1
Introducing Housing Finance in Emerging Markets
Global Findings & Outlook for Turkey
IFC & Dunya Housing Finance Conference December 3-4, 2007
Istanbul
Hans-Joachim DübelFinpolconsult.de, Berlin
2Sources: World Bank, Finpolconsult.
0%
5%
10%
15%
20%
25%
30%
35%
40%
Malays
ia
South Africa
Thailan
dKorea Chile
Mexico
Brazil
Colombia
Estonia
ChinaCze
ch
Poland
Hungary
Indonesia
India
Turke
y
Russia
Ukraine
2000
2005
LatecomerEarly birds
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Macroeconomic crisis› Indexed instruments may not
help› Crowding out by gov
High real interest rates › Legal reform backlog› Weak institutions› Directed credit systems
(subsidies/regulations) Volatile funding sources
› International bank financing, rather than long-term portfolio/direct investment
› Immature domestic capital markets
Successful reforms ~ 95-05
0100020003000400050006000700080009000
10000
0% 5% 10% 15%Housing Loan to GDP Ratio
Real
Per
Cap
ita G
DP
Mexico Colombia
Brazil Chile
Housing loan to GDP and per capita GDP trajectories in Latin American markets
Sources: World Bank, Finpolconsult.
4
Market rates, not directed rationing)
Sufficient domestic savings volume (Asia)
Credible savings instruments› Long-term bonds› Long-term
deposits Credible
intermediaries
Real interest rates and housing loan to GDP ratio ~ 2005
Sources: World Bank, IMF, Finpolconsult.
5
With stabilization, competition, transparency› Maturities, LTVs increase› Shortening time scale.
LTV increase through› Bank self-insurance› Mortgage insurers› Contract savings/
piggybacks Maturity increase through
› Capital markets› Intermediary ALM
Public policy role?› Interest deduction raises
leverage› Rather proper regulation
Loan maturities and loan-to-value ratios in selected emerging markets
Sources: Merrill Lynch, Finpolconsult.
6
Liquidity 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 floating-rate loans (Basel II deficiencies)
Ideally incentives for fixed-rate lending as low credit risk product
40%
60%
80%
100%
120%
140%
160%
180%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
ChileMalaysiaThailandMexicoBrazil
Ratio of private sector loans to liquid liabilities in selected emerging markets
Sources: IMF, Finpolconsult.
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Commercial banks with access barriers, institutional constraints› Some charter competition by
finance companies Diversify from commercial
bank/ developer origination› Finance companies› Brokers› Correspondents
Requires regulation/consumer protection framework› Minimum standards for
mortgage origination› Minimum risk management
quality
0%
5%
10%
15%
20%
25%
30%
35%
India
Mexico
Poland
ChileKorea
Thailan
d
Ukraine
South Africa
Colombia
Share of non-bank, non-insurance distribution in emerging markets ~2005
Sources: Merrill Lynch, Finpolconsult.
8
Per capita GDP and housing loan to GDP ratio ~ 2005
Sources: World Bank, Finpolconsult.
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Supporting factors:› Growth› Migration› Urbanization› Upgrading› Cohabitation
/household division
Repetition of US debacle unlikely in EMs
Household consumption to GDP ratio and housing loan to GDP ratio ~2005
Sources: United Nations, World Bank, Finpolconsult.
10
Causes for lending/price cycles
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.
16%
24%
32%
40%
0% 5% 10% 15% 20%Housing Loan to GDP Ratio
Gro
ss F
ixed
Inve
stm
ent t
o G
DP
Rat
io
20051987
Investment and housing lending in Thailand 1987-2005
Sources: United Nations, World Bank, Finpolconsult.
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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: › Initial adjustment (Mumbai)› Bubbles (Shanghai, Kiev)› Bubbles occur without housing
finance (Moscow)
Mumbai property prices and house price income relation 1995-2005
Source: Parekh.
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0
2
4
6
8
10
12
14
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Hou
se-p
rice-
to-m
inim
um s
alar
y ra
tio
Middle income housingEconomic housingSocial housing
Access to developer finance Developer focus on lower-
middle income segments› Crisis often related to
overbuilding in high-income › Mexico, Malaysia low-income
industries with public stimulus › Thailand (Brazil upcoming)
market solutions. Pitfalls:
› Mass housing loan/production subsidies may cause misallocation (vacancies, defaults)
› Mass housing planning/agency problems (land hoarding)
Mexico – house price to minimum salary ratio in different market segments
Source: BBVA.
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0%
5%
10%
15%
20%
25%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Mor
tgag
es a
s %
of G
DP
Turkey Scenario ATurkey Scenario BGreece 1992-2002Italy 1992-2002
Growth, demand pressure, supply constraints drive prices, lending volumes.
Loan instrument reduces growth› Turkey: fixed, short maturities› Greece: float, long maturities
Funding/hedging strategies› Current: Euro bonds/bank lines
or deposits plus swaps› Future: domestic bonds/deposit
mix Distribution strategies
› Non-bank so far limited to developers
› Excessive regional focus (means price risk)
Turkey scenarios, Greece & Italy historic development compared
Source: Guerlesel, EMF, Finpolconsult.
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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 monitoringInvestment/supply-side policies Zoning/infrastructure policies responsive to demand Liberalize land market, reform of mass housing policy framework Unauthorized housing issue, building standards
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Hans-Joachim (Achim) Dübel
Finpolconsult.de
www.finpolconsult.de
