Central Bank of Trinidad and Tobago Examining the Trinidad and Tobago Banking Sector s Exposure to the Local Housing Market Avinash Ramlogan and Wendy Ho Sing Presented at CCMF Conference, 2014 19th November, 2014 The views expressed are those of the authors and not necessarily those of the Central Bank of Trinidad and Tobago 1
This linkage can be seen as a two-way street 2
Energy-Dependent Trinidad and Tobago Energy accounts for about 50 per cent of total GDP and 80 per cent of total exports (Average 2003 2013) Vulnerable of shocks in international energy prices These shocks impact rest of economy Including the housing market and banking sector. 3
Goal of Paper To assess the extent to which the banking sector in Trinidad and Tobago is exposed to the local housing market. The analysis covers the period Q2:1995 Q2:2014 Macro perspective Is there evidence of over-exposure to the local housing market? 4
1. Why this Paper? Prolonged ultra-low interest rate environment Persistent growth in mortgage lending Recent recovery of local house prices. Dearth of literature on local housing market. 5
Outline of Paper 1. Introduction 2. Why this Study? 3. Literature Review 4. Structure: Housing Market and Related Financing System 5. Developments in the Housing Market and bank credit 6. An Assessment Exposures 7. Conclusion and Recommendation 6
2. Literature Review Micro Perspective Use of detailed data -Models of real estate loan delinquency E.g. Quigley et al(2000) Avery et al (1996) Archer (1998) Hilaire et al (2011) Macro Perspective Aggregate data e.g. Boom-bust housing cycles E.g. IMF (2003) BIS (2001) Claessens et al (2008b) Burnside et al (2011) Auguste et al (2011) Hofmann 2001 Bordo and Jeanne 2002 Reinhart and Rogoff 2009 Macro-Micro Perspective Attempt to empirically link housing market developments to bank distress E.g. Igan and Pinheiro (2009) 7
3. Public policy and housing supply Public Sector plays a key role in the supply of housing as well as in the financing of housing in Trinidad and Tobago 8
3. Robust financing supply and sources in place Private Sector Commercial Banks Trust and Mortgage Companies Life Insurance Companies Public Sector Trinidad and Tobago Mortgage Finance Company Home Mortgage Bank Credit Unions Pension Plans 9
3. Market Share by type of Institution 2003 2013 N.I.B.; 3.7% H.D.C.; 7.3% Pension Funds; 5.7% Trustee Funds; 4.0% Insurance Co.; 8.7% T.T.M.F. HMB and Building Assoc.; 17.9% Com Bks; 8.0% Trust & Mort.; 47.1% Fin & Mer Bks; 0.6% H.D.C.; 1.3% Pension Funds; 0.9% Trustee Funds; 2.2% Fin & Mer Bks; 0.1% Insurance Co.; 7.7% Trust & Mort.; 0.8% N.I.B.; 0.2% T.T.M.F. HMB and Building Assoc.; 17.8% Com Bks; 69.1% Source: Central Bank of Trinidad and Tobago, Annual Reports, Author s Estimates 10
4. Developments in the Housing Market and Related Financing Activities 11
Oil Price US$ Median House Price (TT$000s) 4.1 Trends in House Prices WTI Crude Oil Price vs. Median House Price / In terms of 2003 constant prices/ 90 80 70 60 WTI Crude Oil Price (Left Axis) House Price (Right Axis) 1,400 1,200 1,000 50 800 40 600 30 20 10 400 200 0 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Central Bank of Trinidad and Tobago s Handbook of Key Economic Statistics, AREA and authors calculations. Note: The real crude oil price was found by deflating the nominal crude oil price using US Consumer Price Index. The real house price was calculated by deflating the nominal median estimated price by the TT Retail Price Index (core). The base year was 2003 for both indices. - 12
4.2 Trends in Home Ownership and Housing Affordability Country Comparison: Home Ownership Rates Country Home Ownership Rate (%) Date of Information Developed Countries United Kingdom 66.7 2012 Canada 69.0 2011 United States 64.7 Q2:2014 Spain 78.9 2012 Developing Countries: Caribbean Bahamas 57.7 2001 Jamaica 63.0 2008 Suriname 62.4 1999 Trinidad and Tobago 78.7 2011 Developing Countries: Latin America Argentina 72.2 2003 Brazil 74.4 2008 Chile 71.3 2003 Uruguay 67.0 2004 Sources: Distribution of population by tenure status, type of household by income group, Eurostat; 2011 National Housing Survey: Homeownership and Shelter Costs in Canada, Statistics Canada; Homeownership rates - Census.gov, Jamaican Survey of Living Conditions 2008; Survey Results: Brazil Stays Strong in the face of the Crisis, World Bank; Encuesta Continua de Hogares,Instituto National de Estadistica; CACEN, Ministerio de Planificación; Encuesta Permanente de Hogares, Instituto Nacional de Estadística y Censos; Population and Housing Census, 2000 and 2011, Trinidad and Tobago Central Statistical Office 13
Number of Years 20 18 16 14 12 10 8 6 4 2-4.2 Trends in Home Ownership and Housing Affordability (Cont d) Housing Affordability and Compensation of Employees to GDP Ratios 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 90 80 70 60 50 40 30 Per cent House Price/Average Annual Wage COE/NGDP (Right Axis) Source: Trinidad and Tobago Central Statistical Office, Handbook of Key Economic Statistics, authors estimates. Note: Affordability Ratio = Median House Price/Average Annual Compensation per employee (Non-energy sector). COE/NGDP Ratio = Compensation of Employees in Non-Energy Sector/Non-energy GDP 14
Per cent 4.3 Trends in Lending Consolidated Financial System: Growth in Consumer, Business and Mortgage Credit /Per Cent/ 30 25 20 15 10 5 0 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13-5 -10-15 Business Credit Consumer Credit Real Estate Mortgages Source: Central Bank of Trinidad and Tobago 15
Value of Approvals ($Mns) Number of Approvals Value of Approvals ($000s) Number of Approvals 4.3 Trends in Lending (Cont d) Banking Sector: Residential and Commercial Mortgage Approvals 3,500 3,000 2,500 2,000 1,500 1,000 500 Residential Approvals Value (TT$Mns) Number 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 1,600 1,400 1,200 1,000 800 600 400 200 Value (TT$Mn) Number Commercial Approvals 350 300 250 200 150 100 50 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0 Source: Central Bank of Trinidad and Tobago 16
TT$000s TT$000s 4.3 Trends in Lending (Cont d) Consolidated Banking System: Average Mortgage Size 1,000 900 800 700 Average Value of Residential Mortgages TT$000s 5,000 4,500 4,000 3,500 Average Value of Commercial Mortgage TT$000s 600 3,000 500 2,500 400 2,000 300 1,500 200 1,000 100 500-2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Central Bank of Trinidad and Tobago 17
Per cent 4.3 Trends in Lending (Cont d) 20.0 Commercial Banks: Nominal and Real Prime Lending Rate /Per cent Per Annum/ 15.0 10.0 5.0 - (5.0) (10.0) 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Real Prime Nominal Prime Real 3-Month Source: Central Bank of Trinidad and Tobago 18
Per cent 4.3 Trends in Lending (Cont d) 90 80 70 60 50 40 30 20 10 0 Consolidated Banking System Implicit Residential Mortgage Loan-to-Value Ratios Per cent 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14 Source: Author s Calculations Note: The implicit loan-to-value ratio was calculated as the average value of the mortgage divided by the estimate median house price. 19
5. An Assessment of Housing and Real Estate-Related Exposure 20
TT$ Millions 5.2 Trends in Exposure 21,000 Banking Sector: Stock of Real Estate-Related loans /TT$ Millions/ 18,000 15,000 12,000 9,000 6,000 3,000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14 Construction Bridging Finance Real Estate Sector Total Real Estate Mortgages Source: Central Bank of Trinidad and Tobago. 21
Per cent Per cent Per cent Per cent Banking Sector: Indicators of Real Estate Exposure 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 - Chart 5.2.2a: Stock of Mortgages and Real Estate-Related Loans As a Share of Total Loans Real estate Mortgages/Total (Net) Loans) Real Estate related-lending/total (Net) Loans 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14 /Per cent/ 120.0 100.0 80.0 60.0 40.0 20.0 - Chart 5.2.2b: Stock of Mortgages and Real Estate-Related Loans As a Share of Capital Real Estate Mortgages/Capital Real Estate Related-lending/Capital 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 Chart 5.2.2c: Stock of Mortgages and Real Estate-Related Loans As a Share of Total Assets Real estate Mortgages /Total Assets Real estate Related lending/total Assets 16.5 16.0 15.5 15.0 14.5 14.0 13.5 13.0 12.5 Chart 5.2.2d: Ratio of Total Capital to Total Assets Total Capital/Total Assets - 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14 12.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 22 Jun-14
TT$ Millions 5.2 Trends in Exposure (Cont d) 25,000 Banking Sector: Stock of Real Estate-Related loans /TT$ Millions/ 20,000 15,000 10,000 5,000-2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14 Total Commercial Banks Real Estate-Related Loans Total NFIs Real Estate Related Loans Source: Central Bank of Trinidad and Tobago 23
Per cent Per cent 5.2 Trends in Exposure (Cont d) Stock of Mortgages and Real Estate-Related Loans As a Share of Total Loans /Per cent/ 45 40 Chart 5.2.4a Commercial Banks Total Real estate-related loans Real estate mortgages 60.0 50.0 Chart 5.2.4b: Non-Bank FInancial Institutions Real estate Mortgages/Total (Net) Loans) Real Estate related-lending/total (Net) Loans 35 30 40.0 25 20 15 30.0 20.0 10 5 10.0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14-2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14 Source: Central Bank of Trinidad and Tobago 24
Per cent Per cent 5.2 Trends in Exposure (Cont d) Stock of Mortgages and Real Estate Related Loans As a Share of Total Capital /Per cent/ 140 120 Chart 5.2.5a: Commercial Banks: 140.0 120.0 Chart 4.2.5b: Non-Bank FInancial Institutions Real Estate Mortgages/Capital Real Estate Related-lending/Capital 100 100.0 80 80.0 60 60.0 40 20 Total Real estate-related loans Real Estate Mortgages 40.0 20.0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14-2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14 Source: Central Bank of Trinidad and Tobago 25
Per cent Per cent 5.2 Trends in Exposure (Cont d) Stock of Mortgages and Real Estate-Related Loans As a share of Total Assets /Per cent/ 18 Chart 5.2.6a: Commercial Banks 25.0 Chart 5.2.6b: Non-Bank Financial Institutions 16 14 12 10 20.0 15.0 Real estate Mortgages /Total Assets Real estate Related lending/total Assets 8 6 4 2 0 Total Real estate-related Loans Real Estate Mortgages 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14 10.0 5.0-2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14 Source: Central Bank of Trinidad and Tobago 26
Per cent 5.2 Trends in Exposure (Cont d) Commercial Banks Real Estate Mortgages Outstanding Share of Residential vs. Commercial /Per cent/ 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Commercial Residential 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14 Source: Central Bank of Trinidad and Tobago 27
Per cent 5.2 Trends in Exposure (Cont d) 7.0 6.0 5.0 4.0 3.0 2.0 1.0 Commercial Banks: Return-on-Assets and NPL Ratios /Per cent/ 0.0 2006 2007 2008 2009 2010 2011 2012 2013 Jun-14 Real Estate NPLs Ratio Return on assets Total NPLs Ratio Source: Central Bank of Trinidad and Tobago Notes: 1. Real Estate NPLs Ratio = Real Estate Loans past due 90 days and over divided by Total Real Estate Loans, and 2. Profit after tax divided by Average Total Assets 28
5.3 Credit Risk Stress-Testing Commercial Bank Sub-Sector Stress-Tests Results on Mortgage and Real Estate-Related Portfolios as at June-2014 /Per cent/ Shock Parameter/Increase in Non-Performing Loans 30 40 50 Pre-Shock CAR 23 23 23 Pre-Shock CAR Adjusted for under-provisioning 21.2 21.2 21.2 Decline in the CAR 2 2.6 3.2 Post-Shock CAR 19.3 18.6 18.0 Source: Central Bank of Trinidad and Tobago 29
5.4 Relationship between mortgage exposure and macroeconomic variables The empirical model is based on the following longrun relationship: XP = α + β 1.NY + β 2.R + β 3.P + ε where XP is (log) real mortgage credit relative to total credit to the private sector, NY is (log) real output, and R is the (log) real rate of interest, and P is (log) of real property price. 30
5.4 Cointegration Analysis An Analysis of the relationship between mortgage exposure and these variables (if any) is conducted using the Johansen multivariate approach to cointegration Sample period Q2:1995 Q2:2014 All the variables we tested for unit roots and found to be I(1) at their levels but I(0) after differencing once. 31
5.4 Johansen Test Results H 0 :rank = p 0.05 Critical Max Eigenvalue 0.05 Critical Trace Statistic Value Statistic Value p 0 49.44* 47.86 21.69 27.58 p 1 27.75 29.79 18.38 21.13 p 2 09.36 15.49 07.14 14.26 p 3 02.23 3.84 02.23 03.84 Note: * Existence of cointegration at 5% significance level. 32
5.4 Long-run Relationship Models (Lags) Long Run Equation Loading Coefficient (α) Model (2) XP = 0.34NY 0.91R 1.34P + 20.85 (1.98) (3.42) (5.23) -0.08 (-3.57) The table displays the test statistic of the Johansen trace statistic tests for cointegration, the identified long-run relationship and the loading coefficient (α) in the VECM equation for bank asset exposure; lags () indicate the lag-order of the underlying VAR. XP represents the log of banking sector mortgage asset exposure, Y the log of index of domestic production (non-energy), R is the log of real interest rate and, P the log of the real house price. The long-run and loading coefficient is significant at least at the 5 % level. 33
5.4 Short-Run Dynamics 34
6. Conclusions Exposure to the local housing market in the banking sector trended upwards in recent years. Capital adequacy ratio (CAR) for the commercial bank sub-sector, is 23 per cent (Adjusted CAR 21.2 per cent) as at June 2014. Stress-tests show a fall in the CAR of 3.2 per cent to 18 per cent if house prices collapse by 50 per cent No major risks, at least over the short-term 35
6. Conclusions (Cont d) House Prices (in real terms) have been appreciating in the local market. The price as at June-2014 is 10 per cent below the peak of 2006, and 22.9 per cent below the peak of 1979 Low mortgage rates stimulating mortgage demand and exposure to the housing market rising 36
6. Recommendations Develop a comprehensive database to monitor and assess housing and real estate related activities. Introduce a housing and real estate stresstesting guideline. 37
End of Presentation 38