Some recent estimates describe the situation in U.S.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

The National Association of Realtors lowered its 2007 forecast for new and existing home sales for an eighth time this year. The <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Chicago- based group forecast that new home purchases will total 852,000 this year, down from 1.05 million in 2006.

Toll Brothers Inc., the largest U.S. luxury homebuilder, said that its fiscal third-quarter profit fell 85 percent as it was forced to write down property values. Revenue from traditional home sales declined 21 percent and order cancellations jumped 18 percent.

Homebuilding continued to fall at the start of this quarter. An Aug. 16 Commerce Department report showed housing starts fell 6.1 percent in July to an annual rate of 1.381 million, the lowest level in a decade.

How things are in Finland?

Finnish (or European) housing sector is not in that bad shape as in U.S., not even close, due to better credit quality and tighter credit scrutiny.  However, heightened interest rates should make people to become aware of the true price of their house purchases -roughly, a 30-year mortgage loan doubles the price. Many large loans taken during the time of extraordinary low interest rates have become unjustified in terms personal economical flexibility and borrowers have ended up paying solely interest payments instead of paying the principal. I used the word "should" because the universal truth is that, in average, people are too stupid to act rationally.

Some argue that, in the Helsinki area, the need of apartments is high, and this need keeps prices high. Let's make one thing clear, there is a huge difference between "needs" and demand. If all needs would be fulfilled, everybody would have a mansion next to sea, and that is possible only in communism, although mansion would not be the right word in that case. I remenber one article written about rental levels in Helsinki and how candidates often offer rents above the proposed amount in order to get the apartment. What burned into my memory was some "expert" stating that he is concerned about this kind of development because, in this case, the person who is willing to pay most will get the apartment. Maybe we are not so far away from communism after all. The magic word (in so called market economy) is a purchase power of each individual which together with the personal needs define demand on particular price level. In other words, the law of demand, an inverse relation of quantity demanded and price asked. Should not be so hard to understand the basics. 

 

Most of the residential apartments in Helsinki yield 4-5 percent excluding capital gains – the level of risk free investments. If I would own a residential apartment, I would highly consider going short with it as there are assets providing better expected return with the same risk level (or same return with lower risk). For most individuals, the house is the biggest investment during the whole life, but when people start considering it as one.

 

Development of rents:

 

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Development of apartment prices:

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