Monday, August 28, 2006

Housing market blues

It looks like the US housing boom is turning into a bust. You'll find lots of horror stories on Mish's blog. Over here there are also definite signs of a sudden slowdown with almost one in 5 houses deals in Copenhagen now taking place at a discount of more than 10% off the listed price. People are predicting a housing crash in Norway too. (Meanwhile, the German market - especially Berlin - looks a bit undervalued to me. Perhaps I'm just confused by crazy Danish prices.)

At the same time, I wonder what is going on in Iceland. Their central bank just raised rates to a hefty 13.5% with more rises 'inevitable'. This comes after a few years where Icelandic companies have been buying companies in the UK and Denmark (where they now own Illum and Magasin, the most prestigious department stores in Denmark). Icelandic money is also financing a new national free newspaper here in Denmark and apparently a thousand other capital-intensive projects. Are they borrowing all that at a rate of 13.5%, the sort of interest rate associated with the Stagflation of the 70s?

One of the companies that Baugur now controls is Keops, the Copenhagen property company who have of course done very well out of the property boom there. They even do "high yield bonds, secured in property, listed on the Copenhagen Stock Exchange". (Yes, Keops is a pyramid builder - I think the intended association is 'large building' rather than 'dodgy financial scheme').

Let's hope the house price booms do achieve that much hoped-for soft landing. (The Bank of England apparently managed a soft landing for the UK housing market after they eased interest rates a little last year). However, instability can spread quickly - the economies of the world are all very closely interlinked. In 1999, small changes in Danish interest rates helped provoke the spectacular collapse of a huge US hedge fund. It's not far fetched to think that a financial meltdown in Iceland could have similar unexpected consequences today.

Those with large amounts of variable-interest rate debt might do well to consider that even Iceland's 2006 interest rate of 13.5% isn't especially high in historic terms. After the 90s and especially the zeroes we have become accustomed to borrowing huge sums for practically nothing, but there's no rule that says that will continue to be possible.

3 Comments:

At 17:04, Anonymous Anonymous said...

Greetings from Iceland...


Funny you should mention Iceland. The housing situation is awful here. Prices are so outrageous, it makes you wonder who on earth are buying at these prices (not me). Also, there is no such thing as renting a 'reasonably' priced apartment. In the meanwhile, the Icelandic currency is on a roller coaster ride as well. Let me assure you the salaries on average are not good. Financially it´s been a struggle since I moved here with my spouse almost 2 years ago from the US. I have a bad feeling with this one..

 
At 20:47, Blogger Erik Corry said...

A Danish tabloid seems to think there's something very fishy going on on the island. They have started a series of articles in both Danish and English which you can see here.

 
At 14:00, Blogger Olaf Corry said...

Here we are in 2009 catching our breath after a housing/financial/economic crash of epic proportions. I think you are entitled to say "I told you so" at least once before you then make another sort-of prediction.

 

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