International competition will change mortgage lending

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1 Pentti Hakkarainen Deputy Governor, Bank of Finland International competition will change mortgage lending Nordic Mortgage Council Helsinki, 28 August Unrestricted 1

2 Financial stability reports point to vulnerabilities on a number of housing markets and in housing finance Overall, stability in the European credit institutions sector has strengthened as economic and financial developments have gradually improved Regulatory and institutional reforms have made the financial system more resilient against shocks Risks related household balance sheets and housing markets remain High level of household indebtedness in some countries Recent rapid growth and high level of house prices in some countries and regions (capital/large cities) Unrestricted 2

3 Why are housing markets and housing finance so crucial? Housing booms and busts have been associated with many of the most serious banking and economic crises in developed countries The bursting of a housing bubble is usually a smaller problem for banks than for the economy as a whole Strong effect on the real economy through private consumption and investments The worst excesses in housing markets and finance need to be curbed Macroprudential analysis Macroprudential tools Unrestricted 3

4 Cross-country differences in euro area mortgage lending Local, heterogeneous markets Loan products differ between countries: Fixed vs. variable interest rates Maturities Amortisation requirements Loan-to-value ratios etc. Local banks and mortgage banks dominant in most national markets Unrestricted 4

5 Euro area house prices recovering The latest financial crisis hit the European countries broadly at the same time, albeit with differing force A multi-year correction in house prices after the financial crisis nearing completion Recovery becoming more broadly based across countries Regional divergence remains Unrestricted 5

6 Rebound in house price growth in several euro area countries Source: ECB Financial Stability Review, May Unrestricted 6

7 Estimated over/undervaluation of house prices in the euro area Source: ECB Financial Stability Review, May Unrestricted 7

8 Lending to households still subdued although financing conditions have eased The rate of growth of euro area household lending still sluggish in aggregate despite the record low lending rates and easing of euro area banks lending terms and conditions for housing loans Unrestricted 8

9 Lending to euro area households slowly recovering Source: ECB Financial Stability Review, May Unrestricted 9

10 Euro area mortgage rates historically low Source: ECB Financial Stability Review, May Unrestricted 10

11 Lending conditions continued to ease in mortgage lending Source: ECB Bank Lending Survey, July Unrestricted 11

12 Cross-country differences in Nordic housing markets and finance Housing markets and finance are heterogeneous also in Nordic countries Finland: Universal banks the key lenders, average loan maturities around 20 years, variable-rate loans, LTV cap of 90% (July 2016) Sweden: Longer maturities, non-amortising loans, big role of rental markets, LTV cap of 85% Norway: High share of owner-occupied housing, LTV cap of 85% Denmark: Mortgage banks play a key role, high household indebtedness Unrestricted 12

13 Household indebtedness in Nordic countries Household debt-to-income ratio Finland Sweden Denmark Norway 300 % Loans divided by adjusted gross disposable income. Sources: Eurostat, Statistics Norway and Bank of Finland calculations. Unrestricted 13

14 Housing cycles at different phases in Nordic countries Real house prices in the Nordic countries Finland Sweden Norway Denmark 225 Index, 2000/I = Nominal house prices have been converted to real house prices using consumer prices (HICP). Sources: Statistics Finland, European Central Bank, Eurostat and Bank of Finland calculations. Unrestricted 14

15 Finnish housing finance: some facts Housing loans average maturities are short relative to other Nordic countries Non-amortising loans are almost non-existent Loans are predominantly tied to variable rates Housing loan market dominated by the three largest (universal) banks Tough competition and narrow margins Unrestricted 15

16 Covered bonds increasingly important source of funding for Finnish banks 200 Funding of the Finnish banking sector Certificates of deposit Unsecured bonds Covered bonds Bonds, total Loans to the public and general government Deposits EUR billion Loans 150 Deposits CDs Other bonds Source: FIN-FSA. CBs Unrestricted 16

17 Distribution of reference rates for new housing loans in Finland Source: Bank of Finland. Unrestricted 17

18 12- and 6-month Euribors are the most popular Euribor reference rates 1-month Euribor 3-month Euribor 6-month Euribor 12-month Euribor 100 % Source: Bank of Finland. Unrestricted 18

19 Annual rate of growth of the housing loan stock almost flat at 2% Housing loans to Finnish households by Finnish MFIs Loan stock (left-hand scale) Annual growth (right-hand scale) 100 EUR billion % Source: Bank of Finland. 0 Unrestricted 19

20 Housing loan stock growing faster in Finland than in the euro area as a whole Annual growth of housing loan stock Finland Euro area 20 % Sources: ECB and Bank of Finland. Unrestricted 20

21 The housing loan cycle is passing its second trough after the crisis? 20 Housing loans: new drawdowns and annual growth of the stock Banking and housing market crisis in the early 1990s New drawdowns of housing loans, 12-month moving sum* (left-hand scale) Stock of loans for house purchase, annual growth (right-hand scale) % EUR bn * In real terms (at most recent 12-month consumer prices). Sources: Statistics Finland and Bank of Finland. 0 Unrestricted 21

22 Increased housing lending at the monthly level at the first half of 2015 New drawdowns of housing loans in Finland EUR million Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bank of Finland. Unrestricted 22

23 Interest rates on new housing loans reached a record low Average interest rate on new drawdowns of housing loans in Finland 3.0 % Average interest rate on new housing loans Average reference rate on new housing loans Average margin on new housing loans Source: Bank of Finland calculations. Unrestricted 23

24 Interest rates on new housing loans in Finland are the lowest in the euro area Average interest rate on new housing loans 6 % Finland Euro area Finland: new drawdowns. Source: ECB. Unrestricted 24

25 A flattening of lending margins after a step-up in 2012 Average margin on new housing loans in Finland Average margin on new housing loans 12-month Euribor 2.5 % Sources: Reuters and Bank of Finland calculations Pentti Hakkarainen Suomen Pankki Finlands Bank Bank of Finland Unrestricted 25

26 Finnish house prices are high relative to consumer prices but average relative to household income Relative housing prices in Finland Banking and housing market crisis in the early 1990s Housing prices relative to consumer prices Housing prices relative to wage and salary earnings Long-term average 250 Index, 1981/I = Sources: Statistics Finland and Bank of Finland calculations. Unrestricted 26

27 Household indebtedness has continued to rise, albeit slower than its previous trend Household indebtness in Finland Household loan stock, % of GDP (left-hand scale) Loan stock-to-gdp ratio, long-term trend* (left-hand scale) Loan stock-to-gdp ratio, deviation from long-term trend (right-hand scale) 80 % of GDP % points Loan stock incl. household share of housing company loans. *Calculated using a one-sided Hodrick Prescott filter (lamda = 400,000). Sources: BIS, Statistics Finland and Bank of Finland calculations. -16 Unrestricted 27

28 The most indebted decile of households bears half of the household debt Finnish households and housing debt by debt ratio Proportion of all households (left-hand scale) Proportion of total housing debt (left-hand scale) Housing debt per household (right-hand scale) 100 % EUR 1, Households with no housing debt Households with housing loans, debt ratio of over 0% and up to 300% Households with housing loans, debt ratio of over 300% 0 Debt ratio = total debt as % of disposable monetary income in Sources: Statistics Finland and Bank of Finland calculations. Unrestricted 28

29 Households current interest burden low, but increased indebtedness makes them vulnerable to higher interest rates Average debt and interest burden of indebted Finnish households Debt, % of disposable monetary income (left-hand scale) Interest expenditure, % of disposable monetary income (right-hand scale) 200 % % Sources: Statistics Finland and Bank of Finland calculations. Unrestricted 29

30 Biggest housing loans concentrated in the biggest cities and growth centres Size of housing debt by municipality, per household with housing debt Over EUR 112,700 (5% of municipalities) EUR 89, ,700 (20% of municipalities) EUR 71, (25% of municipalities) EUR 60,100 71,200 (25% of municipalities) EUR 47,600 60,100 (20% of municipalities) Below EUR 47,600 (5% of municipalities) Housing loan debt categories are composed on the basis of the 5th percentile, lower quartile, median, upper quartile and 95th percentile of the distribution. The data refer to Sources: Statistics Finland and Bank of Finland calculations. Unrestricted 30

31 A strong regional divergence also in house prices 210 Housing debt and house prices by municipality in Finland EUR 1, EUR/square metre The vertical axis indicates the average amount of housing loan per household with housing debt (EUR 1,000); the horizontal axis indicates the average selling price of an apartment in a housing company (EUR/square metre) in The diameter of a circle denotes the aggregate amount of housing debt in a municipality. Sources: Statistics Finland and Bank of Finland calculations. Unrestricted 31

32 Model-based risk weights are low in Finland and other Nordic countries Finland: Average risk weights of banking groups using the IRB approach vary between 6% and 13% for mortgage loans (end-2014) Market share of banks using the IRB approach in mortgage lending is about 75% Tighter requirements in Sweden (risk weight floor) and Norway (models) EBA working on the consistency of risk weighted assets in the EU banking sector Unrestricted 32

33 Housing market-related macroprudential tools in Finland A binding and adjustable LTV cap Becomes in force: July /95% (80/85% at minimum) Tools included in the CRD IV/CRR CCB: Currently at 0% Minimum risk weights FIN-FSA s non-binding recommendation on debtservicing ability of mortgage borrowers (Gradual reductions in the tax-deductibility of mortgage interest payments) Unrestricted 33

34 Pentti Hakkarainen Deputy Governor, Bank of Finland Mortgage lending in the future Unrestricted 34

35 Conditions for international competition in mortgage lending are improving Many factors potentially contribute to stronger integration and cross-border competition in mortgage lending: Banking Union in the euro area More harmonised regulation and supervision Digitalisation and the already widespread use of online banking services Development of modern scoring techniques using customer data Collateral valuation has become more standardised Use of mortgage brokers Unrestricted 35

36 Thank you! Unrestricted 36

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