Alternative Financing for the Property Market?

Wanderer78

Timing belt wrote:

Then we don't see any inflation and government will continue with QE to stimulate the economies until they max it out and the credit markets start turning on the sovereign's and picking them off one by one.

I'm not convinced there will be widescale spending, with rising uncertainty, but of course I could be wrong

Timing belt

Wanderer78 wrote: »

I'm not convinced there will be widescale spending, with rising uncertainty, but of course I could be wrong

Then invest in a fixed income fund or a investment bank with a big fixed income desk as they will be coining it when there is more QE.

hometruths

Timing belt wrote: »

This is just showing you where the bubbles are in relation to the unemployment rate (x Axis) and the overvaluation on the (y axis).

Thats what i thought. So it is not say increased risky mortgage lending has caused a property bubble.

Will take a look at the second link.

Wanderer78

Timing belt wrote:

Then invest in a fixed income fund or a investment bank with a big fixed income desk as they will be coining it when there is more QE.

Only available to some unfortunately, I truly can't see the average person doing such things

Timing belt

Wanderer78 wrote: »

Only available to some unfortunately, I truly can't see the average person doing such things

The average person has probably lost 20-30% of their pension from the market crash assuming that it was adequately hedged. They will get a bit of a pick up from fixed income as pension funds will be invested but overall most will get a big shock when they see there annual statement and will question why even bother paying into a pension. That is unless they are lucky enough to be part of a defined benefit pension scheme.

Wanderer78

Timing belt wrote:

The average person has probably lost 20-30% of their pension from the market crash assuming that it was adequately hedged. They will get a bit of a pick up from fixed income as pension funds will be invested but overall most will get a big shock when they see there annual statement and will question why even bother paying into a pension. That is unless they are lucky enough to be part of a defined benefit pension scheme.

I suspect less younger generations are getting involved in pension funds at a younger age, or people are starting their pension funds later in life, compared to older generations?

Timing belt

Wanderer78 wrote: »

I suspect less younger generations are getting involved in pension funds at a younger age, or people are starting their pension funds later in life, compared to older generations?

That would be correct otherwise they can’t get on property ladder and will need to rent during retirement which is nearly as bad as no pension

Wanderer78

Timing belt wrote:

That would be correct otherwise they can’t get on property ladder and will need to rent during retirement which is nearly as bad as no pension

Would this have any negative effects on current pension fund claimants, or soon to be?

Timing belt

Wanderer78 wrote: »

Would this have any negative effects on current pension fund claimants, or soon to be?

Anyone due to retire soon will have there pensions moved into gov bonds for the past few years and as bond yields fall bond prices rise so should be ok.

Wanderer78

Timing belt wrote:

Anyone due to retire soon will have there pensions moved into gov bonds for the past few years and as bond yields fall bond prices rise so should be ok.

Surely the delay in younger generations getting involved have a negative effect somewhere?

Timing belt

schmittel wrote: »

Thats what i thought. So it is not say increased risky mortgage lending has caused a property bubble.

Will take a look at the second link.

Countries that imposed borrower-based measures (either in form of legally binding limits or recommendations) often saw reductions in the share of the riskiest loan segments in terms of lending standards. For example, in countries with LTV limits in place, the share of loans with an LTV ratio greater than 80% declined by between 0.5 p.p. and 5 p.p. between 2016 and 2018 (IE, NL, PT, SI, SK) (see Chart A.8). In many countries without such measures in place, the share of loans with an LTV ratio above 80% increased during the same period (AT[15], BE, DE, FR, IT). In addition, in some countries with DSTI policies in place (NL, PT, SK), the share of loans with an LSTI ratio greater than 45% declined between 2016 and 2018, while it increased in some of the countries that did not have DSTI limits in place (AT, BE, DE, GR). Moreover, the largest increases in the share of loans with an LTI ratio above 5 were also seen in countries without DSTI limits in place (AT, BE, DE, FR).



Conclusion
This special feature has shown that loosening lending standards may have contributed to an increase in RRE vulnerabilities in some euro area countries and that macroprudential policy can mitigate such vulnerabilities. In particular, the broad-based rise in average LTI ratios has increased the vulnerability of many households to negative income shocks. Given the significant deterioration in the euro area economic outlook since the coronavirus outbreak, this RRE vulnerability seems of particular relevance. While pre-emptive macroprudential policy action has contributed to containing vulnerabilities arising from loosening lending standards in some countries, more timely policy action would have been desirable in some euro area countries, as also reflected in the 2019 ESRB warnings and recommendations. A key lesson for macroprudential policy is that the use of borrower-based measures early on in the upswing of the RRE cycle can help contain the build-up of vulnerabilities that could otherwise arise from long periods of loose lending standards.

hometruths

Timing belt wrote: »

I would like to say yes but if you look at the financial stability reports from the ECB or any of the rating agencies papers on bank lending and you will see that EU countries that do not have a Loan to income cap or a loan to value cap were lowering there risk appetite and increasing lending to more risky mortgages which was leading to property bubbles building up in those countries.

Timing belt wrote: »

The second link address the deterioration in lending standards in more detail as it is specifically about property.

Whilst the second link is undoubtedly a thorough look at property lending standards I'm also not convinced if offers anything to suggest the banks in those countries with no LTI or LTV caps are teetering on the brink of collapse.

Presumably problems are likely to be in those countries with both high LTV and LTI ratios:

One can distinguish three broad country groups: (i) countries with high average LTV and LTI ratios (AT, BE, DE, LU, SI, SK)

Excluding those with limits in place:

Countries with borrower-based macroprudential tools in place as at end-2018 were AT, CY, EE, FI, IE, LT, LV, NL, PT, SI and SK. In 2019 and 2020, borrower-based measures were enacted also in BE, FR and MT.

Which leaves Germany and Luxembourg as the only countries. Whilst both have had pretty frothy property markets in recent years, it is hardly fair to say either country is synonymous with lax banking standards.

Quite the opposite in fact. If I rephrased "allow mortgage lending without CB limits" to "change mortgage lending to a model based on German and Luxembourg banks" I daresay many would agree!

Property bubbles come and go, and the German and Luxembourg markets may well crash, sure there will be pain but I doubt mass bail outs of their banks will be necessary.

Interestingly in googling around for commentary on whether German property is in a bubble I found this article:

Yet if renters in Berlin think they have it tough, they should look a little further west, to the Irish capital, Dublin. The city, and to a slightly lesser extent the entire country, is in the middle of a housing crisis that makes the problems in Berlin look almost quaint.

I think it is fair to say there aren't many Germans currently posting online, saying if only our government, banks and housing market were more like the Irish!

hometruths

Timing belt wrote: »

Countries that imposed borrower-based measures (either in form of legally binding limits or recommendations) often saw reductions in the share of the riskiest loan segments in terms of lending standards. For example, in countries with LTV limits in place, the share of loans with an LTV ratio greater than 80% declined by between 0.5 p.p. and 5 p.p. between 2016 and 2018 (IE, NL, PT, SI, SK) (see Chart A.8). In many countries without such measures in place, the share of loans with an LTV ratio above 80% increased during the same period (AT[15], BE, DE, FR, IT). In addition, in some countries with DSTI policies in place (NL, PT, SK), the share of loans with an LSTI ratio greater than 45% declined between 2016 and 2018, while it increased in some of the countries that did not have DSTI limits in place (AT, BE, DE, GR). Moreover, the largest increases in the share of loans with an LTI ratio above 5 were also seen in countries without DSTI limits in place (AT, BE, DE, FR).



Conclusion
This special feature has shown that loosening lending standards may have contributed to an increase in RRE vulnerabilities in some euro area countries and that macroprudential policy can mitigate such vulnerabilities. In particular, the broad-based rise in average LTI ratios has increased the vulnerability of many households to negative income shocks. Given the significant deterioration in the euro area economic outlook since the coronavirus outbreak, this RRE vulnerability seems of particular relevance. While pre-emptive macroprudential policy action has contributed to containing vulnerabilities arising from loosening lending standards in some countries, more timely policy action would have been desirable in some euro area countries, as also reflected in the 2019 ESRB warnings and recommendations. A key lesson for macroprudential policy is that the use of borrower-based measures early on in the upswing of the RRE cycle can help contain the build-up of vulnerabilities that could otherwise arise from long periods of loose lending standards.

Which of these countries have a property bubble?

I guess what I am saying is you don't need an EU study to tell you that no limits will lead to an increase in loans over 80%, but which of these countries are the EU worried might have banks in need of a state bail out?

Timing belt

schmittel wrote: »

Which of these countries have a property bubble?

I guess what I am saying is you don't need an EU study to tell you that no limits will lead to an increase in loans over 80%, but which of these countries are the EU worried might have banks in need of a state bail out?

Most banks should be ok as they have built up sufficient capital reserves to avoid a bail out this time around (Based on what we have seen already) But if Covid continues and countries need to lock down then there is a serious risk of a shock to financial systems then this will test banks.

This time around you are seeing governments stepping in and bailing out sectors of the economy before it hits the banks rather than bailing the banks out. (i.e. Look at the credit market in the US)


The issue with mortgages with a high LTI or LTV ratio is that they are more likely to default. The following extract from the CBI report on payment breaks highlights this as in does the ECB (i.e. the screen shot I showed in the last post)


Other predictors of payment breaks include high loan-to-income ratios at origination, mid-2000s originations, Dublin commuter belt locations and counties where higher shares of workers were receiving Pandemic Unemployment Payment in May 2020. The loans with the fewest payment breaks include early-2010s originations, loans close to scheduled maturity, loans with low loan-to value ratios and loans in arrears more than three months past due.

source: https://www.centralbank.ie/docs/default-source/publications/financial-stability-notes/no-5-covid-19-payment-breaks-on-residential-mortgages-(gaffney-and-greaney).pdf?sfvrsn=4

The Belly

To simplify it why do we need the banks? Who benefits? The gov has access to credit like never before. If banks fail we bail them out as the taxpayer so why have them in the first place. Radical idea but remove the middle man. At the end of the day the state which is us taxpayers pay anyway.

Timing belt

The Belly wrote: »

To simplify it why do we need the banks? Who benefits? The gov has access to credit like never before. If banks fail we bail them out as the taxpayer so why have them in the first place. Radical idea but remove the middle man. At the end of the day the state which is us taxpayers pay anyway.

The banks are required the same as utility companies are required for gas/electricity/water as they provide an essential service to the economy. The sooner people start looking at this way the better and then the argument is whether to have utilities publicly owned or privately which is a totally separate debate.

The Belly

Timing belt wrote: »

The banks are required the same as utility companies are required for gas/electricity/water as they provide an essential service to the economy. The sooner people start looking at this way the better and then the argument is whether to have utilities publicly owned or privately.

All key national interests should be owned by the state and therefore each citizen. Full accountability publicly available. There is no need for private sector involvement in these areas.

Timing belt

The Belly wrote: »

All key national interests should be owned by the state and therefore each citizen. Full accountability publicly available. There is no need for private sector involvement in these areas.

That's a separate debate and deserves its own thread

hometruths

Timing belt wrote: »

Most banks should be ok as they have built up sufficient capital reserves to avoid a bail out this time around (Based on what we have seen already) But if Covid continues and countries need to lock down then there is a serious risk of a shock to financial systems then this will test banks.

This time around you are seeing governments stepping in and bailing out sectors of the economy before it hits the banks rather than bailing the banks out. (i.e. Look at the credit market in the US)


The issue with mortgages with a high LTI or LTV ratio is that they are more likely to default. The following extract from the CBI report on payment breaks highlights this as in does the ECB (i.e. the screen shot I showed in the last post)


Other predictors of payment breaks include high loan-to-income ratios at origination, mid-2000s originations, Dublin commuter belt locations and counties where higher shares of workers were receiving Pandemic Unemployment Payment in May 2020. The loans with the fewest payment breaks include early-2010s originations, loans close to scheduled maturity, loans with low loan-to value ratios and loans in arrears more than three months past due.

source: https://www.centralbank.ie/docs/default-source/publications/financial-stability-notes/no-5-covid-19-payment-breaks-on-residential-mortgages-(gaffney-and-greaney).pdf?sfvrsn=4

I get that high LTIs and LTVs are riskier loans. I don't need more evidence to prove this!!

My point is it ought to be possible to remove this risk from the taxpayer and allow the banks to lend as they wish. Whether that is too much or too little let the banks decide.

As your post above illustrates if governments want to get more money into to peoples pockets to stimulate the economy in a recession it is easily done.

The argument against loosening the limits seems to be the banks will lose the run of themselves and we'll end up footing the bill again.

But the corollary of that is to keep things as they are which has resulted in the tax payer already having far too much exposure to property market risk, and it is increasing all the time.

You cannot afford a home? We will ramp up help to buy. You still cannot afford a home? We will buy some of the equity for you.

Meanwhile this is pushing up prices making homes less affordable for the average punter, rents increasing, HAP and social costs increasing, increasing costs to taxpayer, hotel bills increasing, more HTB needed, more shared equity needed and so on and so forth.

Where does this end?

The Belly

Timing belt wrote: »

That's a separate debate and deserves its own thread

fair enough but I think is a important one as it is part of a lot of the problems the state faces now.

Timing belt

schmittel wrote: »

I get that high LTIs and LTVs are riskier loans. I don't need more evidence to prove this!!

My point is it ought to be possible to remove this risk from the taxpayer and allow the banks to lend as they wish. Whether that is too much or too little let the banks decide.

As your post above illustrates if governments want to get more money into to peoples pockets to stimulate the economy in a recession it is easily done.

The argument against loosening the limits seems to be the banks will lose the run of themselves and we'll end up footing the bill again.

But the corollary of that is to keep things as they are which has resulted in the tax payer already having far too much exposure to property market risk, and it is increasing all the time.

You cannot afford a home? We will ramp up help to buy. You still cannot afford a home? We will buy some of the equity for you.

Meanwhile this is pushing up prices making homes less affordable for the average punter, rents increasing, HAP and social costs increasing, increasing costs to taxpayer, hotel bills increasing, more HTB needed, more shared equity needed and so on and so forth.

Where does this end?

I hear what you are saying and it is not just about the risks to the banks as a relaxing of the LTI cap or abolishing of it would see the price of housing for FTB's go through the roof as all of sudden people would have more credit to buy and there is no increase in supply.

In a market with not intervention the price of houses would have dropped to a level where they were affordable for FTB's and then grow for a few years and go bust again and it keeps going from boom to bust.

The issue is with supply and the fact that there is not enough profit for the builders to take the risk of building new houses. So you need to ask why does it cost so much and a lot of that goes back to previous conversations on development land or vacant properties not hitting the market at realistic values.

hometruths

Timing belt wrote: »

I hear what you are saying and it is not just about the risks to the banks as a relaxing of the LTI cap or abolishing of it would see the price of housing for FTB's go through the roof as all of sudden people would have more credit to buy and there is no increase in supply.

In a market with not intervention the price of houses would have dropped to a level where they were affordable for FTB's and then grow for a few years and go bust again and it keeps going from boom to bust.

The issue is with supply and the fact that there is not enough profit for the builders to take the risk of building new houses. So you need to ask why does it cost so much and a lot of that goes back to previous conversations on development land or vacant properties not hitting the market at realistic values.

It was originally suggested as the final step in a range of measures that would increase supply:

schmittel wrote: »

Clear all this overhang and then scrap CB lending limits. Allow banks to lend as much as they wish based on their risk analysis of individual borrower BUT with non recourse loans and fast tracked repos after 6 months.

We need a different approach because more of the same is clearly making the problem worse.

Timing belt

If you look at the following graphs you can see that loans for housing have been dropping steadily in Ireland since the last crash

Timing belt

schmittel wrote: »

It was originally suggested as the final step in a range of measures that would increase supply:



We need a different approach because more of the same is clearly making the problem worse.

I fully agree that a different approach is needed and think that the government missed the boat by not doing something in this budget even if it was to guarantee that they would buy houses at x amount if they were not sold to the public. This would have provided a floor and taken the risk of building out of the equation and would have got things moving on the supply front and money spent here would have been better than on the HTB & HAP schemes.

hometruths

Timing belt wrote: »

I fully agree that a different approach is needed and think that the government missed the boat by not doing something in this budget even if it was to guarantee that they would buy houses at x amount if they were not sold to the public. This would have provided a floor and taken the risk of building out of the equation and would have got things moving on the supply front and money spent here would have been better than on the HTB & HAP schemes.

I certainly don't think the government should be putting a floor on prices!

As you're aware, my view is there is plenty of existing stock currently under utilised but potentially available. They should concentrate on getting that into circulation.

Timing belt

schmittel wrote: »

I certainly don't think the government should be putting a floor on prices!

As you're aware, my view is there is plenty of existing stock currently under utilised but potentially available. They should concentrate on getting that into circulation.

That is where we differ personally I think we need new housing stock and lots of it people either buy it or the government use it instead of wasting money on HAP. The increase in supply of new houses will cause a drop in the second hand market making it more affordable and reduce the rent.

Once the supply is there then some of the things you have suggest should be implement. I suppose the difference between our outlook is our opinions on the availability of housing stock.

Wanderer78

Great debate folks, there's some extremely knowledgeable contributers here, thank you.

I believe the Italian banks are not looking too healthy, particularly their public banks. On the debate concerning ownership of banks, some believe commercial banks could be done away with in the future, and we ll all just have direct access to central banks, I'm unsure about this, I'd imagine trying to unwind our banking sector would simply be too complex, and potentially dangerous. Even though public banks can become very problematic, such as the Italians, I still advocate for them, I think they can be a great addition to a countries financial sector arsonal, but they need to be carefully run, I don’t advocate for full public ownership though, of the sector, I believe we still need a private sector option, and changing ownership to a full public system would probably be highly problematic.

The Belly

Wanderer78 wrote: »

Great debate folks, there's some extremely knowledgeable contributers here, thank you.

I believe the Italian banks are not looking too healthy, particularly their public banks. On the debate concerning ownership of banks, some believe commercial banks could be done away with in the future, and we ll all just have direct access to central banks, I'm unsure about this, I'd imagine trying to unwind our banking sector would simply be too complex, and potentially dangerous. Even though public banks can become very problematic, such as the Italians, I still advocate for them, I think they can be a great addition to a countries financial sector arsonal, but they need to be carefully run, I don’t advocate for full public ownership though, of the sector, I believe we still need a private sector option, and changing ownership to a full public system would probably be highly problematic.

You have to separate speculate investments which I have no probs with from core society needs.