On the market, sellers and buyers have apparently dug themselves partly into their trenches, and the same spirit is observable in the chain’s yes-no discussion. In my view, those buying a home for their own use have become somewhat more active, as many of them do not calculate the profitability of the property through a yield requirement.
I copied here from above what I consider to be an apt graph on the development of professional investors’ yield requirements:
In my opinion, this graph explains why transactions are largely stuck, for example, for housing funds. The valuations recorded on their balance sheets are still completely off, and many private real estate investors seem to have gotten stuck in the same situation.
Transactions are currently likely to be carried out mostly by those acquiring their own homes, who do not particularly focus on yield percentages for rental use. There are still properties for sale waiting behind the screen for a while, provided the market recovers and a consensus on price levels is found.
In this discussion, we also need to look at the real prices of housing; they have truly fallen a lot. However, wages and other prices are constantly rising, so I personally believe that nominal prices will slowly turn to a small increase from here. But no one has a crystal ball…
By this logic, isn’t Nokia’s stock market price still €65/share, speaking tongue-in-cheek? Stupid buyers just don’t understand the situation, and one should just move on to the next stock if the value stock isn’t acceptable at the asking price.
The current market price in that situation would specifically be €4 from that €100k asking price, if there is no more demand. I would consider that €100k a speculative estimate that either materializes or not, depending on whether a buyer is found.
It’s true that if one isn’t forced to sell, the future value could be something else if the right person happens to offer more.
My own guess is that, since construction costs and expenses are unlikely to be flexible in the future, it will be either quality or the value of the plot that decreases in the equation.
In the future, I guess people will spend a large percentage of their salary on healthcare in the same way as on housing/food/transportation, which will reduce the amount of money available for the aforementioned goods. Probably also the costs of caring for relatives will increasingly be shifted to working-age people.
This week, maintenance fee invoices for investment apartments for this year have arrived by mail.
As one might expect, there is a clear decrease in financing fees, 20-30% from last year. Cash flow improves by 50-150€ /month per apartment in the invoices received so far.
The new fees will soon be updated in sales listings as well, which will likely slightly improve investment demand. At least for those investors who did not factor this in already last year.
When interpreting the graph I posted a couple of messages above, showing the development of professional investors’ yield requirements, I think a couple of factors should still be taken into account from the last couple of years:
-the increase in property maintenance costs has been exceptionally rapid
-the increase in maintenance costs has not been fully passed on to rents
-there has been a clear local oversupply of apartments, especially in the growth triangle
All these factors have reduced the returns investors have received from their apartments over the past couple of years. When this is combined with the simultaneous increase in yield requirements, the fall in apartment prices should have been significantly stronger in the investor market than what has been seen.
Many justify past valuations with new construction costs and other factors, but I would approach the matter more from the perspective of tenants’ ability to pay. Cuts in support have led tenants to seek cheaper and smaller apartments, and this trend could be expected to continue with changes in student support. The pot to be distributed among landlords is inevitably shrinking, at least temporarily, because the ability of a large portion of tenants to pay is weakening. This cannot but also reflect on the short-term development of rents.
Differences between localities also seem to be significant, as some places even suffer from a clear housing shortage. Yet, even in these localities, tenants’ ability to pay limits rent increases.
I myself would not predict a rise in investment apartment prices for the coming years, when one adds to this whole the selling pressure from funds, struggling institutions, and private investors. Quite a few who became real estate investors at the wrong time and with wrong expectations would be ready to jump ship if they could get to shore with dry feet. In my view, this deadlock will be resolved in the market for a long time to come.
No, the market price is what the trade happens and is realized at. Not the valuations in the buyer’s or seller’s dreams/asking prices.
I won’t write more about this matter because that’s just how it is
The market price is not 4€ if the trade doesn’t happen, and it rarely happens if the bid and ask price differ significantly from each other. On that basis, the market price would always be whatever anyone comes up with to offer for anything..
It’s the same with stocks. Someone asks for 5€ and another offers 3€.. Indeed, the market price is what the trade ultimately happens at, not what anyone comes up with to ask or offer.
I also have to give my own view on the discussion above about how prices are formed.
In perfect competition, the price of a commodity is determined by supply and demand. The requirements for perfect competition are:
The commodity is exactly the same as other products available.
All possible information about the product is available to everyone.
The market is highly liquid.
Everyone has access to the market.
As can be seen, the above points are not met in the housing market, and certainly not for individual apartments. Generally, markets with perfect competition are very difficult, if not impossible, to find.
The term market price, on the other hand, describes the realized transaction price, which is formed when the buyer’s and seller’s views on the price reach an agreement. That is, the price of that individual commodity for sale. Apartments are not perfect substitutes for each other, so the price cannot be directly compared to the asking price of an apartment for sale next door. Although this is often done.
If it’s, for example, an apartment in an apartment building, aren’t those requirements met as well as they possibly can be? Yes, everyone can get all the existing information about the apartment for sale if they want to, and they can make an offer. Of course, there isn’t another exact same apartment, but often there are other similar-sized ones in the same building, etc.
Point three is certainly a somewhat relative concept, as the market could be very liquid. Some on the selling side are still living under the misconception that their asking price is anywhere near the market price/liquid price…
This is quite a strange discussion on an investment forum.
Housing price levels are not a matter of debate or opinion.
A few years ago, there was a historically hot boom period, which extended even to Finland. Interest rates were low, people had jobs, and the outlook and confidence in the future were very positive.
Well, now it’s completely different. It’s difficult to pay any significant amount for housing if the money simply isn’t there.
In my opinion, the situation has now worsened even further. The closures of real estate funds and the news coverage surrounding them have probably scared many people into immediately submitting redemption requests. Now all real estate funds are under immense selling pressure because sooner or later redemptions must be allowed, and then there must be money to pay for them. Who will then buy these properties and apartments at current prices when everyone is on the selling side?
Will salvation come from abroad? Large international players can certainly buy properties once a price agreement is reached. The unfortunate thing is that the current price level is such that the return remains worse than US 10-year bonds (4.62%), meaning the price must be clearly lower than the “market price.”
In addition, real estate funds have about 40% debt leverage. So when they are forced to sell for less than the original acquisition price, the losses are even greater. This could lead to truly ugly loss figures for the funds.
If even a portion of these fund apartments come onto the open market as “panic sales,” they will certainly put “market prices” under severe pressure.
Well, but some people always repeat that you don’t lose money on stocks unless you sell them. When you hold junk in your portfolio that has plummeted to, say, a third of its market value since the time of purchase, you can delude yourself into thinking nothing has been lost.
Funds own both individual apartments and entire buildings. Even according to the original plan, they were meant to be sold off, and this has been done even in these times. For example, OP-Vuokratuotto sold over five hundred units to another fund in one go six months ago. Or, more accurately, ten apartment buildings:
I suspect that instead of panic sales, funds will rather choose the path of a long-term burden. What’s the harm in keeping fund doors closed; management fees keep running too.
This could be a good strategy, but the Financial Supervisory Authority (Fiva) might have a different opinion. The matter has been debated in public to such an extent that Fiva cannot simply look on indefinitely.
A couple of days ago, Fiva began inspections of large real estate funds to ascertain whether laws and regulations are being followed in their valuations. This indicates that even officials have become aware. We might hear more once the review is complete.
And it must be remembered that fund units are the property of the unit owners. Redemptions cannot be indefinitely withheld, even if it were in the fund company’s interest.
In my opinion, the biggest problem in this scenario is the suspicion that the fund’s valuation is too positive. It creates an incentive to quickly withdraw money when it is suspected that the calculated price is higher than the real one. If people are allowed to withdraw money from the fund at a high valuation, the others are left holding the bag.
Funds should now update their values transparently. Even if the value drops, it would at least reduce the willingness to withdraw funds. So, it would be sensible to act if people were allowed to withdraw their money at a lower valuation if they absolutely want to, and let others wait for the value to recover. The worst situation is where those who don’t sell suffer, and everyone therefore wants to redeem. Perhaps the FIN-FSA might have something like this in mind.
This is a good point. If unit owners do not trust the valuation, it directly leads to them wanting to redeem their money quickly. This is a kind of bank run; the fund has capital but no cash. If trust can be restored, unit owners will not need to make redemption requests just in case, and the fund will not need to resort to panic selling. Restoring trust is one reason why Fiva has started examining valuations.
And one should not forget how much damage that 40% “moderate” leverage causes if the asset value decreases. A 10% decrease in value is a 16.7% loss, a 20% decrease is a 33.3% loss, and a 30% decrease is a 50% loss.
The valuation of open-ended funds should be as neutral as possible in all situations, because investors can simultaneously exit while others enter. What happened here was that excel-generated returns were recorded in the funds’ value when net subscriptions were positive, and panic struck when net subscriptions turned negative. For example, OP-Vuokratuotto’s net subscriptions were 150 million euros in the negative in 2023, and these were financed by taking an additional 100 million euros in loans for the fund. We can now state that those who exited received an overprice for their units, and those remaining are paying for these redemptions as well. The same problem does not exist for closed-ended funds, provided that investors enter simultaneously and exit together.
OP-Vuokratuotto’s 2023 annual report states that the market’s required rate of return increased by 1-2% during the year, but no corresponding write-downs were made to the fund’s valuations. Now the fund’s residential property portfolio yield is somewhere around 3 - 3.5%, and they refuse to realize their holdings at too low a price. However, they had no qualms about recording revaluations in the portfolio when the market’s required rate of return decreased during the zero-interest rate period.
My understanding is that the stagnant market situation has been known to industry insiders for a long time, and it has further slowed down trading. Now, through the closure of funds, the matter has received more attention than before, which will undoubtedly affect the general public’s behavior in the future. It is worth noting that closed-ended funds are also on the selling side and have not been able to realize their investments at their desired pace. I know of two funds that have been trying to exit for almost three years with poor success. I don’t know how many more similar cases there are, but they are not shouted about in public or in newspaper columns. In addition, during the crazy years, strange contraptions were concocted, of which OP Vuokrakoti Ky is one (owned by YIT and OP-Vuokratuotto).
It seems a bit extra has been added to housing valuations, making it harder to sell properties on the market under sales pressure. Quite sad, but there have been such bubbles in larger markets too.
A studio apartment completed after the corona pandemic in a good area of Helsinki will soon be for sale. Let’s see how the small studio apartment sells, with an asking price a few thousand over the acquisition cost.
It remains to be seen how sales will go amidst this fund drama
It will be interesting to see what Fiva announces about those inspections. If I had to guess, some half-hearted announcement like “some had issues to note” will be made, and then the funds will drop valuations by a few symbolic percentage points, and the closures will continue.
Keep us updated on this. It would be interesting to hear more about how sales are going.
What sources / discussions do people here follow to get up-to-date information on the housing market? It feels like discussion forums are quite quiet regarding the housing market.
I personally follow this forum, Sijoitustieto, Statistics Finland’s publications, Hurun podcast, and bank overviews. Also, good tips on who to follow on X are welcome.
Construction cost index. Hasn’t dived much? Yes, construction is still wonderfully expensive. According to this, costs haven’t come down (at least not for labor)?
