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The financial crisis: stabilty through the Bauspar system
Andreas J. Zehnder
Managing Director
of the
European Federation of Building Societies (EFBS)
Brussels, Belgium
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Outline
1. The financial crisis revisited
2. The German housing market and housing finance system
3. Bausparen
4. Policies for fostering savings for housing
5. Preconditions for a Bauspar system
6. Conclusion – sustainable housing finance
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1. The financial crisis revisited
The global financial crisis and the European sovereign debt
crisis originated in the United States
US housing finance system is at the core of the crisis
- Low-interest rate policy of the US Federal Reserve caused real
interest rates to be negative
- US Mortgage loans became more affordable
- Demand for property rose, prices increased, a building boom began
- People believed that this situation would last forever
- Speculation and over-investment in property were the result
- Indebtedness of private households rose
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1. The financial crisis revisited
- US House prices rose quickly:
From 1995 to 2007 by 135%!
- Share of risky mortgages (less
than 3% down payment) rose:
From 4% in 1995 to 40% in 2007
- US household income did not keep
pace with house prices: House
prices outpaced income by 70%
US household debt as % of disposable income
- US household debt as a % of
disposable income rose:
From 80% in 1995 to 127% in 2007
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1. The financial crisis revisited
US lenders are also responsible for the house price bubble:
- Lax underwriting standards
- Inflated appraisal prices
- Aggressive lending practices and high loan-to-value ratios
- Very relaxed prudential and monitoring standards
Why did US lenders not care about the quality of the loans?
Lenders could offload all risks to the investors of MBS, CDOs…
Originate-to-distribute-model
Loan
Loan
Lenders/
Originators
Borrowers
$$$
$$$
MBS
Sponsors/
Investment
banks
Loan
$$$
Special
Purpose
Vehicle
MBS
$$$
International
Investors:
bear all
risks
This is how the US housing market could infect global financial markets
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1. The financial crisis revisited
Collapse of the financial sector of the countries of the European
periphery not centered at the first place on the proliferation of
complex financial products or of exposure to US housing market
- Spain and Ireland among the European countries with biggest
markets for MBS but share of MBS on outstanding mortgage loans
still below 25% in 2007
- Spanish and Irish banks did not have high exposure to US subprime
mortgage market
Plain vanilla property bubble
Causes:
- Negative real interest rates (caused by weak US monetary policy)
- Unprecedented competition in financial sector; financial innovation
- Spirit of optimism and economic growth omitted risks
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1. The financial crisis revisited
House prices in Spain and
Ireland rose very fast
(increase by 160% in 8
years!)…
only to fall shortly after the
US market crashed
House price indices Spain and Ireland (1999=100)
The German market rose
only very modest, broadly
in line with the inflation rate
(increase by 12% in 9 years)…
it was not affected by the
financial crisis
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2.
The German housing market and
housing finance system
There are many reasons for the stability of the German housing
market:
- Very good housing supply (80 million inhabitants and 40 million
housing units)
- Negative demographic trend for young households
- Newly build housing units matched demand
- Real income of households is stagnating since 1996
- Well developed rental market
- Government policies do not push for owner occupation
- Structure of housing finance market; attitude of borrowers and lenders
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2.
The German housing market and
housing finance system
Typical financing example for the
purchase of an apartment in Germany:
Price for the apartment: 100.000 €
50.000€
22.000 €
18.000 €
40.000 €
10.000 €
Mortgage loan
(first mortgage)
Bauspar loan
(second mortgage)
Bauspar savings
Other equity
Bauspar contract sum
Total equity capital
CIt is important that the buyer brings own equity – it is a form of selfcommitment and a risk buffer for lender and borrower
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2.
The German housing market and
housing finance system
German mortgage lenders can use many different funding
instruments of which non dominates – this has several
advantages:
- Only a set of funding channels is able to meet the needs of lenders
and borrowers properly
- At various points in time some markets are more functional than
others (e.g. markets for MBS and unsecured debt shut down in
financial crisis)
- High flexibility, competitive mortgage rates all time
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3. Bausparen – central role in Germany
The Bausparkassen take a central position in the German
mortgage process:
- Traditional providers of the second mortgage
- They provide also all other kinds of mortgage products
- Market share in 2010: 24%
Bausparkassen are very flexible to adapt their business to
changes in the interest rate environment, the overall economic
situation or the behavior and needs of the customers
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3. Bausparen – how it works
Loans are
funded by
savings and
amortisation
payments
Loans are funded only
by savings and
amortisation payments
→ closed circuit
Bauspar
bank
Saver becomes
debtor and
pays the loan
back (interest
+ amortisation)
Excess liquidity can be
invested only within
narrow limits (giltedged investments)
Safety is the top
priority.
People with Bauspar contract save
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3. Bausparen – how it works
40
Duration
Deposit/
Saver‘s effort
20
10
Contract sum in %
30
10
20
Bank‘s output/
Loan
30
40
50
60
Savings phase
Conclusion of Customer saves
contract
and recieves
interest on deposit
Allocation
phase
Loan phase
Right of payoff Payback of loan
of contract sum
(deposit +loan)
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3. Bausparen – the balance sheet structure
Balance sheet of all Bausparkassen 1990
Total balance: 86 billion Euros:
Average interest rate: 10% (fixed 5 years)
Other
Other
26%
assets liabilities
Advance
21%
loans
22%
Balance sheet of all Bausparkassen 2010
Total balance: 196 billion Euros:
Average interest rate: 3.5% (fixed 5 years)
Other
48% assets
Other
32%
liabilities
Traditional
business of
Traditional
providing
Bauspar Bauspar
Advance Bauspar
business of
second
loans/
38% loans
deposits 74% providing
57%
deposits
mortgages:
collective
second
78%
Bauspar loans
loans
mortgages: 14%
assets
liabilities
52%
assets liabilities
68%
When interest rates are high, traditional business is strong
When interest rates are low, other mortgage businesses become
more important; also Bauspar savings become more attractive
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3. Bausparen – safe haven in times of crisis
2008 was one of the best years for the Bauspar industry –
while the rest of the financial industry was crumbling:
Bausparen is valued by the people for its stability and safety
Bausparen attracts in unstable times and times with low interest
rates many savings: Bauspar deposits increased within 3 years
(2008-2011) by 20 billion Euro or 16%!
2011
Bauspar
deposits
2008/2011:
2008
120
billion
Euro
+ 16%
140
billion
Euro
The large reservoir in Bauspar savings enables Bausparkassen to
provide all customers readily with cheap mortgages when
interest rates and the demand for Bauspar loans rise again .
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4.
Policies for fostering savings for housing
The German government supports and encourages savings and
equity formation:
-
Savings bonus on Bauspar deposits as tax free surplus on savings
expenditures tied to a future usage for housing (with income ceiling)
-
Employee savings allowance granted as tax free surplus to savings
expenditures made for certain investment products including Bauspar
contracts (with income ceiling)
Bonus on savings as best way to support equity generation:
-
Increases savings efforts → national savings rate may rise
-
Transparent → easily budgeted, low administrative expenses
-
Socially reasonable → resources can be concentrated on target group
-
Demand subsidy → empowers families to make their own choices
-
Perfect complement to Bauspar system → increases acceptance and
eases access for new customers
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5.
Preconditions for a Bauspar system
The Bauspar system is a very robust and safe system but
there are preconditions for its successful establishment:
- Stable macroeconomic environment
- Low inflation rate (<10%)
- Well-functioning banking law
- Strong supervisory authority for credit institutions
- Special Bauspar Act (optional, but recommended)
- Savings bonus (optional, but recommended)
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6. Conclusion – sustainable housing finance
Latin America has avoided so far the high leverage and
indebtedness so characteristically for households in the United
States. It should stay on track and opt for a save and
sustainable housing finance system.
Vengan a Austria!
© European Federation of Building Societies
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Questions?
Thank you for
your attention!
Contact details
European Federation of
Building Societies
Andreas J. Zehnder
Rue Jacques de Lalaing 28
B- 1040 Brussels
Tel.: +32/2/231.03.71
Email: [email protected]
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