is offering an amount that is at a level inline with (likely below) the underlying asset's intrinsic/fair value. As lending very close to or beyond this value exposes the lender to what is essentially "equity" risk, or beyond, on the collateral asset itself or the borrowers present value of their future cash flows. A more volatile level risk that I personally don't feel properly priced into the loan.
Much like our Host, I'd argue that both of these are still problems in the Finnish/HKI real estate market which have been recently hidden, and actually exacerbated, by the unsustainably low base rates in the EUR area.
With regards to the first I've talk to people in their early 30's that have taken out loans which they likely require 40 years to repay. So they expect to own their homes in their 70's. In these cases the lender faces a great deal of risk with respect to time and what will occur to their borrower's income a cash flow over that time. The worst case scenario for the banks being the extreme negative events in the early stages of the loan when the outstanding principle is close to or beyond the collateral's intrinsic value. Too bad for the banks, one could call today's economic environment rife with significant downside risks which I personal don't feel will allow borrowers the time to make significant headway in their principle repayments prior to some material risk being realized.
This leaves the second point and the question of intrinsic/fair value. If you are mad enough to think that today's prevailing interest rates are long-term sustainable then, I have to admit, you could can justify the relative values of borrowing to own over renting. However, if I model anything closer to historical interest norms, and just forgot the doomsday story of 8-10% base rates, the relative value of owning quickly disappears. I am not sure how pro-buyers are doing the math to justify today's market valuation, but I know from people that I talk to that they are not doing any math and just following the heard over the proverbial cliff even after seeing their fellow American, British, Spanish, Irish etc. Lemmings splat at the base of that same cliff.
Interestingly, they seem to think that if increase the height of the the cliff by having the Government and ECB build a massive ramp at the edge, as they have with near zero base rates and liquidity measures, they might be saved from the same impact.
Oh well, I'll just let the devil take the hindmost. :-)
There is nothing wrong with debt, and its application in the purchase of an asset, as long as:
1) Your future cash flows will be high enough to service the borrowings. I.e. it's interest over the tenure of the borrowing and principle in a "timely" manner.
2) The lender is offering an amount that is at a level inline with (likely below) the underlying asset's intrinsic/fair value. As lending very close to or beyond this value exposes the lender to what is essentially "equity" risk, or beyond, on the collateral asset itself or the borrowers present value of their future cash flows. A more volatile level risk that I personally don't feel properly priced into the loan.
Much like our Host, I'd argue that both of these are still problems in the Finnish/HKI real estate market which have been recently hidden, and actually exacerbated, by the unsustainably low base rates in the EUR area.
With regards to the first I've talk to people in their early 30's that have taken out loans which they likely require 40 years to repay. So they expect to own their homes in their 70's. In these cases the lender faces a great deal of risk with respect to time and what will occur to their borrower's income a cash flow over that time. The worst case scenario for the banks being the extreme negative events in the early stages of the loan when the outstanding principle is close to or beyond the collateral's intrinsic value. Too bad for the banks, one could call today's economic environment rife with significant downside risks which I personal don't feel will allow borrowers the time to make significant headway in their principle repayments prior to some material risk being realized.
This leaves the second point and the question of intrinsic/fair value. If you are mad enough to think that today's prevailing interest rates are long-term sustainable then, I have to admit, you could can justify the relative values of borrowing to own over renting. However, if I model anything closer to historical interest norms, and just forgot the doomsday story of 8-10% base rates, the relative value of owning quickly disappears. I am not sure how pro-buyers are doing the math to justify today's market valuation, but I know from people that I talk to that they are not doing any math and just following the heard over the proverbial cliff even after seeing their fellow American, British, Spanish, Irish etc. Lemmings splat at the base of that same cliff.
Interestingly, they seem to think that if increase the height of the the cliff by having the Government and ECB build a massive ramp at the edge, as they have with near zero base rates and liquidity measures, they might be saved from the same impact.
Oh well, I'll just let the devil take the "easy" speculative hindmost. :-)
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