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Introducing Housing Finance in Emerging Markets Global Findings & Outlook for Turkey IFC & Dunya Housing Finance Conference December 3-4, 2007 Istanbul Hans-Joachim Dübel Finpolconsult.de, Berlin 1 M So al ut ays h A ia Th fric ai a la n K d or ea C hi M le ex ic B o C ra ol zi om l Es bia to ni C a hi n C a ze Po ch H lan u d In nga do ry ne si a In di Tu a rk R ey us U sia kr ai ne 40% Early birds Latecomer 35% 2000 30% 2005 25% 20% 15% 10% 5% 0% Sources: World Bank, Finpolconsult. 2 Housing loan to GDP and per capita GDP trajectories in Latin American markets 10000 Mexico Colombia Brazil Chile Real Per Capita GDP Macroeconomic crisis › › 9000 8000 High real interest rates › › › 7000 6000 5000 4000 2000 1000 › 0 0% 5% 10% 15% Housing Loan to GDP Ratio Sources: World Bank, Finpolconsult. Legal reform backlog Weak institutions Directed credit systems (subsidies/regulations) Volatile funding sources › 3000 Indexed instruments may not help Crowding out by gov International bank financing, rather than long-term portfolio/direct investment Immature domestic capital markets Successful reforms ~ 95-05 3 Real interest rates and housing loan to GDP ratio ~ 2005 Market rates, not directed rationing) Sufficient domestic savings volume (Asia) Credible savings instruments › Long-term bonds › Long-term deposits Credible intermediaries Sources: World Bank, IMF, Finpolconsult. 4 With stabilization, competition, transparency › › Bank self-insurance Mortgage insurers Contract savings/ piggybacks Maturity increase through › › Maturities, LTVs increase Shortening time scale. LTV increase through › › › Loan maturities and loan-to-value ratios in selected emerging markets Capital markets Intermediary ALM Public policy role? › › Interest deduction raises leverage Rather proper regulation Sources: Merrill Lynch, Finpolconsult. 5 Chile, Malaysia with long-term bond market strategies Mexico hitting liquidity wall (as earlier Spain), introduces covered bonds Risk management Still imperfect, e.g. Spain swaps fixed-rate cedulas back to floatingrate loans (Basel II deficiencies) Ideally incentives for fixed-rate lending as low credit risk product Ratio of private sector loans to liquid liabilities in selected emerging markets 180% 160% 140% Chile Malaysia Thailand Mexico Brazil 120% 100% 80% 60% 40% 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 Liquidity Sources: IMF, Finpolconsult. 6 20% 15% 10% 5% fr C th A kr So u U a ol om bi a ic ne ai nd la ea Th ai or K hi le C an d o 0% Po l Minimum standards for mortgage origination › Minimum risk management quality › 25% ic Requires regulation/consumer protection framework 30% ex Finance companies Brokers Correspondents 35% M Diversify from commercial bank/ developer origination › › › Some charter competition by finance companies di a › Share of non-bank, non-insurance distribution in emerging markets ~2005 Commercial banks with access barriers, institutional constraints In Sources: Merrill Lynch, Finpolconsult. 7 Per capita GDP and housing loan to GDP ratio ~ 2005 Sources: World Bank, Finpolconsult. 8 Household consumption to GDP ratio and housing loan to GDP ratio ~2005 Supporting factors: › Growth › Migration › Urbanization › Upgrading › Cohabitation /household division Sources: United Nations, World Bank, Finpolconsult. Repetition of US debacle unlikely in EMs 9 Fixed exchange rate policies attract investors with risk amnesia (Thailand, Mexico). Lobbyist pressure to reduce lending/bond market standards, tax deductions Conflict of interest between intermediaries and consumers/investors (US), esp. re house prices. Severe distortions in urban land and housing markets limiting supply. Gross Fixed Investment to GDP Ratio Causes for lending/price cycles Investment and housing lending in Thailand 1987-2005 40% 32% 2005 1987 24% 16% 0% 5% 10% 15% 20% Housing Loan to GDP Ratio Sources: United Nations, World Bank, Finpolconsult. 10 Mumbai property prices and house price income relation 1995-2005 Housing finance permanently reduces funding costs › › initial house price increase. production signal to developer industry sets virtuous cycle in motion. Distinct from price cycle caused by fluctuations in interest rates › change in mortgage instrument (fixed-float). › Emerging market experience is divided: › › › Source: Parekh. Initial adjustment (Mumbai) Bubbles (Shanghai, Kiev) Bubbles occur without housing finance (Moscow) 11 Access to developer finance Developer focus on lowermiddle income segments › Middle income housing Economic housing Social housing 14 12 › 10 › 8 6 2 02 01 20 00 20 99 20 98 19 97 19 96 19 95 Source: BBVA. 19 94 19 93 19 19 19 19 92 0 Crisis often related to overbuilding in high-income Mexico, Malaysia low-income industries with public stimulus Thailand (Brazil upcoming) market solutions. Pitfalls: › 4 91 House-price-to-minimum salary ratio Mexico – house price to minimum salary ratio in different market segments › Mass housing loan/production subsidies may cause misallocation (vacancies, defaults) Mass housing planning/agency problems (land hoarding) 12 Turkey scenarios, Greece & Italy historic development compared 25% Turkey Scenario A Turkey Scenario B Greece 1992-2002 Italy 1992-2002 Mortgages as % of GDP 20% Growth, demand pressure, supply constraints drive prices, lending volumes. Loan instrument reduces growth 15% 10% Turkey: fixed, short maturities Greece: float, long maturities › Current: Euro bonds/bank lines or deposits plus swaps Future: domestic bonds/deposit mix Funding/hedging strategies › 5% 20 15 20 14 20 13 20 12 20 11 20 10 20 09 20 08 20 07 20 06 0% 20 05 › › Distribution strategies › › Source: Guerlesel, EMF, Finpolconsult. Non-bank so far limited to developers Excessive regional focus (means price risk) 13 Lending/demand-side policies Develop local bond markets, reduce dependence on foreign lending, swaps Avoid subsidization of mortgages, rather reduction of transactions costs and macro/banking sector stability Strengthen public risk monitoring Investment/supply-side policies Zoning/infrastructure policies responsive to demand Liberalize land market, reform of mass housing policy framework Unauthorized housing issue, building standards 14 Hans-Joachim (Achim) Dübel Finpolconsult.de [email protected] www.finpolconsult.de 15