Developing Housing Finance Systems Veronica Cacdac Warnock IIMB-IMF Conference on Housing Markets, Financial Stability and Growth December 11, 2014 Based on Warnock V and Warnock F (2012). Developing Housing Finance Systems. Reserve Bank of Australia 2012 Conference Volume.
Motivation Housing Household s largest expense and most important asset Sector impacts health and economic growth Need participation of private sector to housing problems A complex good in a complex system Housing (rental and owned) Housing Market Housing Finance Market Land Use Regulations / Urban Planning Our focus: One pillar of a well-functioning housing sector, the market for housing finance (and the infrastructure that supports it).
Motivation Housing finance in the global financial crisis Prominent role in the run-up to the crisis as well as in the aftermath Should housing finance be restricted in the name of financial stability? In most countries around the world the problem is not too much housing finance, but too little. Most countries have severe housing deficits. The provision of housing finance is, in many cases, a binding constraint that must be addressed for the sector to sustainably provide adequate housing. Housing is a major purchase 4 to 8 times annual income that is affordable only when payments can be spread out over time. In this paper, a follow-up of Warnock and Warnock (2008 JHE), we examine factors that support the development of housing finance systems in an analysis of 61 countries.
Housing Deficits in Latin America and the Caribbean HOUSING DEFICIT Count Total Housing Year Source Argentina 3,500,000 2008 Titularizadora Colombiana (2010) Brazil 5,572,313 2008 Martins et al (2010) Chile 639,000 2008 Titularizadora Colombiana (2010) Colombia 3,828,055 10,578,899 2005 DANE Censo General (2005) Costa Rica 182,265 1,257,000 2009 Sancho et al (2010) El Salvador 540,499 1,406,485 2008 Sancho et al (2010) Guatemala 1,500,000 2010 Cuevas et all (2010) Mexico* 6,000,000 2009 Titularizadora Colombiana (2010) Panama 125,014 862,586 2009 Sancho et al (2010) Peru 1,500,000 2009 Titularizadora Colombiana (2010) Trinidad and Tobago** 40,000 2006 UN-Habitat (2006) * The government estimate for the 2008-2013 period was 7 million units (Lopez-Silva et al (2011)). **40,000 for the 2001-2006 period Source: Housing Finance in LAC: What is Holding it Back? Research Program at IDB.
Jan-2002 May-2002 Sep-2002 Jan-2003 May-2003 Sep-2003 Jan-2004 May-2004 Sep-2004 Jan-2005 May-2005 Sep-2005 Jan-2006 May-2006 Sep-2006 Jan-2007 May-2007 Sep-2007 Jan-2008 May-2008 Sep-2008 R$ Billions Motivation: Are these related? Mortgage/GDP ratio of only 3% Private Home Loans: Required and Actual 60 55 50 45 40 35 30 25 20 15 Net Requirements Total Housing Loans
A Cross-Country Study of Housing Finance Systems What are the fundamental determinants of the size of a country s housing finance system? Note: The analysis is more long term (i.e., of fundamental factors) rather than about how mortgage markets vary with the business cycle.
Pakistan Argentina Russia Indonesia Venezuela Bangladesh Kenya Ecuador Brazil Peru Colombia Ghana Dominican Republic Philippines Turkey Romania India Guatemala Mexico El Salvador Slovenia Bolivia Bulgaria China Slovakia Costa Rica Hungary Poland Chile Thailand Czech Republic Panama Japan Italy South Korea Austria Malaysia South Africa Greece Singapore Latvia France Hong Kong SAR Taiwan, China Luxembourg Belgium Estonia Germany Finland Canada Spain Portugal Norway Australia United States Sweden United Kingdom New Zealand Ireland Switzerland Netherlands Denmark Great variation in size of housing finance systems 100 90 80 70 Mortgage Debt Outstanding as percent of GDP 60 50 40 30 20 10 0 Source: 2009 Data compiled by authors.
Great variation in size of housing finance systems, even within regions.
Fundamental Ingredients of a Well-Functioning Housing Finance System Mortgage markets support the provision of housing by channeling savers surplus funds to households who need loans to finance the purchase of a home. How well mortgage finance systems function relates to a number of factors including: 1. macroeconomic stability 2. availability of funds for lending 3. ability of lenders to mitigate information asymmetries and credit risk 4. the legal-regulatory infrastructure
Fundamental Ingredients of a Well-Functioning Housing Finance System Mortgage markets support the provision of housing by channeling savers surplus funds to households who need loans to finance the purchase of a home. How well mortgage finance systems function relates to a number of factors including: 1. macroeconomic stability: Stability lower interest rates affordability Stable rates lenders more willing to offer fixed rates Otherwise, lenders more willing to offer variable-rate mortgages which shift the interest rate risk to borrowers What happens to households who borrowed at variable rates when the secular decline in inflation reverses?
Fundamental Ingredients of a Well-Functioning Housing Finance System Mortgage markets support the provision of housing by channeling savers surplus funds to households who need loans to finance the purchase of a home. How well mortgage finance systems function relates to a number of factors including: 1. macroeconomic stability 2. availability of funds for lending: The basic financing problem in the mortgage market is how to mobilize funding sources to satisfy demand for home loans that are necessarily long term. Short-term deposits (if long-term fixed rate mortgages bank has maturity mismatch, if variable rate mortgages household has interest rate risk) Contractual savings schemes Housing provident funds Covered bonds Mortgage Securitization
Fundamental Ingredients of a Housing Finance System Mortgage markets support the provision of housing by channeling savers surplus funds to households who need loans to finance the purchase of a home. How well mortgage finance systems function relates to a number of factors including: 1. macroeconomic stability 2. availability of funds for lending 3. ability of lenders to mitigate information asymmetries & default risk: To assess creditworthiness of borrowers To assess value of property To reduce default risk by requiring property to be put up as collateral
Fundamental Ingredients of a Housing Finance System Mortgage markets support the provision of housing by channeling savers surplus funds to households who need loans to finance the purchase of a home. How well mortgage finance systems function relates to a number of factors including: 1. macroeconomic stability 2. availability of funds for lending 3. ability of lenders to mitigate information asymmetries, and interest-rate and credit risks 4. legal-regulatory infrastructure Collateral laws Ease of foreclosure Property registration
Fundamental Ingredients of a Housing Finance System Mortgage markets support the provision of housing by channeling savers surplus funds to households who need loans to finance the purchase of a home. How well mortgage finance systems function relates to a number of factors including: 1. macroeconomic stability 2. availability of funds for lending 3. ability of lenders to mitigate information asymmetries and credit risks 4. legal-regulatory infrastructure
Empirical Analysis Housing Finance Demand & Supply Framework Demand for Housing Finance A Derived Demand Housing demand is influenced by income levels and rate of household formation. Transaction costs Supply of Housing Finance Willingness and ability of lenders to invest funds in housing Information on the borrower Ability to determine value of property Ability to secure collateral in case of default Macroeconomic stability Sources of funds: deposits, mortgage bonds and securitization
Empirical Analysis Housing Finance Demand & Supply Framework Demand for Housing Finance A Derived Demand Housing demand is influenced by income levels and rate of household formation. * Transaction costs * Supply of Housing Finance Willingness and ability of lenders to invest funds in housing Information on the borrower * Ability to determine value of property Ability to secure collateral in case of default * Macroeconomic stability * * INCLUDED IN OUR EMPIRICAL ANALYSIS Sources of funds: deposits, mortgage bonds and securitization
Empirical Model Size of Mortgage Market Fundamental Explanatory Variables Credit Information Legal Rights for Borrowers and Lenders Ease of Registering Property Inflation Volatility IFC/World Bank Doing Business database description and chart Control Variable Country Size
Most countries score well (either 5 or 6) on the depth of credit information.
Across countries, great variation in the strength of collateral and bankruptcy laws.
Across countries, great variation in the ease of property registration.
While global inflation surged in 2007 (prior to the crisis), inflation volatility is low for most countries in our sample.
Same Information as Regional Averages
Regression Results: All countries (column 1) Across 61 countries, those with stronger legal rights (bankruptcy/ collateral laws), greater ease in registering property, and less inflation volatility have larger mortgage markets.
Regression Results: EMEs (column 2) In EMEs, similar results strong legal rights and low inflation volatility associated with larger mortgage markets but ease in registering property is marginally insignificant and depth of credit information system matters.
Regression Results: AEs (column 3) In AEs, where legal rights are high and inflation volatility is low, deviations in the size of mortgage markets are associated with variation in the costs of registering property.
Additional Regression Results: Private Credit Private Credit and Mortgage Debt are clearly related. Columns 1-3: Many factors impact the provision of housing finance above and beyond their effects on private credit. Col. 4: Mortgage market size is associated with variation in the costs of registering property, the volatility of collateral (i.e., house price volatility), and instrumented private credit.
Basic Findings of Empirical Model examining the fundamental ingredients of HF systems We show empirically that countries with stronger legal rights, better provision of credit information, greater ease in registering property, and a less volatile macroeconomic environment have larger housing finance systems. This supports the policy prescription of establishing needed institutions and systems to enable well-functioning housing finance systems.
Summary Key Question: How can governments enable the private sector to play a more important role in expanding access to housing finance while maintaining financial stability? In general, how well mortgage finance systems function relates to a number of factors including: macroeconomic stability availability of funds for lending ability of lenders to mitigate information asymmetries and credit, interest rate, and liquidity risks the legal-regulatory infrastructure From our cross-country study, to promote the development of housing finance systems, countries should strengthen legal rights for borrowers and lenders (i.e., bankruptcy and collateral laws) enable (mandate?) better provision of credit information Improve the functioning of the housing market by making registering property less onerous maintain a stable macroeconomic environment.
Thank you.