Historical ...slump

"The Finnish economy experienced a decline last year that is deeper than any that has taken place in any single 12-month period since the Civil War which followed the country’s independence.

According to figures put out by Statistics Finland, total production in Finland declined by 7.8 per cent last year.

Only in 1917-1918 has total output declined by more.

Not even in the economic crisis of the 1990s, nor in the Second World War, did the Finnish economy fall as steeply in a single year as it did in 2009... read the rest@ hs"

... Not sure what will be the price to pay for that in the years to come... Any idea?

"... Meanwhile, Finland’s Minister of Labour Anni Sinnemäki (Green) said on Monday that she hopes that unemployment in Finland will peak by the middle of this year.

“If this does not happen, and if it does not peak until next year, we will be in serious trouble”, said Sinnemäki at a meeting of EU competition ministers in Brussels."

...Strange, who will be in serious trouble?... Any idea?

The Housing Market, a Population Perspective : Part 1

The outlook for the housing market ( and indirectly for the Finnish economy as a whole) in the longer term are pretty grim, due particularly to its demography and population characteristics.

I will try to highligh few areas that are of interest in this domain. Let's first project ourself in the future to understand how the population will evolve (Part 1) and then extract the causes of why it is that way (part 2) and its implication on the housing market (part 1 & 2).

This is a quick analysis, if you have some information or any interpretation you are welcome to enrich the discussion.

First let's look at the population as projected by the European Statistic Agency (View Source).

The projecton scenarios are based on assumptions for fertility, mortality and migration. The method used for population projections is the "cohort-component" method as stated in their web site.


Based on that raw data, here is a graph where I added important facts:


Based on the projection, one could clearly see that the need to build in greater amount new dwellings has no ground. Obvioulsy, some Finnish economists or politicians have been lately voicing the contrary - maybe to add oil to the fire to the current housing bubble?

So I want to highlight here, it is the fact that intuitively we would think that there is a need to build more and more housing since wrongly we think that the population will be greater in the future than now...we just extrapolate in a linear manner - (in)fortunately the human way of thinking is linear - we think in a very simple manner (it is even more true for politicians).

Moreover, this analysis takes the most optimistic perspective (not taking into account household formation which obvioulsy will drastically reduce the need of housing starts).

So what are the implications? are we building too much? would the supply excess the demand?

Let's have a look at the housing permit that were given for 2009 as found in Statistics Finland web site (view source) :



So no there is no excess supply and the contruction builder have understood it and have ramped down the number of construction. Most probably, they are looking abroad for keeping their shareholders happy or changing their business model into for example building railways or metro (guess who will win most of the contracts and who is going to pay for it?)...

Obviously at the end it all lies on one particular parameter : Immigration as we will see in part 2 the fertility rate in Finland can barely keep the population at the same level...so stop reading, act :->

Additionaly , immigration may also imply lower affordability level which could obvioulsy impact prices over time...

Chart of the Day: Central Government Liabilities

Stock of central government guarantees EUR 19,4 billion at the end of 2009. At the end of 2009 the stock of guarantees was 27 per cent higher than one year previously...

Central government guarantees include all guarantees for which the state is ultimately liable.

Guarantees to enterprises make up 49 per cent of the stock of central government guarantees. Guarantees granted to housing associations made up 22 per cent and those to households made up 16 per cent of the guarantee stock. Statistics Finland

...just wondering until then they will stop fuelling the housing bubble, maybe after the next major election?...

In the same worisome development, we have the following statement:

Minister of Housing Jan Vapaavuori (Nat. Coalition Party) sees signs of possible overheating in the housing market.

“I wouldn’t call this a bubble yet, but there are slight signs of concern in the air. In some growth centres, the situation is worrisome”, Vapaavuori said in Helsinki on Monday.

...so please refer to that ("Prophet of the past") to understand the real value of such statement.

Finnish Housing Market: Doom, Doom and Gloom?

"Although at present the U.S. economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding.

We have spent considerable effort in developing the tools we will need to remove policy accommodation, and we are fully confident that at the appropriate time we will be able to do so effectively.", Chairman Ben S. Bernanke on "Federal Reserve's exit strategy" Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. February 10, 2010

I think what is said is of prime importance, especially the following critical words:
- "raising short term rates"
- "at the appropriate time"

This could lead to many potential scenario, which I could quickly highlight without going into much details - Obvioulsy it is based on the fact that the ECB (European Central Banks) mirrors with a lag the behaviour of the US Federal Reserve:

Scenario 1: The economy show futher signs of strengh, it signals an "appropriate time" to remove policy accomodation, the consequence would be to "raise short term rates"
-> the Finnish housing market readjust sharply due to an overwhelming amount of default, linked to the fact that the mortgage market is mainly on short term variable rates, that leads to futher weaknesses in the banking sector that may need governmment rescue.

Scenario 2: It is not an "appropriate time" as the economy shows signs of weaknesses and need to be further supported by an accomodative policy which means that tightening will not occur and "short term interest rates will not be raised"
->The Finnish housing market readjust sharply as the economy deteriorate further amid rising unemployment and plummeting banking profit that ultimately questions the solvability of the entire banking sector which will ultimately require government intervention that could jeopardize its credit ratings.

Scenario 3: The economy neither weaken nor show signs of growth. The "appropriate time" to withdraw stimulus is extended futher in time and "short term interest rates" stays lows in a similar japanese deflationnary scenario of the 1990's
->The Finnish housing market deflate at a snail speed. In real term housing price do not budge but a low inflation slowly but surely reduce its value overtime. Like the air of a bike tire that is left in a cellar for a very long period, it slowly deflates.

Scenario 4: well all in pictures...

Legal note: what is said in this article should not be taken as an advise for any decision you make on any type of investment. It is highly advisable that you do not consult banks but instead use common sense when making a lifetime decision. This article purpose is to trigger a discussion if any, and gather different perspectives. Whatever is said in this article should not be taken seriously and this account for comments too.

Finnish Housing Market and Psychology of a bubble

Above here the characteristics of a bubble, below is the trend of Finnish House price.

Guess what?

Finnish Housing Market - Biggest Bubble EVER?

THE Biggest bubble EVER, you have been warned... Of course, nobody knows in the next century there won't be one on such scale...regulators and investors never learn and greed seem to transcend time...

The last uprise was expected as discussed in the last blog article on the previous housing price release see link , so it was clearly expected to have such a rise and was in fact necessary to remove any doubt on the fact that we are clearly experiencing a bubble.

You don't have to be a genius to understand that the Finnish housing market is at a very critical level.

Heuu, about genius, is there one in the room?

“It appears that consumer faith and confidence in the economy has been channelled into the housing market”, says Anssi Rantala, head economist of the OP-Pohjola Group.

Rantala does not believe that the prices will continue to rise this year as sharply as at the end of 2009, especially in a situation in which unemployment is expected to continue to grow.

“Housing construction will start to recover gradually, and interest rates will rise. Another reason why the increase cannot continue at such a high rate is that people’s ability, and desire, to pay are limited”, Rantala says.

Had they not put his title, I would have guessed he would be working for the banking industry.

I need to chat with him...let me take my mobile phone .... "tut tut tut..."

"Mr Rantala?"
"This is HousingFinland on the phone, from the Housing bubble Blog"
"Coming back to your latest media comment, I would like to remind that historically speaking, when interest rates rise so do housing price... and instrumentally the economy"
"Don't you think that your arguments, the one you put forward in HS are flawed?"
"I beg your pardon?"
"bip bip bip..."

Apparently, it didn't like to debate... back to interest rates, when they rise, it simply mean that inflation become a threat (i.e salary rise, price pressure increase, and the economy is back to growth, etc...). I don't believe a second that such event will occur end of this year...on the contrary.

Now it doesn't mean that there are not cause that explain why the Finnish housing market is distorted...As I said earlier see link , the Finnish housing mortgage market is based on variable interest rates for an astonishing 90% of it.

Moreover Interest rates will stay low simply because the economy will resume shrinking, maybe end of this year and next year (maybe the next and the next). Current growth is based on borrowing future wealth...obviously there is a limit to that (see Spain, Greece). So stimulus and monetary effect will fade and the economy will resume its downward spiral as its foundation and its banking system is not sound.

Indeed, there is a price to pay for having allowed an economy to grow for about 20 years on ever increasing and ballooning debt level, failing regulation and greed- at some point, you reach the breaking point, and we have reached it.

For sure, interest rates will rise but not yet maybe in 4 (10?) years? when the deflation threat become smaller than the inflationnary/hyper inflationnary threat.

In addition, historically speaking, a massive correction should occur from both stock market and housing market (strangely, every 20 years, the economy transform itself for good or worse).

If one is hesitating whether or not to buy, it should ask itself: "is it safe to buy at an historical peak, a level even greater than the one witnessed during the 1990 bubble (inflation ajusted)?"

Maybe it will be worth to make a comparison between the Nasdaq bubble when euphoria took over all common senses and where banks advised private customers to invest in the stock market , even pushing them to borrow for buying stock... let's see the chart:



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 is not true and may be removed at any stage, at anytime (you like it or not) - the article above is meant for entertainment purpose and only targetted to trigger a smile or two...

Tap, Tap ... The "snow" palm 2010 is for ...

"Finnish bancassurer Tapiola said in a statement Tuesday its pension arm had raked in a 13.5-per cent return on investments last year after taking a 8.3-per cent hit the year before. ... the result was the best ever.", STT

Put the music on - even if you are at work ;-> (that will chill you out)- the text below will make even more sense.

Indeed, applaude the speculator of the year ...but let me remind (may I ?) that they made gain on the back of governments stimulus (tax payer's money) and central banks financial rescue(generosity) . This company only represent , the exact same type of company that created this mess (price speculation - oil/food -) and will flood its managers with record bonuses - in some cases.

While at the same time some earn less, or lost their job...."what a wonderful world" as my friend Louis would echo...

"I see trees of greed, red carpets too
I see them boom for them and them
And I think to myself what a wonderful world.

I see skies of green and clouds of black
The dollar blessed day, the dark sacred oil
And I think to myself what a wonderful world.

The color of money so pretty in the sky
Are also on the faces of bankers going by
I see speculators shaking hands saying how did you gain
They're really saying I love it.

I hear bankers smiling, I watch them bet
They'll earn much more than I'll never work for
And I think to myself what a wonderful world
Maybe I think to myself what a wonderful world?

Delusion

"I have the impression that many people, whether in the business sector, the financial markets, or in academic and political circles, think that the post-crisis world will be quite similar to the pre-crisis one in 2006-2007. In other words, they expect the economic recovery to bring us back to where we were before the crisis.

My feeling is that those who think like that are deluding themselves. The pre-crisis situation was not in equilibrium. It was not sustainable. The crisis occurred precisely because the situation was unsustainable, both within certain countries and globally.

If the world economy were to return to the pre-crisis situation, within a short time span a new crisis would be likely to occur because the same imbalances that led to the crisis would build up again. Considering some recent developments and behaviour, and considering the way certain policies are being discussed and the thinking of some key players, such a scenario does not seem that unlikely.", Lorenzo Bini Smaghi, Member of the Executive Board of the ECB, 18 January 2010

Another way to think of what has been said is to consider that the growth from 2003-2007 was based on illusion , an economy fuelled by an ever increasing amount of private debt that ultimately inflated all possible assets.

SO?

Well, my point is if 2003-2007 GDP growth, wealth creation was based on an illusion, what to think about housing price growth during that period?...

Not convinced?

Well, overall private wage are sharply falling (unemployment, furlough, bonus etc..), GDP has been on free fall in Finland wiping out the gain made during the period 2005-2007, interest rate is almost zero and has only one way to go...on top of that the economical situation's strengh is based on temporary measures (monetary and fiscal)...so you still think that price will go higher. Well my forecast for seeing a deflation of housing price in the next 2-3 years by about 30% (minimum) has never been so probable...

Convinced?

Finnish Competitiveness

"Wärtsilä has analysed its manufacturing footprint as announced in October. To adjust to the fundamental changes in the market Wärtsilä plans to reduce its manufacturing capacity.

Wärtsilä also plans to move the majority of its propeller production and auxiliary engine production to China, close to the main marine markets. The current propeller manufacturing in Drunen, and the component manufacturing DTS in Zwolle, both in The Netherlands, are planned to be closed.

The Wärtsilä 20 generating set production in Vaasa Finland is planned to be closed and moved to China in order to stay competitive in this market."

If you look at the chart above, Finland has never been so uncompetitive, since the past decade or so. Had Finland stayed with the "Markka", the Finnish currency before the Euro, they would have certainly devaluated it...but they can't.

The result is a slow but sure disappearance of the manufacturing from Finland to low cost countries like China as expressed by Wartsila in the above article. By the way, it is worth noting that China is artificially keeping its currency at low level which of course accelerate the "one way" globalization.

Obviously, the competitiveness is a function of the currency - the Euro - that is far too strong at the current time and of course wage growth agreement not inline with the current situation.

Deflation, How Would IT Happen?

"Unemployed for nearly a year, David Becker was relieved to land a new job in information technology last summer.

The offer carried a price, though: It was a lower-rung job than the one Becker had lost. He had to uproot his family from Wisconsin to Nevada. And, like many formerly jobless people who find work these days, Becker is now paid far less than before — $25,000 less.

It's one of the bleak realities of the economic recovery: Even as more employers are starting to hire, the new jobs typically pay less than the ones that were lost.

In the government's data, a job is a job. More jobs point to a growing economy. But to people who used to earn $60,000, a new $40,000 job means they'll spend less — and contribute less to the recovery."

Simply...by reshuffling the workforce following a period that will be remembered as credit excesses in almost all sectors.

Now one has to take that into account when purchasing an asset that will have to be served for 20-30 years i.e in the shorter term (at least 2-5 years) do not count on inflation to ease the burden of debt quite on the contrary...deflation will probably hold for the foreseable future making debt a real burden.

Please Applause... Mr Iceland President Olafur

Iceland President Olafur R. Grimsson struck out at Fitch Ratings after the service cut the nation’s sovereign grade to junk following his decision to block a U.K. and Dutch depositor bill.

“This rating agency that did that, Fitch, has a lot to answer for because its rating in the last two or three years has turned out to be completely wrong,” Grimsson, 66, said in an interview with Bloomberg Television today.

“That is the same agency that gave the Icelandic banks in 2007 and 2008 top marks and we here in Iceland were perhaps foolish enough to think that this was a respectable agency, but it turned out to be completely wrong.”

How true it is. Those agencies that managed to "contaminate" the market and almost sink the economy are still around trying to give lesson as if people have forgottent are miserably they failed the system.

The same can be said to financial institution and a majority of economist... they ought to be humble and report to the public in a transparent and honest way.

Obviously let's not forget the reckless bankers:

Iceland “is not running away” from its obligation to compensate the U.K. and Netherlands for covering depositor claims that stemmed from the failure of Landsbanki Islands hf in October 2008, Grimsson said.

Because at the end it is the people that will pay the price.

Even so, “the people who are going to carry the burden, who are going to pay with their taxes in the future, will have the final say,” Grimsson said.

The same will happen in Finland, tax will rise because rescuing reckless banks and business (stimulus, liabilities, state exponential debts etc...) is and will be costly especially knowing that the people at the head of those institution were ripping millions in profit, bonuses and other largesse... but again this is not new and and it is well known and documented.

Variable Rates and Housing Bubble

"Federal Reserve Chairman Ben S. Bernanke said the central bank’s low interest rates probably didn’t cause the past decade’s housing bubble and that better regulation would have been more effective in limiting the boom.

Increased use of variable-rate and interest-only mortgages, and the “associated decline of underwriting standards,” were more responsible for the bubble, Bernanke said today in a speech at an economics conference in Atlanta."

"Use of variable rates are more responsible for the housing bubble"... however obvious it always make more impact when coming from the "man of the year 2009" or simply the chairman of the Federal reserve, the entity that sets interest rates in the U.S. .

Maybe The Fed chairman Bernanke should talk to our Banks in Finland and maybe to our governors in "Bank of Finland" or (sleeping) regulators to wake up before more damages are made.

Indeed in Finland 95% of mortgage rates are based on variable rates. Knowing that interest rates are hoovering at around 1%, something that has never been witnessed in Europe, could create even bigger distortions in many markets including the housing market.

"Finnish real estate agency Huoneistokeskus said in a statement Tuesday that the number of house and flat transactions had doubled year-on-year in December.

It added that an exceptionally busy month would raise the full-year transactions total beyond 64,000, or close to this decade's annual average." STT, Tuesday, 29 December 2009

First it is important to understand that we are dealing with a real estate agency, as it may not be a surprise that they jump on any piece of data that could be used to support their business.

And it is the case with the above article.

Comparing data Year on Year in december is rather mean. One must have in mind that the credit market and the financial system was on the brink of collapse last december. Icelandic banks were closing doors in Finland while the forest industry took the opportunitty to reorganize itself by shedding thousands of jobs. So confidence was indeed very low and housing transactions was low.

So It doubled, is that significant? it's a little bit like the deposit in my bank account, it went from 0.01 cents to 0.02 cents...well I got 100% interest when everybody is getting under 1%... you got the point? Same as the stock market gain 60% since March however many investors are still 20-40% down from the peak.

The other point is the "full-year transactions ... close to this decade's annual average", again you wonder if a politician has been working with Huoneistokeskus or at least helping writing such statement. First the full extent of the bubble started in 2003-2004, that is 5 years ago, the average for the decade is far lower that the average in the past 5 years where excess were made. Second close to doesn't mean equal...

Nevertheless, transactions are falling (note it won't be in a straight line) and it will continue. Nobody knows for how long maybe until a big shock comes (sudden increase of short term interest rates) followed by a readjustment as in previous periods...

Disclaimer : whatever is said above does not reflect the opinion of the writer or any one who makes comments on it. This was most probably written by some unknown force, that remind us not to underestimate the power of internet and the lack of knowledge on how the information is controlled, created and disseminated.

2009 "Crystal Ball" Review

First Let's have a review on what I predicted beginning of 2009 but before that, one has to remember the context in Janurary 2009.

In a few words I would say that the global economy, beginning of 2009, was on free fall amid a very instable financial system. On top of that, economists were confused and disturbed: Their research and academic books did not describe such chaotic situation while their models were all failing to grasp the nature and forces that were unleashed.

More disturbing, signs of social instability started to emerge, during the first phase of the financial crisis (2008). Belgium's deep political crisis was averted by sworning Mr Van Rompuy and avoided a a very dangerous and slippery situation. In Finland, the Far right represented by the "True Fins" political party reached an historical levels in local elections.

Against the deflationnary forces that were set in motion, central bankers and governement around the world united. The Federal reserves in the forefront and The European central bank vowed to protect the financial system at whatever costs while governments started to accumulate debts and liabilities in order to support a wounded private sector.

The result was a stabilization of the financial system, sometime in the first quarter, followed by a recovery of the economy albeit from a low level, . The stock market did not any more discount a depression (or Armageddon) and recovered substantially since then.

So let's review last year prediction (1 January 2009):

Let's try to make some predictions on what we will see in 2009 in Finland.

1- The economy will probably enter into recession from 1st or 2nd quarter amid rising unemployment. Today unemployment is about 6%, it will most probably rise to 11%. Although we won't reach levels of the 1990's of 25%, for technical reason: the number of employed, the working force, will drop dramatically as the massive retirement forces start to kick in.

That was right, since the GDP contracted by 7.6%, showing the worse economical activities in Europe.

2- The Finnish Stock market will go side ways during the first half of 2009, in trying to assess the extent of the damage done to the real economy due to the credit crunch. Should a hint of recovery appear to be on the agenda from 2010, then we will see the stock market pointing it -rising- during the second half of 2009. I think we could have a growing optimism during the second half of 2009 only be watered out in the first 2010.

That was right, during second half the rise in stock market appeared globally as said previously the markets did not discount a depression. Optimism is at its peak as if the crisis was "behind us"

3- The Finnish has transformed itself, thanks to globalization, into an export economy. Relying mainly on the external demand, its strength of the past 10 years as become its weakness. The first sign of Finland recovery will be seen when Russia, Baltics and China start to recover...I do not see that until, maybe, end of 2010 at the earliest. Regarding the domestic economy, it was a factor of internal growth, partly due to an unprecedented credit growth, due to cheap credit and reckless lending. This will vanish too as consumer will start saving amid witnessing their principal source of wealth - housing- shrinking.

That's right, so far GDP is predicted to be "on par" i.e hoover around zero (0.7%? for 2010 as predicted by the Bank of Finland and echoed by the finance ministry).

4- Eastern Europe will see a major downturn that will put a very high pressures on Nordic and western exposed banks. Merging to survive could be a possible event as credit growth velocity will slow dramatically questioning the necessity of having a fragmented banking sector. The same will apply to the construction sector as well as satellite activities (real estate agents merger or disappearance could be on the agenda too)

That's almost right, Eastern Europe (Latvia, Estonia etc...) were and are in deep trouble and could drag with them quite many countries such as Sweden and Greece ... However we have not yet seen big banks merging such as Sampo and Nordea or real estate agents such as Kiintestomailma and huonestokeskus...but this could be the surprise of the next two years.

5- Housing price downward spiral had started end of 2008, and will accelerate on the first half of 2009. a 10-20% drop during 2009 cannot be ruled out. 2010 will see the same phenomenon or worse if a recovery is not at the end of the tunnel.


That's not right, Price did not budge as they are as the same level as the end of 2007. However, 2009 has been a very thin market the demand has collapsed (the same can be said to the new supply). In such market, very few players can set the tone. In any case these are just indication of an exhausted market where first time buyers are completely priced out.


6-Current politicians will still get the same support as they have enjoyed during 2008. During crisis, citizens tend to be conservative. History has shown that the same political group or figures are reelected. Matti Vanhanen could resign or be ousted from his party after failing to stop the decrease of popularity of his party.

Well almost right, pressure to see him resign were very high during 2009 however one could say that the call was right since Matti Vanhanenwill resign next summer 2010.

7-Deflation will be pointing its noise during the first half of 2009 with all asset/product prices going downward - all prices set by the market. On the contrary, prices set by government will rise, which can be seen as a form of taxation (Train tickets , Alcohol ,Electricity ....). Second half will see a pick up of inflation, although as for the first half, it will be mainly technical and short lived.

That's correct.

8- Interest rates will first stabilize at 2%, and depending if a recovery is on sight or if the deterioration is dramatic, they will fall to an unprecedented 1% or lower, clearly signaling that the deflation threat is real.

That's correct.

9- Rent will start falling from the second half, synchronizing with the unemployment growth. That will add to the deflationary threat.

I think that's correct - I need to check the rent growth or its velocity. Rent are going down since unemployment is rising and salary not rising any more.

10- This blog will slowly but surely disappear as the sole existence of it was to express the risks of a dramatic fall of housing price, something which was viewed as improbable, especially by figures such as the Bank of Finland, IMF, politicians and economists

I did not have that much time to post this year for professional reasons. However this blog will cease at the same time the bubble burst or reach a major bottom which could be sometime in 2012.