Since Summer, Finland seem to be the safe haven - Politicians and finance ministry have been glossing whenever they could that Finland is well managed, the economy is strong bla bla bla... the same broken tune...actually since a week something really got broken...
Maybe people realize that :
1- That the Finnish bond market is highly illiquid market hence volatile. When people see that inflation is becoming a threat or when they need the money asap (deleveraging i.e deflation force here), then all exit through the same door...and yield (interest rates) start to shoot up
2- Finland , whatever good economical and budget practices are made , remain a export oriented economy with an aging population and low immigration country. If the rest is sneezing, Finland get the Flu. Finland is not immune to the global slowdown or to an European slowdown.
So I have noticed a vague of layoff planned for 2012 by multiple of significant industry and company in Finland. The impact is going to be huge in term of employment and of course, our key focus housing price.
I bet, as I did in 2008 that the market will readjust except that this time I see little room for recovery as it did back then (due to mostly to global coordinated monetary and fiscal stimulus that resulted in a short spaced recovery). This time all the ammunition have been used or little is left. Of course, the central banker "magician" will make you think that it can make disappear all the problem - its an illusion, a confidence trick that has ran its course.
Be ready, the Mayan were right :-)..and of course the price will readjust by 2013 by at least 30%...if not then by 60% in the next 30 years a long slide similar to the japanese housing market: You were warned.
26 comments:
This article can also relate...
"Weak German Bund Auction Highlights Euro Fears"
http://www.cnbc.com/id/45414822
Germany’s Auction ‘Disaster’ Stirs Crisis Concern
http://www.bloomberg.com/news/2011-11-23/germany-fails-to-receive-bids-for-35-of-10-year-bunds-offered-at-auction.html
While I did not fully grasp the strategy from the Fed back then..now in light of what is happening in Europe...
"Fed to keep interest rates low until 2013"
http://money.cnn.com/2011/08/09/news/economy/federal_reserve_meeting/index.htm
Absolutely LOVE your blog.
Last summer, an old friend who is professor at the big university in Helsinki stopped by for a visit. This guy has always been one of the smartest guys I know. And yet, while giving him a tour of a restored neighborhood in St. Paul, he gets all excited because some nicely restored houses originally built for minor 19th century robber barons are selling for less than $300,000. (Our housing boom has already gone bust.)
Why was he excited? Because his modest little house in Helsinki is supposedly worth 400,000 Euros.
I've seen his house. It's a $40,000 detached dwelling sitting on rented land 40 minutes by tram from downtown. Only the madness of a housing bubble could convince anyone that house was worth 400k.
I was so depressed that someone like him could be sucked into this madness I was depressed for a month. So I am especially pleased that someone like you still has his head screwed on right. Restores my faith in Finnish intelligence.
Some of the bond yields dont make much sense. Mr Market is apparently saying that an Italian two year bond has more likelyhood of defaulting than a Spanish 10 year.
More likely the ECB is happy with a Spanish right wing government and wants to keep the pressure up on the various Italy pressure groups and perhaps also send a signal to Greece to sign or they really will get no money.
Meanwhile even after the bund 'disaster' German 30 year yields are still only 2.75%
The Germans have made it clear they dont see any quick fixes. If the USA UK or even Russia wants a quicker fix then they will have to pay towards it, as for example via IMF contributions where bond losses get shared around the world.
There must also be the question of how does Germany deal with France? By what political process did Dexia manage to get to be the 'strongest bank in Europe' during the stress tests?
"“France has the biggest debt burden of the top-rated euro nations, at 85 percent of gross domestic product. Its financial institutions also have the largest debt holdings in the five crisis-hit countries, at 681 billion euros ($921 billion) as of June"
I heard the saving guarantee per person per bank is 100K € in Finland now, up from the 50K promised in 2009. Is any official web site confirming this? Thanks.
Thanks Jonathan, for your comment. Indeed, the bubble has kept on growing after the beginning of the crisis...due to economical and monetary policies that are trying to maintain an "utopian"system. So the damage will be bigger than if it had inflated back then (as it has actually done in the US and some other countries).
But sadly, the council of the wise, decided to put more oil on the "housing" fire, to add more subsidies, to lower interest rates...and banks kept lending , never actually stopped - in fact only very recently they reviewed their standard (10 % deposit, 6% interest rates calculation...from last summer)...well at a time when credit growth is slowing drastically....
Not sure what is going on between France and Germany. France has smart people so do Germany. They have long term agenda. Nordics and southern country are not really part of the equation. After all Europe was build on the impulse of France and Germany...so it will be.
100 000 k is the deposit guaranty in Finland. Confirmed by my bank. It is true that at the beginning it was 25 000, then I remember the financial minister at the time - Katainen - saying that there was no need to increase it i.e no danger of bank run (at the time where Nordea was collapsing and Icelandic bank in Finland closing doors). Well not only they did not keep it a t25 000 but in fact, increased it by 300% ! I suppose the same rhetoric goes with the stress test...no one really knows what goes in the background...
Don't get me wrong, I usually favor low interest rates because for many reasons (the health of manufacturing, for example) but easy money provides an unholy temptation to home buyers.
What happens is that someone buys a house for 40,000 in 1977. Now in 2011, some eager real estate booster tells this homeowner his house is worth 400,000. The fool thinks he's rich and can easily borrow against his increased equity. The real house is 34 years older and now needs some expensive maintenance. No problem, just borrow against the equity and while you at the bank, get enough for two months in Asia.
So you now get to buy your house again—only now repairs are much more expensive than new construction (did I mention the house needed a new 100,000 kitchen because the owners believe they have become gourmet cooks?)
So now we have a guy with a 40,000 house who spent 40,000 in maintenance to get it back to original condition. So the real house has been returned to its original value. And assuming it was done well, the new kitchen and sauna have added 100,000 of value to the real house.
So even though he might have paid off the original mortgage, our owner is now 200,000 in debt (remember the super vacation). He finds the new debt service onerous but, hey, someone told him his house was worth 400,000 so he still feels rich even though he is massively in debt.
Of course, if the median family income is 50,000, the most a reasonable young couple should be able to pay is 150,000 (100,000 would be a lot better). This means that unless incomes rise, nobody can afford that house at 400,000 and the prices must eventually crash back to affordable levels.
What friggen mess this is. It doesn't take much to turn a mortgage upside down. Get a bunch of foreclosed properties in the same neighborhood, and those inflated property values crash down pretty fast. My nephew recently bought a house near Orlando Florida for 95,000. It had been sold previously for 385,000. The values would come down even faster if folks didn't cling to the crazy idea that high prices will return.
The construction industry has 50% unemployment and the real estate business is worse. Meanwhile, beautiful houses sit vacant and deteriorate in the nature. Thousands of folks with serious skills have been essentially unemployed for four years.
And all this pain came about because otherwise intelligent people came to believe that their homes were an investment. They are not—homes (the real ones we live in) are like cars. They start depreciating the minute we buy them. They wear out. And they need regular maintenance.
I should tell you, I repeated the above paragraph at a party in 2007 in front of lots of academics who were delighted by their new-found wealth courtesy of their rising home prices. (When these folks started felling rich, the began reading the economist which confirmed their greedy fantasies.) They looked at me in surprise and anger for telling the obvious truth. I could not have made a bigger social error if I had shit in the punch bowl. Trust me on this—when folks get caught up in a property boom, the madness is nearly universal.
Hi HousingFinland,
Can you give some insight on what will be the impact of Euro collapse on savings in the bank. Is it a good time to move away from euro and open a foreign currency account.
I am also wondering what will happen to Euro deposits once the Euro fails. I am assuming if i ask Nordea i will not get a satisfactory answer. I suppose i find it hard to believe Nordea will suddenly fail without warning given its strong Swedish connections.
But in the circumstances a foreign currency deposit in Finland might be a bad idea. You will be just another creditor of that bank if it fails.
It makes sense to do what you can to open a foreign currency account in a foreign country before things get even worse - not so easy if you dont have connections already.
I have Euro deposits here and it is worrying me but can transfer to existing accounts in New Zealand.
What a mess we are witnessing!
Almost conflicting news on the banking sector.
FSA Finland says "Banking sector's capital adequacy was good" http://www.finanssivalvonta.fi/en/publications/Press_releases/pages/12_2011.aspx
But also in the news is "Moody’s puts Finnish banks under review" http://www.yle.fi/uutiset/news/2011/11/moodys_puts_finnish_banks_under_review_3065824.html
"Island Crow"
ps. any idea of how the British Pound will fair against the Euro? At some stage I might move back there and need to buy, but according to the latest Economist the housing bubble there is still very 'bubbly'.
Excellent discussion ... finally things are getting exciting ... I recommmend one book "the end of the Euro" ... but you might not even have to finish its reading before the Euro is gone
More seriously, the whole system is now cracking, and the country ponzi scheme being recognised ... nice time isn t it?
The housing bubble will burst, have a look to another interesting article in last week economist ...
Jonathan
You are right with your analysis, there is just a slight difference in Europe ... People can not just leave their house and give the keys to the bank ... Even if there is a foreclosure, they still have to repay the debt, isn t it fantastic? not only people will loose a roof but they will be bankrupt for several years ....
I can only see one end to this ... not a good one unfortunatly social unrest, strikes, bank runs, people loosing their savings and having to break into department store to get food (what happened in Argentina not a long time ago, will also happen in Europe)
Hum, it seems that all are scared by the coorperate releases that some may call them as "news" and comments from ... experts. What I see of the end will be the move of local rights to the EU central rights, and there will be a stronger Euro area like the Unite States of A in a bit longer run.Let's look at the milestone after 9 days...
Mr Hongbin Song explains the current EURO crisis:
Merkel's tough, Sarkozy's euphemism, Soros's clamor, Mundell's warning, Drudge's very dark, with Monty's cooperation, Bernanke's help, IMF’s meddling, fueled by rating agencies…
The center point of all is to establish the European Ministry of Finance! Otherwise, see you die; the sky will collapse and it will fall with euro’s collapse, the disintegration of the EU, and the outbreak of a major worldwide economic crisis!
Terrifying prospect, ah. Turn over your financial power and then you will be spared, Amen!
The problem is the belief that people in an office can set interest rates for an entire supra-national country (USA and the EU). This also extends to just States (Member States in the case of the EU). It is a fatal conceit to believe that a person (or persons) can set the correct interest rate and supply of money.
The only way to fix this type of issue from ever happening again on such a large scale is to denationalize the money system.
Question: If economists, financiers, bankers, and (many) politicians praise free market capitalism why not have a free market in currency?
Currency is just a medium of exchange in which we have placed our trust - and I trust my local bank more than people in DC or Brussels. Heck I trust Microsoft more than them.
Another area is currency backing. Who is to say that fiat currency is the "best" form? Why not a basket of goods? Or backed by shares of a company? There are infinite ways to back trust in a currency - our "wise" and "generous" overlords have just chosen the most expedient way to buy our vote to keep them in-power and scratch the backs of their crony friends.
While I'm under no delusion that my ramblings above will actually be accomplished (which makes it all the more tragic). I hope that I can expand the debate of this blog's forum.
Keep it up HousingFinland, it's people like you who shine a light on how the politicians are giving us a good "run for our money" (literally...)
Just one more force building up pressure in Finland ahead of 2012! From YLE :-
The recession in the economy has boosted the number of homes and other real estate repossessed to pay loan defaults....
The value of debt recovery this year has reached new highs and for the first time hit the one billion euro mark. Most of the bad debt has been taken on as consumer credit.
Around 1,300 house, flats and other properties, such as holiday home, were forced into sale last year....
... the depression of the 1990s taught that forcing the sale of homes to recover debts should be a final resort.
.... Most households are also poorly prepared for a sudden change in fortunes. According to Statistics Finland, the average savings that can be used as a buffer is less than 2000 euros.
http://www.yle.fi/uutiset/news/2011/12/value_of_debt_recovery_at_record_high_3077919.html
Clearly it is not in the interest of banks and other lenders to crash the house prices. However, I wonder if with the increase in repossessions and debt levels whether the increased supply of repossessed houses will soon force then to start dumping houses.
"Island Crow"
However interest rates have already fallen once already and are picked to fall again next ECB meeting. Plus the banks are going to get even more ECB support.
Thanks all for the quality comments. It was a real pleasure to read them. I will come back later to that.
Yes, Good blog this. Thanks for the effort and keep it up!
I too have considered a small bit of diversification on currencies (NOK or SEK) but there is a lot of potential to get burned there as well- I see Nordea have foreign currency accounts that would fit the bill. Gold is also an option, although another gold dip may well be the result of a fresh stockmarket dip/sell off, gold is a longer bit of diversification for me personally though... (bullionvault.com seems OK). Don't want to sound too much like a tinhatter but I have also heard people also checking the serial numbers on bigger denomination Euro notes to make sure they are prefixed with "L" or "X"...Is that really something one needs to consider? I have watched this blog for a long time and counted myself as a potential property buyer at some point but I an honesty say that I'm no longer interested in the slightest as there are more important shorter term concerns at the door. Good luck!
Finnish 2 year bond yields are now at a what seems like a record low of only .508 which is half the interest France will have to pay next time it goes to the market. Italians are paying 6.5%
Day by day it gets harder and harder to see how the Euro can survive. Everything seems now to hinge upon a US recovery to keep EU growth positive, while Germany forces the other countries to repay loans without default and Banks like Deutsche bank need 15 billion in new capital even without other countries defaulting.
Meanwhile the ECB is allowing banks to use their own senior bonds as collateral??
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