Households and housing markets in financial crises The Icelandic version

Transcription

1 Central Bank of Iceland Households and housing markets in financial crises The Icelandic version Þorvarður Tjörvi Ólafsson Economist, Central Bank of Iceland Nordic conference in Reykjavik: The Financial Crisis, the Property Market and Home Ownership November 26, 29

2 Overview of presentation Two main subjects 1. The financial crisis in Iceland in an international perspective, especially with regard to households and housing markets 2. The effects of the financial crisis in Iceland on the housing sector and households economic situation

3 The financial crisis in Iceland in an international perspective

4 Chile ('81) Equador ('98) Finland ('91) Indonesia ('97) Korea ('97) Malaysia ('97) Mexico ('94) Norway ('87) Russia ('98) Sweden ('91) Thailand ('97) Turkey (') Venezuela ('94) Japan ('91) Iceland ('7) Switzerland UK Ireland France Germany Spain Japan Australia Canada Italy US Iceland International perspective It is well-known that Iceland had the largest banking system ever to have gone through a crisis Commercial banks' assets as % of GDP a year before the onset of various crises Banking group assets as % of GDP in the current global crisis % of GDP % of GDP Total consolidated banking group assets fro domestically owned banking sector only. This includes assets of domestic banks held abroad. End-27 except UK (end 28) and Iceland (June 28). Sources: Bank of England, Central Bank of Iceland. Sources: Bank of England, Central Bank of Iceland.

5 Russia ('98) Turkey ('1) Argentina ('1) Ecuador ('99) Mexico ('94) Indonesia ('97) Norway ('87) Finland ('91) Sweden ('91) Thailand ('97) Iceland ('8) Finland Germany Sweden Spain Switzerland UK Denmark USA Iceland International perspective the most indebted private sector Private sector lending as % of GDP in a few crisis countries Private sector lending as % of GDP in a few countries in the current global crisis 6 % of GDP 5 % of GDP The year in parentheses represents the onset of the crisis in the country concerned. Sources: Reuters EcoWin, Central Bank of Iceland. 1.The value is for 27. Sources: Bank of England, Reuters EcoWin, Central Bank of Iceland.

6 Argentina (') Thailand ('96) Korea ('96) Brazil ('1) Uruguay ('1) Iceland ('8) International perspective and widespread foreign-currency borrowing Corporate foreign currency debt to GDP in a few crisis countries Proportion of total foreign-denominated debt in some of Iceland's key sectors % of GDP % Households Businesses Municipalities 1. Figures for households and municipalities are as of year-end 28, and figures for businesses are as of June 29. Sources: IMF, Central Bank of Iceland. Source: Central Bank of Iceland.

7 USA (1929) Malaysia (1997) Thailand (1997) Korea (1997) Argentina (21) Norway (1899) Sweden (1991) Spain (1977) Historical average Japan (1992) Norway (1987) Indonesia (1997) Finland (1991) Columbia (1998) Iceland (28) Philippines (1997) Hong Kong (1997) USA Italy Norway Finland Australia Canada Sweden Denmark UK France Ireland New Zealand Spain Iceland International perspective Loss of household wealth will be in the high-end relative to other crises as house prices decline Real house price declines in a few crisis countries % Real house price rises and subsequent falls in the current global crisis % 1.Central Bank of Iceland baseline forecast. Sources: Reinhart, C.M. and K.S. Rogoff (29), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland. Change in real house prices (Q1/21-Q3/26) Real house prices falls from recent peak Sources: IMF, Central Bank of Iceland

8 Argentina (21) Hong Kong (1997) Norway (1987) Sweden (1991) Historical average Phillippines (1997) Japan (1992) Finland (1991) USA (1929) Columbia (1998) Spain (1977) Malaysia (1997) Indonesia (1997) Korea (1997) Thailand (1997) Iceland (28) USA Italy Norway Finland Australia Canada Sweden Denmark UK France Ireland New Zealand Spain Iceland International perspective and financial assets collapse Real equity price declines in a few crises countries % Real equity price rises and subsequent falls in the current global crisis % 1.Central Bank of Iceland baseline forecast. Sources: Reinhart, C.M. and K.S. Rogoff (29), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland. Change in real equity prices (Q1/21-Q3/26) Real equity prices falls from recent peak Sources: IMF, Central Bank of Iceland

9 Korea ('97) Finland ('91) Sweden ('91) Norway ('87) Iceland ('8) France Euro area Spain Australia New Zealand USA Norway Ireland Iceland Denmark International perspective Icelandic households were vulnerable to the effects of the crisis due to high indebtedness Household debt as % of disposable income in a few crisis countries Household debt as % of disposable income in the current global crisis 25 % of disposable income 3 % of disposable income Values for Iceland are for 22 and 28. Sources: Riksbanken, Norges Bank, BIS, Central Bank of Iceland Sources: OECD, Central Bank of Iceland.

10 Latvia Estonia Hungary Lithuania Rumenia Poland Bulgaria Iceland Slovak Republic Czech Republic Latvia Estonia Hungary Lithuania Rumenia Poland Bulgaria Iceland Slovak Republic Czech Republic International perspective Icelandic households have been more affected by depreciation than FX borrowers in other countries Share of banks' household loans in foreign currency in a few countries Comparison between 23 and 28 Share of loans (%) Exchange rate changes from July 27 to October 29 BIS broad nominal effective exchange rate indicies % Sources: Magyar Nemzeti Bank, Central Bank of Iceland. Sources: BIS, Central Bank of Iceland.

11 Malaysia (1997) Indonesia (1997) Japan (1992) Philippines (1997) Thailand (1997) Hong Kong (1997) Norway (1987) Korea (1997) Argentina (21) Historical average Sweden (1991) Iceland (28) Spain (1977) Columbia (1998) Finland (1991) USA (1929) Norway Denmark Sweden Finland UK New Zealand France USA Iceland Ireland Spain International perspective The increase in unemployment is expected to be relatively high 25 Unemployment increases in a few crises countries Percentage points Expected unemployment increases from 27 to 21 in the current global crisis Percentage points Central Bank of Iceland baseline forecast. Sources: Reinhart, C.M. and K.S. Rogoff (29), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland. Sources: IMF.

12 Norway ('87) Philippines ('97) Sweden ('91) Hong Kong ('97) Columbia ('98) Korea ('97) Historical average Norway New Zealand Denmark Spain Euro area Netherlands United Kingdom Sweden Germany Japan Finland Hungary Ireland Iceland Romania Estonia Latvia Lithuania Malaysia ('97) Iceland ('8) Finland ('91) Thailand ('97) Indonesia ('97) Argentina ('1) USA ('29) International perspective and the drop in GDP large Real GDP per capita cycles in a few crises countries % Number of years Forecast for GDP growth in 29 Volume change on a year earlier (%) Peak-to-trough decline in GDP per capita (left) Duration (right) 1.Central Bank of Iceland baseline forecast. Sources: Reinhart, C.M. and K.S. Rogoff (29), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland. Source: IMF.

13 The effects of the financial crisis on the housing market and households economic situation

14 Malaysia (1997) Iceland (28) Spain (1977) Sweden (1991) Argentina (21) Korea (1997) Thailand (1997) Indonesia (1997) Norway (1987) Hong Kong (1997) Columbia (1998) Finland (1991) Historical average Norway (1899) Philippines (1997) USA (1929) The Icelandic housing market Relatively short duration of real house price declines and inflation playing a large role in the adjustment Duration of real house price declines in a few crisis countries Number of years 1.Central Bank Iceland baseline forecast. Sources: Reinhart, C.M. and K.S. Rogoff (29), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central House price levels Index = 1 in Nominal house price level CPI level Real house price level Sources: Statistics Iceland, Central Bank of Iceland.

15 ágú..'4 des..'4 apr..'5 ágú..'5 des..'5 apr..'6 ágú..'6 des..'6 apr..'7 ágú..'7 des..'7 apr..'8 ágú..'8 des..'8 apr..'9 ágú..'9 The Icelandic housing market Dysfunctional market Turn-over on the residential housing market and quarterly growth in household debt in Number of new mortgage loans issued at DMI and share of swaps in total turnover Number of contracts 45 Volume change on a year earlier (%) 8 35 Number of loans % Turn-over on the residential housing market (left) Quarterly growth in household debt in real terms (right) Number of new mortgage loans at DMI Swaps as a portion of total turnover Sources: Icelandic Property Registry, Central Bank of Iceland Sources: Icelandic Property Registry, Central Bank of Iceland

16 Icelandic households: Aggregate data Changes in net wealth and real disposable income Developments in household net wealth and contribution of underlying components Volume change on a year earlier (%) Developments in real disposable income and contribution of underlying components Volume change on a year earlier (%) House prices Housing stock Financial assets Debt Net wealth 1. Central Bank of Iceland baseline forecast The contribution of the main underlying factors in the yearly changes in net wealth is calculated based on each factor's weight in new wealth. The combined contribution does of underlying factor does not add up to the total change due to rounding. Sources: Statistics Iceland, Central Bank of Iceland Prices Other income Nominal wages Taxes Sources: Statistics Iceland, Central Bank of Iceland. Employment Real disposable income 1. Central Bank baseline forecast The contributions of the main underlying factors in the yearly changes in real disposable income is calculated based on each factor s weight in disposable income. The combined contribution of underlying factors does not add up to the total change due to rounding and incomplete income accounts for households.

17 Italy France Germany Japan UK USA Canada Australia New Zealand Iceland Icelandic households: Aggregate data Leverage is high in international comparison but it decreased in the boom as expected Household leverage in the current global crisis Icelandic households leverage ,5 % 1,6 Ratio 1,4 1,5 1,3 1,4 1,2 1,1 1, 1,3 1,2 1,1 1, Total household assets as proportion of net wealth at year-end 27 Sources: OECD, Reserve Bank of Australia, Reserve Bank of New Zealand, Central Bank of Iceland. 1. Total household assets as proportion of net wealth based on the Central Bank of Iceland estimate of asset and net wealth except for 28 where leverage growth in based on tax authority data Sources: Central Bank of Iceland, Icelandic tax authorities (RSK).

18 Icelandic households: Aggregate data but leverage has become much more dependant on exchange rate movements In the run-up to the crisis, household assets increased even faster than debt and households equity position improved and leverage decreased But the large depreciation and asset destruction has pushed leverage up and balance sheet restructuring has begun % 15, 12,5 1, 7,5 5, 2,5, -2,5-5, -7,5 Household leverage growth and exchange rate movements Growth in household leverage (left) % Nominal exchange rate changes (reverse right axis) Household leverage growth is based on the Central Bank of Iceland estimate of asset and net wealth except for 28 where leverage growth in based on tax authority data Sources: Central Bank of Iceland, Icelandic tax authorities (RSK).

19 Icelandic households: Micro data The Central Bank of Iceland household sector project Assessing the extent of debt problems in the private sector, their effects on the crisis dynamics and developing the policies needed to limit the severity of the crisis is a daunting challenge One of many preconditions for success is access to valuable data on household and corporate sector balance sheets The Central Bank has assembled a unique database for households and an analysis on the household balance sheet and debt servicing capabilities is ongoing See e.g. chapter 2.2. in Central Bank of Iceland Financial Stability 29

20 Icelandic households: Micro data The Central Bank of Iceland household sector project The database contains financial data on all individual customers of the commercial banks, savings banks, smaller financing undertakings, pension funds and the Housing Financing Fund (HFF) Income data from the tax authorities (RSK) Data on unemployment from the Directorate of Labour The data are encrypted and have been processed in a format which is not personally identifiable This data base is unique for a country experiencing a financial crisis and offers many possibilities for analyses and projections

21 Icelandic households: Micro data The largest share of household liabilities is mortgage debt which is mainly in ISK O v e r d r a f t : 53,8 b.kr.; 3% of total d e b t Auto loans: 127,1 b.kr.; 8% of total d e b t Household debt by category Loans backed by securities: 46,7 b.kr.; 3% of total d e b t Source: Central Bank of Iceland. Mortgage debt: 1.329,7 b.kr.; 86% of total debt Note: Combined household debt in the database is 1557 b.kr. Student loans, loans from some smaller pension funds and more complete data on loans backed by securities are missing from the database. According to tax returns for the year 28, total household debt amounted to 1683 b.kr., which is ca. 2 b.krk. lower than according to credit system data for September 28.

22 Icelandic households: Micro data FX borrowing is more widespread in auto loans than in mortgages Households with mixed auto loans; 8.592; 19% of households with car loans Households with only ISK auto loans; 7.189; 16% of households with car loans Less than 7 thousand households have foreign currency mortgages But 37 thousand households have foreign currency auto loans Households with only FX auto loans; ; 65% of households with car loans

23 Decreased -25% 25-5% 5-75% 75-1% 1-125% % Over 15% Icelandic households: Micro data Households with FX mortgages have experienced the greatest increase in debt levels Housing liabilities have more than doubled for 43% of households with pure FX mortgages and risen more than 5% for roughly half of households with mixed mortgages Relatively few households Less impact for households with indexed ISK mortgages but a third has nevertheless experienced more than 3% increase Change in outstanding amount of mortgages from date of origin to yearend 28 Share of households (%) Households only with ISK mortgages Households only with foreign currency mortgages Households with mixed mortgages 1. All loans backed with residential housing collateral are defined as mortgage loans. Source: Central Bank of Iceland.

24 Decreased -1% 1-2% 2-3% 3-4% 4-5% 5-6% 6-7% 7-8% 8-9% 9-1% Over 1% Icelandic households: Micro data and so have the great number of households with FX auto loans Liabilities due to car loans have risen by more than 5% for roughly half of households with pure FX auto loans Relatively many households Change in outstanding amount of auto loans from date of origin to year-end Share of households (%) Households only with ISK auto loans Households only with foreign currency auto loans Households with mixed auto loans Source: Central Bank of Iceland.

25 -15 t.kr t.kr t.kr 35-5 t.kr 5-65 t.kr. over 65 t.kr. Icelandic households: Micro data The highest-income group carries a smaller share of debt than is common abroad The distribution of debt is well in line with 25 income distribution and 2 the share of debt borne 15 by higher-income groups 1 is smaller than is often 5 the case in other countries Mortgage, auto and overdraft debt as per cent of annualised disposable income % Share of combined debt Share of households 1. Based on outstanding amounts of loans at year-end 28 and income data from PAYE records in February 29. Source: Central Bank of Iceland.

26 -5% 5-1% 1-2% 2-3% 3-4% 4-5% 5-6% 6-7% 7-8% 8-9% 9-1% Over 1% Icelandic households: Micro data A large share of total debt is in the hands of very indebted households 63% of households have debt less than 4% of annual disposable income but for roughly 1/4 of households the ratio is above 5% Smaller share with > 5% than in Norway prior to the banking crisis Households owing more than 6% of disposable income carry 39% of total debt Mortgage, auto and overdraft debt as per cent of annualised disposable income 5 Share of households (%) 6,6 9, 17,6 16,5 13,6 1,1 6,6 4,5 3, 2,1 1,6 8,8 1. Based on outstanding amounts of loans at year-end 28 and income data from PAYE records in February 29. Source: Central Bank of Iceland.

27 -1% 1-2% 2-3% 3-4% 4-5% 5-6% 6-7% 7-8% 8-9% 9-1% 1-11% 11-12% 12-13% 13-14% Over 14% Icelandic households: Micro data Roughly 2% of households were in negative housing equity at year-end 28 Likely that around a third of homeowners will go into negative territory in the coming years as nominal house prices continue to fall Mortgage debt as a share of housing wealth at year-end 28 Share of households (%) 1. Based on outstanding amount of mortgage debt and Land Registry value of residential property in December 28. Source: Central Bank of Iceland.

28 -1% 1-2% 2-3% 3-4% 4-5% 5-6% 6-7% 7-8% 8-9% Over 9% Icelandic households: Micro data 2-26% of households with debt service ratio above common danger points Households that have to use more than 3-35% of their disposable income to service their mortgage debt are often considered at risk 2% of households need to devote more than 35% of their income to service their mortgage debt 35-4% of households with FX mortgages or mixed mortgages Mortgage debt service ratio Share of households (%) 1. Mortage debt at beginning of the year as a service ratio from PAYE records in February 29. Excludingsome households with mortgage loans where interest or principal payments have been frozen. Source: Central Bank of Iceland.

29 Final remarks

30 Final remarks Unemployment and debt restructuring will be major determinants of the scope of financial distress Households have sustained severe blows as a result of the banks and the currency s collapse The pre-crisis spree of FX borrowing has proven extremely costly for many, and banks were far too liberal in issuing FX loans Various evidence indicates that 2-25% of households are in financial difficulties and that this figure will rise if no action is taken Household debt restructuring has begun The scope of financial distress will be determined by unemployment and the success of debt restructuring