Transcript slides

Financial Crisis, Property Markets
& Homeownership,
26.11.2009, Reykjavik
The Impact of the Financial Crisis on the
Finnish housing market and Households
By
Elias Oikarinen
Structure of the presentation
•
Brief overview of the impact of the crisis on the Finnish
overall economy
•
Why haven’t housing prices collapsed in Finland?
– What is different between the current crisis and the
recession of the early and mid 1990s?
2
•
Household indebtedness and the effect of the crisis on
households
•
What about the near future?
Finnish real GDP and unemployment rate
1975Q1-2009Q2
260
20
real GDP index (1975Q1=100, left
scale)
240
18
16
220
Unemployment rate (%, right scale,
Hodrick-Prescott filtered, lambda=2 )
14
200
12
180
10
160
8
140
6
120
4
3
Data source: Statistics Finland
20091
20071
20051
20031
20011
19991
19971
19951
19931
19911
19891
19871
19851
19831
19811
0
19791
80
19771
2
19751
100
Finnish real exports and export share of GDP
1975Q1-2009Q2
1000
60 %
50 %
share of GDP (left scale)
900
real exports index (1975Q1=100,
right scale)
800
700
40 %
600
500
30 %
400
20 %
300
200
10 %
100
0
4
Data source: Statistics Finland
20091
20071
20051
20031
20011
19991
19971
19951
19931
19911
19891
19871
19851
19831
19811
19791
19771
19751
0%
The twofold influence of EMU
+ Strong currency – low inflation
+ Low interest rates
-
No devaluation
 exports suffer (2008Q3-2009Q3 down 38%)
 unemployment
5
Real housing price index (1987Q1=100)
Helsinki metro area & the rest of Finland
1987Q1-2009Q3
200
Helsinki area
Rest of Finland
175
150
125
100
75
6
Hedonic real price indices of privately financed flats, Data source: Statistics Finland
20091
20081
20071
20061
20051
20041
20031
20021
20011
20001
19991
19981
19971
19961
19951
19941
19931
19921
19911
19901
19891
19881
19871
50
Why haven’t housing prices collapsed?
•
Relatively low level of housing prices before the crisis
– Housing prices vs. household income
– Housing prices vs. rental price level
– User cost of housing vs. rental price level (e.g. OECD and
IMF computations)
•
Drop in the mortgage rates
•
Relatively low indebtedness and absence of subprime
type loans
•
Household income has still increased
•
Banks are in a relatively good shape (credit availability)
•
Government stimulus
•
Housing construction halted
 low level of new housing supply
7
Real housing price development in Finland
vs. in some other developed countries 1970-2008
8
Real housing price index, real wage and salary
earnings index and average nominal after-tax
mortgage rate 1970Q1-2009Q3
225
9
Income (1970Q1=100)
8
200
Housing price
(1970Q1=100)
Mortgage rate (%, right
axis)
175
7
6
5
125
4
%
150
3
100
2
75
1
9
Data source: Statistics Finland & own computations
20081
20061
20041
20021
20001
19981
19961
19941
19921
19901
19881
19861
19841
19821
19801
19781
19761
19741
19721
0
19701
50
Mortgage rates on new housing loans and on
the whole housing loan stock 1989Q3-2009Q3
18
New housing loan
withdrawals
Whole outstanding housing
loan stock
Euribor 12
16
14
%
12
10
8
6
4
2
•
10
20093
20083
20073
20063
20053
20043
20033
20023
20013
20003
19993
19983
19973
19963
19953
19943
19933
19923
19913
19903
19893
0
Average mortgage rate reacts rapidly to changes in (mainly) the
12 month Euribor rate
– Mostly adjustable rate mortgages with interest rates tied to the 12
month euribor (or even shorter term rate)
– This feature is beneficial now to undermine the harmful effects of
the crisis, but it is a risk factor in the future
A negligible share of housing loans is tied to
fixed (for more than 12 months) interest rates:
11
Real asset price and rental price development
in the housing market 1985-2008
(Helsinki area, privately financed market)
225
Real housing price index
(1985=100)
Real rental price index
(1985=100)
200
175
150
125
100
75
12
Data source: Statistics Finland
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
50
Real housing price index, sales volume and
housing starts 1987Q1-2008Q4 (flats)
16000
180
15000
Sales (HP filtered, lambda=10)
14000
Starts (HP filtered, lambda=10)
13000
Price index (1987Q1=100, right scale)
160
140
12000
11000
120
10000
100
9000
8000
80
7000
13
2008/1
2007/1
2006/1
2005/1
2004/1
2003/1
2002/1
2001/1
2000/1
1999/1
1998/1
1997/1
1996/1
1995/1
1994/1
1993/1
1992/1
1991/1
1990/1
1989/1
1988/1
60
1987/1
6000
Data source: Statistics Finland (all started construction of flats, including subsidized construction;
prices and sales represent privately financed flats)
•
14
Subsidized production has been counter-cyclical during
the crisis – good for the economy
Homeownership rate
(66% in 31.12.2008 has still increased from 2006 and 2007)
•
15
Kuvio kehityksestä
Why did housing price level collapse in the
late 1980s – early 1990s?
•
Liberalization of the financial market induced a huge
growth of credit

•
Devaluation of the Finnish Mark


16
there was a substantial housing price overshot
interest rates notably rose & indebtedness
substantially increased (a significant share of loans
were in foreign currencies)
defaults, forced housing sales
•
Credit availability and backward-looking expectations
led to a boom in housing construction; new
construction topped when prices were already
dropping  oversupply
•
Similar boom-bust cycle recently in the Baltic
countries (and in Iceland?)
The financial crisis and
Finnish households
17
Indebtedness and interest payments of
Finnish households
(% of the household disposable income)
1 Housing loans; 2 Consumption loans; 3 Other loans; 4 All loans (prediction)
5 Interest payments (right scale); 6 Prediction for 2009 (right scale)
18
New housing loan drawdowns have
declined but not collapsed:
19
The impact of the crisis and housing market
development on households
•
Disposable income of the employed has still increased (tax cuts &
increases in wages)
•
Availability of credit for households has (almost) returned to the
2007 level (after a notable tightening in autumn 2008)
•
Interest rates are extremely low (despite the growth of the margins
set by banks)
•
No ”negative equity” problem
•
Rental prices have increased
•
Special incentives for the first-time home-buyers
 Most households’ ability to buy housing is good
 Sales volume has increased lately
20
The impact of the crisis and housing market
development on households, cont’d
•
Unemployment rate has increased and further grows



•
income uncertainty
defaults & forced sales?
downwards pressures on housing prices
Not many defaults or forced sales yet, though
– Low interest rate
– Flexibility of the terms of loan payments (longer
maturities, installment free periods)
– Unemployment insurances (last usually only around
12 months)
21
What about the close future?
•
GDP will not drop any more, but the growth will be
slow (Bank of Finland)
2009: -7.2%
2010: 0.0%
2011: 1.6%
•
Unemployment rate keeps increasing
2009: 8.7%
2010: 10.6%
2011: 10.8%
•
22
Potential threat is caused by the increasing
unemployment together with the adjustable mortgage
rates and the fact that the interest rates will probably
somewhat increase in the future
23
tammi.09
tammi.07
tammi.05
tammi.03
tammi.01
tammi.99
tammi.97
tammi.95
tammi.93
tammi.91
tammi.89
60
tammi.87
tammi.85
Economic sentiment indicator (ESI) in EU
and in Finland 1985/1-2009/10
130
120
110
100
90
80
70
EU
Finland
50
Finnish consumer confidence regarding the overall
economy and households’ own economy 1995/10-2009/10
30
20
10
0
-10
-20
Consumer confidence (one year horizon, own economy)
Consumer confidence (one year horizon, overall economy)
-30
Will buy or may buy a dwelling in the forthcoming 1-2 years
24
M:2009/10
M:2008/10
M:2007/10
M:2006/10
M:2005/10
M:2004/10
M:2003/10
M:2002/10
M:2001/10
M:2000/10
M:1999/10
M:1998/10
M:1997/10
M:1996/10
M:1995/10
-40
Conclusions
•
Finland has suffered severely from the financial crisis
•
Nevertheless, housing prices have not collapsed
•
Most households and the banking sector are doing well
– Level of defaults regarding housing loans is still relatively low
– This is likely to be, to some extent, due to the lessons learned
from the boom-bust cycle of the late 1980s and the early 1990s
• Indebtedness has increased, but not dramatically
• Banks have taken relatively small risks (e.g. no subprime type
lending)
•
25
However, unemployment is still rising and the variable
mortgage rates involve apparent risks