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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