The Financial Crisis, the Housing Market and the Households

Nordic conference at Hotel Nordica, Reykjavik, Iceland November 26th 2009.

REPORT

The Nordic conference “The Financial Crisis, the Housing Market and the Households” was held in Reykjavik, Iceland, 26th of November 2009. The conference was held by Icelandic authorities. All the Nordic countries had their representatives at the conference.

In his welcoming speech Minister of Social Affairs and Social Security, Árni Páll Árnason, talked about the importance of meeting and discussing the housing situation in the Nordic countries and learning from one another. The housing market is different in Iceland in comparison to the other Nordic countries. Most Icelandic families own their houses. The financial crisis has affected the households significantly. Together with the inflation the banks came into the housing market and gave almost unlimited amount of housing loans. These transactions became the reason for the housing bubble in Iceland. This bubble has now burst with serious consequences for many families. Too many flats and houses have been built in recent years. Today these houses are abandoned. The Icelandic government is going to change the housing policy fundamentally and give people the possibility of renting houses rather than owning them. (recording in Icelandic)

Moderator: TV reporter Þóra Arnórsdóttir.

Invitation letter (click here)
Programme (click here)
Programme information (click here)
Report (click here)
Fact sheet (click here)

 

Programme:

 

The Financial Crisis and the Housing Sector: Consequences for Society, the Family and Home-ownership

 

Gwilym Pryce, Professor of Urban Economics and Social Statistics, is currently Chair of the Cities and Regions Research Group and the Urban Resilience Cluster at University of Glasgow, and is Founding Chair of the Scottish Housing Economics and Finance Research Network.

Pryce talked about consequences of the financial crisis for households, house prices, construction, transactions, unemployment and repossessions. The consequences have been significant in the UK, with unemployment rising from 5% to 8% within the space of a year. At the same time, availability of credit has fallen rapidly, and interest rates on new mortgages have risen, relative to base rates. The combination of falling incomes and teaser rate mortgage periods coming to an end, have led to a substantial rise in the number of families facing severe repayment difficulties. This has led to a rise in mortgage repossessions, which would have been significantly worse if it were not for government intervention in the mortgage sector and a move towards greater forbearance by many of the major lenders (likely due to a combination of low house prices—which implies less profit to be made from resale—and the state bail-out of some of the biggest mortgage companies). Nevertheless, thousands of families have been forced to move out of their homes, and research suggests that this can have significant social and health impacts due to the trauma of repossession and relocation. Children are particularly vulnerable. There are also implications for neighborhood decline when repossessions are spatially clustered. Unplanned, involuntary moves of this kind could have longer term effects, such as reducing the chances of high school graduation, as US research suggests. The fact that rising repossessions coincide with the economic and credit cycles may also have implications for the long-term risk-return relationship faced by different social groups. For example, if low income households are more likely to purchase a house when the employment sector is booming and when there is an abundance of mortgage credit, and more likely to be repossessed during a slump, they may be entering homeownership when prices are high and leaving when prices are low. Thus, the timing of entry and exit to homeownership could affect the financial returns for different income groups over the course of a lifetime. Yet this tends not to be considered in studies that show housing to be a good investment. Huge swings in housing wealth may also pose a problem because returns to housing during booms may dwarf the returns from employment and other sources of investment, distorting work incentives and saving decisions. Also, negative housing wealth (“negative equity”) during housing market slumps may delay wider economic recovery by reducing labour mobility. A further problem with housing wealth accumulation is that a certain proportion of the population are likely to be excluded due to the incompatibility of short-term employment contracts (which tend to characterize low-skilled work) and the long-term debt commitment required by mortgage finance. So policies that promote homeownership, by providing tax breaks on real estate capital gains, for example, will disadvantage renters and those who cannot afford to access homeownership. At the same time, the social benefits of homeownerships remain unproven, he said.

Pryce raised the question of whether banks need to fundamentally change their operating ethos, rather than simply be subject to stricter regulation. A shift is needed towards a more ethical approach, one that takes into account the wider social impacts of lending activities, he argued. In the long run, lenders themselves will benefit from such a strategy since it will bring greater stability—the subprime crisis is a powerful example of how unethical lending can bring financial institutions, and even the global financial system, to its knees. Not all lenders have operated unethically. And if one lender can operate ethically so can all lenders. Pryce thinks that banks are already changing the way they do things. “Since the crisis, there has been a noticeable shift to greater forbearance towards borrowers facing repayment difficulties,” he says. An important component of more ethical lending is transparency. Pryce argues that freedom of information is crucial to financial accountability, and all major lenders should be required to publish statistics on the number and location of repossessions, their forbearance policy, and the characteristics of new loans. Given that the impacts of credit crises are often profoundly spatial, policy makers and researchers should, at minimum, be able to track the financial exposure of localities over time.

Pryce also raised the question of whether a housing tenure system dominated by homeownership was the most appropriate for coping with future risks facing European society. For example, most climate models predict significant temperature rises and major changes in weather patterns over the next 50 to 100 years. Rising sea levels, increased storminess and more intense bouts of precipitation will combine to significantly increase flood risk for many major European cities by 2080. We have already seen how a crisis in one sector of the housing market (US subprime) can have a domino effect that spreads throughout the entire financial and macro economic system.  Similarly, given that real estate is so highly leveraged in many European countries, we should not overlook the risks posed by climate change for European housing and economic systems. A homeownership-based system is particularly problematic because of the lack of diversification it implies for individual households, many of whom will have placed almost their entire financial worth in the value of their house. They have, in effect, put all their eggs in one basket. This means that the risk of climate change is not well diversified in a housing system dominated by owner-occupancy.  A large private rented sector with institutional landlords, on the other hand, can have higher rates of diversification because landlords can own many properties across many areas, offsetting exposures in one area by owning properties in another. If households want to invest in housing, they can simply buy shares in a variety of property companies and further limit their exposure by including other sources of investment in their portfolio.  (slides)

For technical reasons, only second half of Pryce's lecture is available here: (audio)

 

The Bank Collapse, the Housing Policy and the Future

Jón Rúnar Sveinsson, sociologist and independent researcher at the Reykjavik Academy.

Jón Rúnar Sveinsson explained the events in Iceland in the autumn of 2008 and the winter of 2008-2009 when Iceland was suddenly in severe financial crisis as a consequence of the collapse of three private banks. Iceland experienced turbulent times both politically and financially with a negative impact on the housing market and the families. The most problematic situation is in the Reykjavik area. Families and individuals are unemployed and cannot keep the ownership of their homes because of the heavy loan burden. They are migrating because of the problematic situation. 90% of Icelandic families own their homes/houses. Almost one third of them has more debt than the worth of their houses. Many of them will probably lose their houses. Sveinsson wonders if the development in Iceland will change the housing system and that home-ownership will not be as general as it has been until now. He thinks that the desire to own your home will be reduced. The housing crisis, he states, calls for a new policy from the public authorities. (audio) (slides)

 

 

Households and Housing Markets in Financial Crises: The Icelandic Version

Þorvarður Tjörvi Ólafsson, economist at Central Bank of Iceland.

 Iceland has the largest banking system ever to have gone through a crisis of this magnitude. Iceland has a most indebted private sector and widespread foreign currency borrowings. The shock that the Icelandic households have endured is probably bigger than in any other country. The households are more indebted than in earlier crises. The loss of household wealth will be relatively high as house prices decline. It is not just that many households are indebted in foreign currency, other households’ debts are bound to the inflation rate through indexation so their payments change according to inflation. Unemployment has been very low in Iceland through recent decades but now there has been a change. Icelandic unemployment is now above the average and is expected to stay relatively high, at least during 2010.

The Central Bank of Iceland has been assessing the extent of debt problems in the private sector and their effects. The Central Bank has been developing policies needed to limit the consequences of the crisis. The bank has collected data from the Icelandic banks, the tax authorities, Directorate of Labour etc. The data is encrypted and on an individual level. This data is unique for a country experiencing the financial crisis. The largest share of household liabilities is mortgage debt, mainly in ISK. Automobile loans in foreign currency are more widespread than housing mortgages. Housing liabilities have more than doubled for 43% of households with pure foreign currency mortgages and risen more than 50% for half of households with mixed mortgages. The impact for households with indexed ISK mortgages is less but nevertheless a third has experienced more than 30% increase in the last months.

The highest income group carries a smaller share of debt than abroad. The distribution of debt is in line with income distribution. The share of debt of higher income groups is smaller than is often the case in other countries. The pre-crisis spree of foreign currency borrowing has proven extremely costly for many Icelandic families. A large share of total debt is in the hands of very indebted households. Ólafsson says the banks were far too liberal in issuing foreign currency loans. Roughly 20% of households were in severe financial difficulties in the end of 2008. This figure will rise if no action is taken.

Ólafsson believes that a third of home owners will be in serious financial problems in the coming years as nominal house prices continue to fall. Household debt restructuring has begun. The scope of financial distress will be determined by unemployment and the success of debt restructuring. According to Ólafsson, the key element is not to get into similar situation like Finland in the beginning of the 1990s with high unemployment. (audio) (slides)

 

 

The Norwegian Housing Market – Heading towards a Bubble?

Chief economist at Nordea/kreditkassen, Steinar Juel.

Juel explained the structure of the housing market and housing loans in Norway. The difference between Iceland and Norway is big. There was a housing crash leading to banking crisis in the late 1980s and the beginning of 1990s. The house prices then declined strongly. The crisis was a result of bad banking, bad policy and bad luck after a liberalization of the banking market. Norwegians own their houses in 63% of cases, 14% live in and hold shares in housing co-operatives and 23% are renting an apartment. There are no price regulations on rents, and houses and apartments may be freely sold, including shares in housing co-operatives. The Norwegian tax system favours home ownership.

The banks are the main providers of home mortgages. Bank owned mortgage institution have grown in importance. 93% of the households’ debts have a flexible interest rate fixed for less than 12 months.

The housing development is an important part of the Norwegian economy. It is wrong to say it was a housing crisis or financial crisis in Norway in 2009. There was an acute liquidity crisis for banks when the Lehman Brothers crashed in September 2008. But the Norwegian banks had any toxic assets. The Norwegians still remember the crisis in 1987-1993. The knowledge is still remembered by the financial surveillance authorities and by key bank managers. This is one reason why the banks have been functioning quite well during the current financial crisis now. Another reason was that the Norwegian economy experienced a relatively mild recession compared to most other countries. But Juel admits that the banks became more careful after the fall of Lehman Brothers. Norwegian banks experienced major losses on lending in the Baltic countries, but the size of their exposure here was limited.

The growth in mortgage lending has declined in Norway, mainly because of reduced demand, but the banking system and housing market are functioning normally. But Norwegians have among the highest debt relative to income in the world. This makes the households more vulnerable, especially when most of them have floating rates on the debt. According to Juel the Central Bank of Norway would like to see a larger share of the mortgages to have fixed interest rate. The housing prices went down somewhat in Norway in 2008 but today these prices have risen again and are higher than that last price peak which was in in 2007. House prices are still rising. The house prices in Norway are elevated, but there is not yet a housing bubble. (audio) (slides)

 

 

 

 

 

 

 

 

 

 

 

Danish Crisis Response and its Effects on the Housing Market

Chief economist Jakob Legård Jakobsen, Nykredit koncernen.

Jakobsen gives an overview of the Danish crisis response and the effects on the households and the housing market. The financial growth has collapsed in Denmark. Unemployment is rising. 150 thousand people will be unemployed in Denmark 2010 and 2011, or 5-5,5%. This is less unemployment than for instance in Germany. Denmark has a positive situation in many ways. Denmark has reacted in different way from most other countries. The authorities have been increasing the money the homes have at their disposal. The question is whether the homes are consuming enough. Danes are afraid of unemployment. Statistics show that until now the families are and have been putting money into the banks for harder times. Research indicates that next year or year 2011 people will start consumption again.
 
Denmark is heading towards more flexibility in the labour market. The Danish economy is more flexible now than ever before. Together with the banks the government is trying to find ways to help people in severe debt. People are not losing their homes.
Housing prices have fallen in Denmark, especially in the cities. Jakobsen thinks the prices will keep falling until 2011, particularly in the cities, but the prices are still high and above last years’ average housing price. Indicators show that there might be a housing bubble in Denmark and that it might be bursting. The housing market has been changing. Now the housing market in Copenhagen seems to be stable but it is unstable in other cities in Denmark, e.g. in Jutland. This is very unusual for Denmark.
Danish public is very interested in interest rates. This interest makes the housing prices go up. During the crisis it as been more difficult to sell flats and houses. Danes like floating interest rates. However, Jakobsen’s bank, Nykredit koncernen, recommends stable and unchangable rates. The Danish economy is sensitive to interest rate changes. When the loan demand was low the economy wasn’t sensitive to the interest rates but now when the demand has gone up borrowers have been changing their borrowing behaviour. They want loans with floating interest rates. (audio) (slides)

 

 

Housing Financing Fund’s Restructuring of Mortgages – First Aid and Permanent Solutions

Gunnhildur Gunnarsdóttir, director for the juridicial part of the Housing Financing Fund.

Gunnhildur Gunnarsdóttir says that the Housing Financing Fund has always been the most important source for mortgages in Iceland except for the last few years when the banks offered long-term mortgages. There has been an increase in the number of people that are not able to pay back their loans to the Housing Financing Fund. According to Gunnarsdóttir it is not necessarily the people with the lowest income that have the most difficulties in paying back their loans. People with medium to high income have the biggest problems. This is the people who has been over-borrowing during the bubble.
Housing Financing Fund finds it difficult to address the problems with traditional measures even though some of them are still used. Recently some new types of measures have been introduced. People have gotten grace period or payment suspension if they have been unable to sell their previous property. The Housing Financing Fund has been granted permission to lease apartments acquired through auction. The Fund has also been granted the permission to increase maturity of mortgages for defaulted payments to up to 30 years. In October 2009 a decision was made on default for all mortgages held by individuals unlessthe  customers declined. Almost 50% of the banks’ customers did so. This is a good sign, according to Gunnarsdóttir. People can pay and they are paying.
People can also get temporary payment adjustment on mortgages. If somebody has low income he or she only has to pay back a low amount for the time being. (audio) (slides)

 

 

The Paradox of Sweden – Formation of a New Housing Price Bubble?

Professor Mats Wilhelmsson, Royal Institute of Technology in Stockholm.

Wilhelmsson points out that apartment and single-family house prices in Sweden have increased since the collapse of Lehman Brothers last year. Apartment prices have increased by 5% at the same time as the prices in Denmark have decreased by 17%, 1% in Finland and 44% in Estonia. At the same time unemployment is increasing, the export is decreasing and GDP is falling. The Swedes have a low interest rate on housing mortgages together with low level of housing construction in major areas. The mortgage interest rate is now 1.64% in Sweden while it is 3,66% in Denmark and 4,59% in the USA. Some prognoses fear that the housing market will fall dramatically when the interest rate starts increasing again in 2010.

Statistics show that only one tenth of the households can cope with an interest rate increase. Policy rate has been 2-2,5% in Sweden (is 0,5% today), in Iceland 18%. Prices have been increasing, in Sweden the increase has been 19% the last 12 months while the price increase is -17% in Denmark, +7% in Norway and -44% in Estonia. Wilhelmsson says the reason that the prices in Sweden are increasing so much is because of the policy rate, income taxes and interest rates. Construction activity has decreased in Sweden. If people cannot pay back their housing loans they don’t have to move out of their houses. (audio) (slides)

 

 

The Impact of the Financial Crisis on the Finnish Housing Market and Households

Assistant Professor, Elias Oikarinen, at Turku School of Economics.

Finland has been strongly hit by the global financial crisis. The exports and exports’ share of GDP have dropped substantially. Unemployment went up to almost 20% during the 1990s. The unemployment rate is now approximately 8,5% and could become 11% during 2011. The housing prices have not collapsed in Finland. The average income level has continued to rise. The banking sector is in relatively good shape. There has been no housing bubble in Finland. Finns have a relatively low level of housing prices and of household indebtness, relatively healthy banking sector and the stimulation policies by the Finnish government and the European Central Bank have had positive effects. The lessons of the severe recession in Finland in the beginning of the 1990s have contributed to the fact that Finnish households and banking sectors have not behaved in as risky, over-exuberant and short-sighted manner as in many other countries. Oikarinen thinks that the impact of the Finnish membership in the European Monetary Union on the recent development has been twofold. On the one hand, Finland has low interest rate and little inflation. On the other hand, the exports suffer due to the strong currency and the inability to devaluate. The housing market overreacted downwards in Finland during the 1990s. During the current crisis the prices went down a bit first, but have bounced back recently, i.e. the housing price level has not collapsed. This is due to five factors: housing prices were relatively low in Finland before the crisis, mortgage rates have dropped and are very low at the moment, household incomes have increased, the new housing supply is low, and rental prices have grown rapidly. The Finnish economy is predicted to start climbing in 2011.(audio) (slides)

 

 

Overview of Government Initiative on Household Debt in Response to Financial Crises

Economist, Yngvi Örn Kristinsson, External Advisor on Housing Debt at the Ministry of Social Affairs and Social Security in Iceland.

Kristinsson presented the measures of the Icelandic government on household debt in response to the financial crisis. The purpose is to strengthen economic recovery, minimize losses for households and creditors, avoid social problems resulting from increased debt burden and potential insolvencies and reach a consensus on a permanent solution. Kristinsson said that the prior emergency measures were freezing of payments in autumn 2008, payment equalization for price indexed mortgages in the beginning of 2009, payment equalization of foreign currency mortgages in May 2009 and new legislation on court administered payment restructuring based on a Nordic model to ensure social concerns for insolvent households in spring 2009. In Kristinsson’s presentation he said the government initiative in November 2009 had four pillars; a temporary legal framework for Out of Court work-outs for household and corporate debt and a specialist commission to monitor fairness of treatment; wholistic approach to household debt, households should be able to retain suitable housing and one car, debt burden should be adjusted to capacity and debt should be adjusted. A potential write-off deferred for three years; modification of payment equalization of price indexed and foreign currency mortgages, potential lengthening of maturity capped at three years based on agreement with financial institutions; payment equalization extended to household automobile loans, potential lengthening of maturity capped at three years, based on agreement with financial institutions. Banks expect that 4.000-5.000 households will need special debt restructuring in Iceland in the coming months. (audio) (slides)

 

 

Panel discussion in Scandinavian. (audio).

 

Closing by Guðmundur Bjarnason, head of the Housing Financing Fund. (audio)