Pentti Hakkarainen Deputy Governor, Bank of Finland International competition will change mortgage lending Nordic Mortgage Council Helsinki, 28 August 2015 28.8.2015 Unrestricted 1
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
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
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
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
Rebound in house price growth in several euro area countries Source: ECB Financial Stability Review, May 2015. Unrestricted 6
Estimated over/undervaluation of house prices in the euro area Source: ECB Financial Stability Review, May 2015. Unrestricted 7
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
Lending to euro area households slowly recovering Source: ECB Financial Stability Review, May 2015. Unrestricted 9
Euro area mortgage rates historically low Source: ECB Financial Stability Review, May 2015. Unrestricted 10
Lending conditions continued to ease in mortgage lending Source: ECB Bank Lending Survey, July 2015. Unrestricted 11
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
Household indebtedness in Nordic countries Household debt-to-income ratio Finland Sweden Denmark Norway 300 % 250 200 150 100 50 0 1995 2000 2005 2010 Loans divided by adjusted gross disposable income. Sources: Eurostat, Statistics Norway and Bank of Finland calculations. Unrestricted 13
Housing cycles at different phases in Nordic countries Real house prices in the Nordic countries Finland Sweden Norway Denmark 225 Index, 2000/I = 100 200 175 150 125 100 75 2000 2002 2004 2006 2008 2010 2012 2014 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
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
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 100 50 CDs Other bonds 0 2010 2011 2012 2013 2014 2015 Source: FIN-FSA. CBs Unrestricted 16
Distribution of reference rates for new housing loans in Finland Source: Bank of Finland. Unrestricted 17
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 % 80 60 40 20 0 2012 2013 2014 2015 Source: Bank of Finland. Unrestricted 18
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 % 20 80 16 60 12 40 8 20 4 0 2003 2005 2007 2009 2011 2013 2015 Source: Bank of Finland. 0 Unrestricted 19
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 % 16 12 8 4 0-4 2003 2005 2007 2009 2011 2013 2015 Sources: ECB and Bank of Finland. Unrestricted 20
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 30 15 25 10 20 5 15 0 10-5 5-10 1990 1995 2000 2005 2010 2015 * In real terms (at most recent 12-month consumer prices). Sources: Statistics Finland and Bank of Finland. 0 Unrestricted 21
Increased housing lending at the monthly level at the first half of 2015 New drawdowns of housing loans in Finland 2015 2014 2013 2012 2011 2010 2 500 EUR million 2 000 1 500 1 000 500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bank of Finland. Unrestricted 22
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 2.5 2.0 1.5 1.0 0.5 0.0 2010 2011 2012 2013 2014 2015 Source: Bank of Finland calculations. Unrestricted 23
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 5 4 3 2 1 0 2003 2005 2007 2009 2011 2013 2015 Finland: new drawdowns. Source: ECB. Unrestricted 24
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 % 2.0 1.5 1.0 0.5 0.0 2010 2011 2012 2013 2014 2015 Sources: Reuters and Bank of Finland calculations. 28.8.2015 Pentti Hakkarainen Suomen Pankki Finlands Bank Bank of Finland Unrestricted 25
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 = 100 200 150 100 50 1980 1985 1990 1995 2000 2005 2010 2015 Sources: Statistics Finland and Bank of Finland calculations. Unrestricted 26
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 16 60 8 40 0 20-8 0 1980 1985 1990 1995 2000 2005 2010 2015 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
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 1,000 200 75 150 50 100 25 50 0 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 2013. Sources: Statistics Finland and Bank of Finland calculations. Unrestricted 28
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 % % 10 160 8 120 6 80 4 40 2 0 0 2002 2004 2006 2008 2010 2012 2014 Sources: Statistics Finland and Bank of Finland calculations. Unrestricted 29
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 89,100 112,700 (20% of municipalities) EUR 71,200 89100 (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 2013. Sources: Statistics Finland and Bank of Finland calculations. Unrestricted 30
A strong regional divergence also in house prices 210 Housing debt and house prices by municipality in Finland EUR 1,000 180 150 120 90 60 30 600 1 400 2 200 3 000 3 800 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 2013. 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
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
Housing market-related macroprudential tools in Finland A binding and adjustable LTV cap Becomes in force: July 2016 90/95% (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
Pentti Hakkarainen Deputy Governor, Bank of Finland Mortgage lending in the future 28.8.2015 Unrestricted 34
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
Thank you! Unrestricted 36