Tag Archives: housing bubble

Housing bubble in parts of Finland? Yle Housing -edition

I thought recent statistics showed that at least in terms of total housing prices outside the Greater Helsinki area showed real signs of decline. It seems like the Finnish housing bubble is slowly deflating.

But now Finnish news service YLE has an interactive feature, to check the development of square-meter-prices by postal code area. Data is from Statistics Finland. There are some really drastic numbers. To show an example, this is the Rantakylä area of Joensuu in Eastern Finland (of which city I have earlier said, that there is something strange going on).

Source: Yle Asuntokone

Source: Yle Asuntokone

It says that the square-meter-price (blue line, for appartments) in this area of Joensuu was 536€ in 1987 and in 2013 it was 1760€.  Now, as you can see on this map, Rantakylä is broadly speaking on the edge of Joensuu – not quite the center although in Joensuu everything is relatively close.

As has been said e.g. here, Finnish housing prices are severely overvalued in terms of price-to-rent ratio, but for a long time the increase in housing prices more or less happened in tandem with increases in the average wage (yellow line). But since about 2005, which is very clear for Joensuu but also for certain areas in cities like Rovaniemi and Kuopio, the prices of these appartments originally bought in 1987 has increased much more than the average wage. A similar development can be seen for newer appartments (say from 2005) but then the price-increase is ‘only’ 72%.

On the other hand, there are many places in Finland where price developments have stagnated or declined, such as Toijala, which can be regarded as a commuting village to Tampere.

Source: Yle Asuntokone

Source: Yle Asuntokone

I think it is very difficult still to explain the surge in Joensuu prices. In a previous post (in Finnish) I argued that it can’t be completely explained by decisions to centralize the area’s health care to Joensuu, which goes to explain some part of the migration of health-care sector workers to Joensuu. But there remains a lot to explain. As I found earlier, also the real estate brokerage and construction sectors in Joensuu have shown growth.

It is probably true, that at this moment, with interest rates what they are, construction firms can build cheaply in the presumption that they will make a handsome profit anyway, because prices are rising. Consider this area of Joensuu, which is new (from around 1992, that is from after the Finnish recession of the 1990s):

Source: Yle Asuntokone

Source: Yle Asuntokone

Maybe this area is still not expensive in absolute terms, but given the average wage development, it looks like it is. Now, the question is: how would you finance an appartment, if you have to live in Joensuu for whatever reason. The easy answer is: a fat mortgage. Because with extremely low interest rates, it is possible to pay the mortgage down even if the price of the mortgage seems way too high regarding income.

As Michael Hudson has said,

They thought that homes were worth what the rental value was or what people could afford to pay when actually what a home is worth is whatever a bank is going to lend against it. So if somebody goes out to buy a home they’re bidding against other people for the same house and the winner is the person who can get the biggest bank loan and that’s the person who says I’m going to pledge all the rental value to the bank so the bank gets all the rent as if it were the landlord.

So here we see the danger of the ECB’s minimal interest rate policy: it creates asset/real estate bubbles. And banks are happy to play along, as long as they can borrow extremely cheaply from the ECB through the various liquidity-enhancing programmes.

The dangerous issue for Finland nonetheless is that a) these bubbles seem to be very local and b) work is very concentrated around cities and other places that have big employers such as the paper industry and the electronics industry. When these employers disappear, as happened in Oulu, Salo, the Kymenlaakso region, there is a big problem. Maybe people can still repay the mortgage as long as they have unemployment benefits, but the difficult part is selling the house, because when there’s no work, nobody will buy. And the other way around: as long as the house is not sold, people cannot move to places where there is work for them.

Although there are still many people who see this as some temporary glitch, I think this is a big problem for Finland and the Finnish economy. Eventually it will become a problem of the banks also.

The Finnish economy in 2014 – an overview

This post is in a way an update of this post, but with a different focus and hopefully a bit more structured approach. The post is timely, in that the interim budget negotiations are about to start and various politicians have started marking their positions. I apologize that most links are in Finnish only.

By way of an introduction, I wish to refer to a currently ongoing debate, in which the Finnish mainstream economists argue that Finland has clearly structural problems, and that therefor (logically) the welfare state should be reduced. Nonetheless, professor Pertti Haaparanta has convincingly argued that the problems of the Finnish economy are not structural, or “at least misleading: business cycle problems that are not corrected create structural problems.” He refers among other things to hysteresis. One particular  good argument is what he writes (my translation):

Also Sweden has suffered more [from the crisis] than OECD countries on average, although less than Finland. This is in itself already sufficient reason to doubt the claim that Finland has big structural problems regarding the labour supply, that Sweden is claimed to have solved.

This claim is especially suspicious because the decline of potential production was timed in all countries at the start of the financial crises, which everywhere led to a decline of private and unfortunately also almost everywhere of public demand. How can this be, if Finland has some particular structural problem? And even though the crisis might have revealed some particular structural problem of the Finnish economy – as has been claimed – without the crisis it wouldn’t have been noticed, so…??

The current economic debate in Finland is thus clearly ideological (as it is almost anywhere). This being said, the state of the Finnish economy is quite horrid. First I show the development of GDP since 2000 (figure source: Tilastokeskus). It shows both the old and new methodologies of counting GDP.

GDP (volume change). Blue is EKT95 and Red is the new EKT2010

GDP (volume change). Blue is EKT95 and Red is the new EKT2010 (Source: Tilastokeskus)

This does not look good. And with the Ukraine crisis and the related economic sanctions, it may press Finnish GDP further down, as Russia is still an important trade partner for Finland, especially regarding energy resources:

Source: ULJAS/Tulli.fi

Source: ULJAS/Tulli.fi

The core of the ECB strategy is combating inflation. We know that it is not really succeeding at achieving its near-2% goal, but how is inflation developing in Finland? Well, since mid-2011 there has been a strong downward trend:

CPI (Blue) and HICP (Red) Source: Tilastokeskus

CPI (Blue) and HICP (Red) Source: Tilastokeskus

The question is always, what causes this drop in prices. On the one hand, Statistics Finland reports that industrial producer prices have declined (especially in export sectors, broadly since 2011) but on the other hand service sector producer prices have risen continuously since 2010. One the biggest factors in price increase is rents (both so-called social rental levels and private sector, but real estate has declined in value – more about housing etc below.)

Unemployment is high in Finland. Although the problems in Finland are not likely structural, Finland does have a fairly high level of structural unemployment, which dates back to the economic crisis in the 1990s. But this is how the unemployment level has developed (Source: Tilastokeskus):

Unemployment rate (Green) and Trend (Blue)

Unemployment rate (Green) and Trend (Blue) (Source: Tilastokeskus)


Obvi0usly, in this figure nothing like a recovery can be observed. With the ongoing structural changes in the Finnish forest industries and the implosion of Nokia it is not quite likely that this trend is coming down soon. The Finnish ministry of Employment and the Economy has its own methodologies and statistics, and focuses on people who actually look for work. The picture can’t be copied here but I suggest to take a look. Line (1) shows unemployed people looking for work and line (2) shows the number of open positions (through mediation of the Employment Office). In my view, this is a quite depressing figure.

I have previously argued, that Finland did fairly well as long as domestic demand kept up. How has this developed in the meantime? OECD.Stat gives this development:

Domestic Demand (P3-P5). Source: OECD.Stat

Domestic Demand (P3-P5). Source: OECD.Stat






This graph shows that at least using this measure domestic demand is perhaps slowly decling or has been at most flat since 2011. This may be somewhat explained by the Finnish system of unemployment benefits – the labour unions manage the unemployment funds, and union members get up to 500 days a certain percentage of their last salary. Thus, unemployment does not immediately mean a crisis in household expenditures. But on the other hand, under current circumstances it is not likely that domestic demand would soon increase. Most likely the growth of domestic demand from 2009 to 2011 was due to availability of credit at low interest rates. This may be reflected in increases in private indebtedness as well (see below).

One issue which has been current in economics blogs is that international capital is searching either safe havens or yield. Finland has been for many years on top of various innovation- and competitiveness indexes, but is that reflected in Foreign Direct Investment? This table from the Bank of Finland gives us the following graph:

Foreign Direct Investment in Finland, EUR million

Foreign Direct Investment in Finland, EUR million









From this graph it would seem that Finland has only recently become less interesting as a country to invest. By far most FDI comes from Europe, with Sweden and the Netherlands the biggest investors from Europe. Investment is needed to create new jobs, so this would seem to be a fairly positive situation, as Finland has a highly educated workforce, good infrastructure etc.

So, on these macro-level variables, Finland is not doing very well in terms of GDP and Unemployment but FDI and domestic demand seem to hold up fairly well. The big question is of course, how the Russian sanctions and possible counter-sanctions are going to affect the Finnish economy. In the post that I referred to above it can be read that the trade balance of Finland is well, nearly in balance. This is perhaps a function of increasing imports and declining exports – after all, the whole labour market debate is centered around the primacy of Finland as an export-oriented economy.

To return to domestic demand, it is instructive to show this graph (through Revalvaatio.org):

Indebtedness of households. Mortgages (light blue), Consumption credit (red), other loans (dark blue), interest costs (yellow)

Indebtedness of households. Mortgages (light blue), Consumption credit (red), other loans (dark blue), interest costs (yellow)











Here we can see that consumption credit has expanded somewhat, but the main driver of Finnish private indebtedness is the mortgage. Elsewhere I have argued (in Finnish) that it is possible that Finland has seen a real estate bubble, which by now has burst – there are many indications for this, as in the country side prices are declining rapidly and houses stand for sale quite long. Another indicator is that even though housing prices are down, rents are up, which may be a way of recuperating (future) losses. Either way, Finland’s household sector debt is quite high and their financial assets are seen to be contracting. This is not yet a problem, but with rising unemployment and declining housing prices it could become a problem, since if you are unemployed somewhere and are unable to sell your house, you are literally stuck because it is often necessary to move near a job. And since the places with Nokia -related industry are not doing well, this is likely to become a problem.

On the other hand, public debt is still relatively modest. The expectation is that it will cross the 60% -limit next year but it is still nothing to panic about.

Private sector debt is high, but this is not necessarily a problem either. The problem is that Finnish companies are faced with reduced aggregate demand and therefore don’t invest, or worse make many people redundant. This realization means that the current trend in labour market relations, extreme wage moderation, is misguided. It is true that Finnish labour costs are higher than Germany’s. But Finland can never become a low-wage-high-productivity-export-led economy like Germany. This is an issue which demands another post, but Finland really should focus on the domestic demand and high quality export goods and services (which it does, with examples of KONE or METSO or Pöyry).

All in all, the big risk for Finland lies in the combination of a big correction in the housing market prices, a continuing economic crisis with consequences in unemployment and finally as a result of both AND the Ukraine situation a crash in domestic demand. But Finland is certainly no Greece or Spain – the economic fundamentals, innovation and capacity to attract investment seem to be all right. This crisis can be prolonged with the wrong policies (another blast from the past regarding the 1990s crisis and its prelude), and there should be more focus on the issues which are in my view more relevant for the future of the Finnish economy. As I have written somewhere sometime last year, a good start would be for the unions to demand higher wages, before Finnish households become trapped with deflation. Wage moderation may appeal to a moral sense of ‘we all have to suffer’ but it is not exactly good for domestic demand.





The Finnish real estate market – a summary of things happening here

First of all, a quote from a post by Wolf Richter which just came online:

Since early 2012, Wall Street players, armed to the teeth with the nearly free and limitless money that the Fed in its infinite wisdom has made available specifically for these purposes, piled into the market, buying up hundreds of thousands of homes helter-skelter and turning them into rental properties. It switched these homes from for-sale lists to for-rent lists, where many languished unperturbed, and it drove up prices in record time. Current homeowners welcome that.

But first time buyers, the natural force in the housing market, were effectively pushed aside and are now priced out of the market. Even many current homeowners who want to sell are locked into their homes as they cannot afford the next home, given higher mortgage rates and sky-high prices. At these prices, even investors can’t buy these homes and rent them out at a profit. In many areas of the country, that business model is kaput. So they pulled back too. This is how the Fed fixed the housing market.

The only thing lacking in this “fixed” housing markets are willing and able buyers. So inventories are piling up, and someday sellers will “read the memo.” Then prices will be whittled down to where they make economic sense in this economy. We’ve been through this before. Only this time, it’s different: the Fed, which so eagerly took credit for having “fixed” the housing market, is going to be hard-pressed to cut interest rates further, or do anything else it isn’t already doing.

I think this is on a smaller scale what is happening in Finland. In Finnish I have some posts on the issue (here, here, here and here). The core message is: there are a few areas where prices are still rising, but at the moment real estate prices in Finland are declining. Also it is expected that there will be a relatively small “trapezium” in Finland where real estate will retain its value, in particular detached houses. One source says that there will be some 1,1 million detached houses which will dramatically lose value with ongoing processes of urbanization and concentration of jobs in urbanized areas. Recent statistics say that certain types of appartments are in high demand but this is not enough to explain all cases of (recent) price increases, e.g. in the Eastern Finnish city of Joensuu.

In this context, I found the news by Statistics Finland on recent rent increases revealing – rent increases sharply diverged from inflation developments from 2012 onwards:

Rent development in the capital region (yellow) and rest of Finland (blue) in comparison with inflation (green)

Rent development in the capital region (yellow) and rest of Finland (blue) in comparison with inflation (green)










It is quite possible, that this divergence relates to the moment that the Euribor-rate started to approach zero, which happend during 2012 (link). For normal consumers/buyers this perhaps has not been a very dramatic event but for investors hungry for yield this has been very attractive, especially with all kinds of liquity “sloshing around in the financial system.” and since low interest rates make for lousy yield it can be compensated with rent increases (as WR writes on the US situation: ‘At these prices, even investors can’t buy these homes and rent them out at a profit.’) It is difficult to find very hard evidence on these kinds of developments, especially since there are so many different statistics out there. But also this news (in Finnish) mentions that there are big difference in yield between investment apartments in Oulu or Helsinki. I think this table of the Bank of Finland holds the clue to the question of credit flows to Finland, but probably from this it still can’t be seen where this credit goes.

All in all my analysis stands, that there have been local housing bubbles in Finland, but with the continuing downturn of the Finnish economy these bubbles are mostly bursting and investors may be going from buying-and-selling to buying-and-renting (in the context of difficulties of selling and the low interest rates), especially in the capital region, around Tampere and Turku and some other larger cities/growth centers. It would be nice if someone could poke around in financial and housing statistics to get confirmation for this analysis (or show it to be wrong!)

Acting Man: ‘Scandinavian Sorrows’

As usual, I am not entirely convinced by their analysis of central bank action (‘Luckily the bubble was not the Danes’ fault. See, the central bank had to impose negative interest rates to ‘defend the Krone’s peg to the euro’. The credit bubble was practically forced on them at gunpoint!’ Really?).  But otherwise this a very sobering situation and the picture of the real estate price developments (reprinted below) looks very similar to that of the Netherlands and to some extent, Finland, but perhaps even more extreme.

Single family home prices in Denmark in crowns per square meter. The value of collateral is now falling after the strong price increases from 1994 to 2007 – via globalproperty.com.

One more country to worry about, it seems. And Danish banks do have significant holdings elsewhere in the Nordic countries, e.g. the Sampo bank in Finland.

More negative data on the Netherlands

I have mentioned before, that I do not particularly like Acting Man/Pater Tenebrarum’s approach to economic reporting; they are incorrigable goldbugs and they have some serious ideological problems with social safety nets – their invocation of Socialism! Socialist! Marxist! is just ridiculous. And I don’t know if it is a sense of humour on their part but they for instance connect the former accusations to the ‘obvious’ Dutch Economic Policy Research Centre (or what is it officially), i.e. the Centraal Planbureau or literally Central Planning Bureau. This name really reflects 1950s-1970s economic thinking and has never had anything to do with Communist institutions of the same name. But the good Pater doesn’t know that obviously.

That being said, AM does also have good, data-based reporting, and today’s data on the Netherlands is such a case. I disagree with their interpretation regarding inflation/devaluation and ECB, but the important part is the data on the Dutch housing market. The crash is really quite worrisome, and as Ambrose Pritchard-Evans has also pointed out, there will be more and more mortgages ‘under water’, which puts incredible strain on the banks. Similarly, and relatedly, private debt is, as shown in the post, much higher than it even was in Ireland. This doesn’t bode well, given how quickly the unemployment rate is going up at the moment! Acting Man points out core problems with the tax constructions that were/are possible in the Netherlands. And indeed, the Netherlands seems to be a ‘worse offender’ than Cyprus, regarding tax evasion, Russian money etc.


You can’t be very happy about the euro given these developments.

Dutch debt and the future of Germany’s little brother

Ambrose Pritchard-Evans discusses the state of the Dutch economy here. As usual, other people with more experience are able to write about the same issues much more concisely than I can. But there are the same issues nonetheless: wobbly banks, with too much real estate on their portfolio; extremely high private indebtedness and a stuck housing market where real estate prices decline rapidly. As I mentioned here, the trajectory of housing prices is very much like Spain’s, and I have seen a long-term graph of Dutch housing prices which really shows that a slow bubble had been developing since the 1990s.

After the collapse of SNS Reaal due to ‘bad real estate’ portfolios, it is a matter of time when the next banks start to become very shaky, as per Pritchard-Evans Dutch banks are

up to their necks in mortgage portfolios. They face a huge “funding gap”. The loan-deposit ratio (LTD) is 183pc, compared with roughly 70pc in the US and Japan, 100pc in Germany or 120pc in Britain.

This means that Dutch lenders – like Northern Rock before them – must rely on the capital markets to roll over debts. This is courting fate. “The persistently high LTD ratio makes Dutch banks particularly vulnerable to a scenario in which market confidence evaporates,” said the Nederlandsche Bank (DNB) in its latest stability report.

With unemployment rising, scrutiny of Dutch (and Luxembourgian) tax constructions, and weakening of the Dutch neighbour countries (on which it relies with export and throughport), things are not looking so well.

And as Pritchard-Evans says: ‘It is a case of misaligned monetary policy. The Netherlands offers a salutary lesson of what can happen to a rich sophisticated economy caught in a post-bubble crunch once it has lost control of its currency, central bank and monetary levers.’ In other words, the existence of the EMU.

Nobody is safe anymore.


Finnish real estate bubble?

As Edward Hugh stated on his Facebook page on the 14th of February (can’t link that, so please look it up):

The depth of Finland’s recession may raise an eyebrow or two here and there. It was meant to be a very competitive economy. I have long felt, studying the evolution of the trade balance, that it had more to do with the periphery than the core. The economy has been supported by a housing boom, but now that appears to be coming to an end. Not so different from Denmark, or the Netherlands.

As I blogged, I have shown some Eurostat statistics on housing price developments, which I thought did not look like a boom. But now I found statistics from Statistics Finland on square meter prices in various regions of Finland, and they tell something I suspected but could not put in a graph, until now. Please note that the first graph is a combination of two time series (2000-2008 and 2005-2012) which use a slightly different methodology (mainly, the latter has much more indicators on which it measures price).[UPDATE: A commenter has longer range graphs on housing prices in the Nordic countries, which make the pattern even more clearer] The picture looks a lot like the Netherlands – a slow bubble, starting in the 1990s. As for the latter graph, Helsinki 1 is basically downtown, prime, Helsinki, while Helsinki 3 is more of a peripheral area, although public transport connections are very good. Vantaa is (traditionally) a more working class city next to Helsinki, where also the Finnish main airport is located.

Source: Statistics Finland

Source: Statistics Finland

And for the capital region:

Source: Statistics Finland

Source: Statistics Finland

I don’t know how to define a housing bubble, but it seems that Helsinki prices, especially in prime and other near-center Helsinki (this holds true also for 2-room appartments and bigger) have gone up quite a bit. That has to do partly with this:

Source: Tilastokeskus

Source: Tilastokeskus

Although Tampere and Oulu are also growth centers in a sense, the Helsinki region has a much greater pull. I don’t have time now to dissect the nature of those moving to Helsinki (age, gender, where they come from) but from what I know anectdotally, there is quite a shortage of appartments for people who need only a single or double-room appartment, mainly because they are so expensive (for students etc.)

I don’t know if this is part of the possible bubble-story but it seems to happen mainly in the Helsinki area, not elsewhere.