HOUSEHOLDS LENDING MARKET IN THE ENLARGED...
Transcript of HOUSEHOLDS LENDING MARKET IN THE ENLARGED...
HOUSEHOLDS LENDING MARKET IN THE ENLARGED EUROPE
ECFin Workshop on “Housing and mortgage markets and the EU economy”, Brussels, 21st November 2005
Debora Revoltella and Fabio Mucci copyright with the author
New Europe Research
2
Stylized facts
Liquidity constraints and the role of credit
Sustainability and risks of retail lending growth
Conclusions
AGENDA
3
A SNAPSHOT OF HOUSEHOLD FINANCIAL BEHAVIOUR WITH SPECIAL FOCUS ON THE LIABILITY SIDE
Year 2004 data
Gross Disposable income per capita, €
Eurozone
15,871(1)
New Europe*
3,178
Household liabilities over GDP 12%
Households financial wealth over GDP 182%(2) 53%
50%
Home ownership 69%70%(5)
Note: (1) As of 2003; excluding Ireland and Luxembourg; (2) Proxy including all eurozone countries with the exception of Luxembourg, Ireland, Greece and Austria; unquoted shares, other equity and other accounts have been excluded from total wealth (3) Eurozone 2001; (*) New Europe includes 8 CEECs new EU members, plus other candidate or EU approaching countries (I.e. Bulgaria, Romania, Croatia and Turkey). Malta, Lithuania, Slovenia and Cyprus are excluded. Source: UCI New Europe Research Network, ECB, OECD, Federal Reserves and US Census Bureau
US
23,617
124%
277%
69%
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EUROZONE VS NEW EUROPE: SAME PATTERN OF FAST GROWTH OF RETAIL LENDING MARKET, BUT FROM VERY DIFFERENT STARTING POINTS
� Very different market size and level of households indebtedness
� Similar trends in terms of accelerated growth
� Increasing relevance of retail lending over total bank lending (meaning increasing banking focus towards the retail sector)
7%12%
46% 50%
2000 2004 2000 2004
EurozoneNE(10)
Household Indebtedness [as a percentage of GDP]
EurozoneNE(10)
23%
38%43% 45%
2000 2004 2000 2004
Bank credit to individuals [ weight in tot. banking sector]
23%
7%
Household debt growth in nominal terms [CAGR ’00-’04]
EurozoneNE(10)
Source: UCI New Europe Research Network Database, based on National Central Banks and Eurostat
5
1%
4%
4%
5%2%
3%
2000 2004
29%34%
7%
7%
9%
9%
2000 2004
NE(10) Eurozone
RETAIL LENDING DRIVEN BY THE MORTGAGE MARKET, STILL WITH FAST GROWTH IN CONSUMER LENDING
7%
12%
46%50%
Household Indebtedness by type of instruments[as a percentage of GDP]
Mortgage
Consumer loans
Other loans(1)
Note: (1) In the New Europe, the aggregate other loans includes overdraft, revolving credit cards, other loans and financial leasing
Source: UCI New Europe Research Network Database and ECB
� Average annual mortgage growth in NE equal to 43%, vs 8% in Eurozone
� Average annual consumer lending growth equal to 12% in NE, vs 2% in Eurozone
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MARKET STRUCTURE AND GROWTH BY COUNTRY
*CAGR ’04-’00
AustriaBelgium
Germany
Spain
Finland
France
Greece
Italy
The Netherlands
Portugal
Romania
Latvia
Bulgaria
Hungary
Estonia
CroatiaCzech R.
Slovakia
Poland
Turkey
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
0% 20% 40% 60% 80% 100%
Mortgage over total loans
(Mort
gage g
row
th -
Consum
er
loans g
row
th)*
Note: for Slovakia, loans granted by non-bank financial institutions excluded from total individuals liabilities while for the Czech R. CAGR ’04-’01
Source: UCI New Europe Research Network Database and National Central Banks for Eurozone countries
Prevalence of consumer credit Prevalence of mortgages
Prevale
nce
of consum
er c
redit
Pre
vale
nce
of m
ort
gages
7
Bul
garia
Rom
ania
Cro
atia
Pol
and
Tur
key
Cze
chR
.S
lova
kia
Hun
gary
Est
onia
Latv
iaF
inla
ndIta
lyG
reec
eA
ustr
iaG
erm
any
Irel
and
Spa
inP
ortu
gal
Bel
gium
Fra
nce
Net
herla
nds
0
5
10
15
20
25
30
35
Gap
A CLUSTER ANALYSIS FOCUSED ON CYCLICAL FEATURES OF RETAIL LENDING MARKET PROVIDES FIRST SIGNALS OF CONVERGENCE…
Cluster based on:
� debt over GDP (2004)
� weight of mortgages in total loans (2004)
� real credit growth
� change in fin.wealth
Source: UCI New Europe Research Network
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…ALTHOUGH A CLEAR GAP REMAINS WHEN TAKING INTO ACCOUNT THE DEGREE OF MARKET DEVELOPMENT IN THE TWO REGIONS
Bul
garia
Rom
ania
Cro
atia
Cze
chR
.H
unga
ryP
olon
dE
ston
iaLa
tvia
Slo
vaki
aG
reec
eT
urke
yA
ustr
iaG
erm
any
Por
tuga
loF
inla
ndS
pain
aIta
lyIr
elan
dB
elgi
umF
ranc
eN
ethe
rland
s
0
10
20
30
40
50
60
70
80
90
100
Gap
Cluster based on:
� real GDP growth
� change in unemployment rate
� per capita GDP
� fin. wealth over GDP
� debt over GDP (2000)
� change in interest rates
� weight of mortgages in total loans
� real credit growth
� change in fin.wealth
Source: UCI New Europe Research Network
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Stylised facts
Liquidity constraints and the role of credit
Sustainability and risks of retail lending growth
Conclusions
AGENDA
10
HIGHER VOLATILITY OF CONSUMPTION RELATIVE TO INCOME GROWTH PROVIDES FIRST EVIDENCE OF LIQUIDITY CONSTRAINTS, PARTICULARLY IN NE COUNTRIES
Consumption and real GDP volatility and Correlation between consumption and credit
Coeff. of variation of real GDP
Bulgaria 4.76% 3.39% 0.29Czech Rep 2.64% 1.76% 0.06Croatia 1.28% 1.14% 0.24Estonia 3.00% 1.94% -0.15 (0.08 three lags)Hungary 1.85% 0.40% 0.65Latria 1.80% 1.37% 0.2Poland 1.18% 1.59% 0.21Romania 4.83% 2.79% -0.37 (0.51 two lags)Slovakia 1.98% 1.01% -0.14 (0.11 one lag)Turkey 4.76% 3.90% 0.85simple avg NE 2.81% 1.93% -Belgium 0.77% 0.75% 0.05Germany 0.87% 0.76% -0.42Spain 1.00% 0.54% 0.34France 0.67% 0.72% 0.46Greece 0.67% 1.00% -Italy 0.68% 0.71% -0.07Netherlands 1.19% 0.92% -0.01Portugal 1.09% 1.08% 0.08simple avg EU 0.87% 0.81% -
Coeff. of variation of real consumption
Corr(cons, credit)
Note: own estimates based on UCI New Europe Research Database, ECB and Eurostat
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ECONOMIC ANALYSIS OF CONSUMPTION GROWTH AND HOUSEHOLDS DEBT: A SIMPLE FRAMEWORK
� 3 GROUPS OF HOUSEHOLDS:
� (1-λ1-λ
2) not liquidity constrained - can choose their optimal consumption path, on
the basis of permanent income, having free access to credit markets� (λ
1+λ
2) liquidity constrained, thus consumption is a function of current income
�Among those liquidity constrained, λ2 can access credit markets
Δct= β’’ + (1-λ
1-λ
2) σ E
t-1 r
t-1 + (λ
1 +λ
2) Δy
t+ λ
2 ΔHC
t
� CREDIT EQUATION ΔHCt= a – bi1
t-1+ c (i1 * Δy)
t-1
� CONSUMPTION EQUATION Δct= β’’’+ (λ
1+λ
2) Δy
t+ λ
2 (a-bi1
t-1 + c (i1 * Δy)
t-1)
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EMPIRICAL ANALYSIS FOR OLD EUROPE PROVIDES EVIDENCE THAT IN ITALY, BELGIUM AND UK ABOUT 50% OF THE CONSUMERS ARE LIQUIDITY CONSTRAINED (DE BONDT 1999)*
� Developed credit market should allow a smoothing of consumption patterns of individuals, in line with the life cycle theory
� Excess sensitivity of consumption to current income is frequently interpreted as evidence of liquidity constraints, that is the inability or unwillingness to use capital markets to smooth consumption
� The evidence provided by De Bondt shows that in most EU countries 80% to 100% of all consumers are liquidity unconstrained with the only exceptions of Italy, United Kingdom and Belgium where about 50% of the consumers are liquidity constrained
� Moreover, the empirical analysis tend to confirm that variations in credit market conditions as reflected by changes in the so-called external finance premium (the wedge between cost of internal and externalfinance connected to informal asymmetries, cost of borrowers monitoring etc) significantly impact private consumption growth in the case of Germany, Italy and the Netherlands
De Bondt (1999), “Credit channels and consumption in Europe: empirical evidence”, BIS wp no. 69
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LIQUIDITY CONSTRAINTS PLAY A KEY ROLE IN THE NE (CORICELLI, MUCCI AND REVOLTELLA 2005)
� By estimating both consumption and supply equations on quarterly data for a sample of 10 New Europe countries over the period 2000-2004, the analysis reveals that:
� the effect of household credit conditions on individual consumption is highly significant. As expected tightening of credit conditions have larger effects during a slow-down, rather than during an upturn;
� supply effects have been very relevant in explaining the dynamic of consumer credit during the sample period.
� Moreover, the estimation results suggest that the value of the share of liquidity-constrained households (λ
1+λ
2) appears to be large at 53%.
� Among the liquidity constrained individuals, only 5% have access to credit.
� Important to note: the total share of households with access to consumer credit includes as well those households that are not liquidity-constrained.
Coricelli, Mucci and Revoltella (forthcoming), ‘The New Europe household lending market’
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PROSPECTS: SIMULATION OF DEMAND AND SUPPLY EFFECTS
� Relaxation of supply conditions in the context of liquidity constraints behind accelerated growth of household lending in most NE and some old EU countries
� Interest rates decline potentially partly balanced by upward movements in the demand curve (with enlargement of clients pool)
Credit supply
Credit demand
Int. rate
Credit
15
Stylised facts
Liquidity constraints and the role of credit
Sustainability and risks of retail lending growth
Conclusions
AGENDA
16
RELATIVE LOW INDEBTEDNESS VS THE US. IN THE NE CONCERNS FOR FAST GROWTH …
Household debt as a percentage of GDP (2004)
Source: UCI New Europe Research Network Database, ECB, National Central Banks for Eurozone countries and Eurostat
5% 6%10% 12%12% 13%14%
19%20%24%25%
31% 32%35%
40%40% 40%46%
50%53%
64%
78%
Rom
ania
Tur
key
Slo
vaki
a
NE
(10)
Bul
garia
Pol
and
Cze
chR
ep.
Latv
ia
Hun
gary
Est
onia
Italy
Gre
ece
Cro
atia
Bel
gium
Fra
nce
Aus
tria
Fin
land
Ger
man
y
Eur
ozon
e
Spa
in
Por
tuga
l
Net
herla
nds
124%
US
17
… AND HIGHER VULNERABILITY TO ADVERSE SHOCKS GIVEN THE LOW LEVEL OF WEALTH
Data as of 2004
Note: (*) As of end of 2003.
Source: UCI New Europe Research Network Database, based on National Central Banks and Eurostat
Per capita debt
143
210
300
540
663
740
852
1,217
1,587
1,603
1,939
13,286
Romania
Turkey
Bulgaria
NE(10)
Slovakia
Poland
Latvia
Czech R.
Estonia
Hungary
Croatia
Eurozone
Household Debt over Fin. Wealth
13%
21%
22%
23%
24%
27%
28%
29%
31%
36%
46%
83%
Turkey
Czech R.
Slovakia
NE(10)
Poland
Eurozone
Bulgaria
Latvia
Romania
Hungary
Croatia
Estonia
(*)
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ACCUMULATION OF “CORRECTED” NET FINANCIAL WEALTH PROVIDES A POSITIVE SIGNAL IN THE NEW EUROPE AND IN SOME EUROZONE COUNTRIES
“Corrected”(2) Net Financial Wealth 2000-2004
Note: (1) Latvia as of 2003; (2) Corrected Net Financial Wealth is calculated as Gross Financial Wealth minus the non-mortgage part of households debt. All divided by GDP. Source: UCI New Europe Research Network Database, Natianal Banks, ECB and Eurostat
0%
50%
100%
150%
200%
250%
300%
350%
Bu
lgar
ia
Cro
atia
Cze
ch R
.
Est
on
ia
Hu
ng
ary
Lat
via(
1)
NE
(10)
Po
lan
d
Ro
man
ia
Slo
vaki
a
Tu
rkey
Eu
rozo
ne
Bel
giu
m
Ger
man
y
Sp
ain
Fra
nce
Italy
Net
her
lan
ds
Po
rtu
gal
Fin
lan
d
20002004
19
NO EXCESSIVE GROWTH IN HOUSING PRICES SO FAR DESPITE THE POSITIVE CORRELATION BETWEEN DEMAND FOR MORTGAGES AND PROPERTY PRICES
HPRICE = 0.36 HLOAN + 3.229
-4
-2
0
2
4
6
8
10
12
14
16
0 10 20 30 40
Mortgage loans
House prices
Mortgage loans
House prices
Mortgage and House Prices Levels in the Eurozone
Mortgage and House Prices Levels in the New Europe
Source: UCI New Europe Research Network estimates on Eurozone countries and Mihaljek D. (2005) ‘Rapid expansion of credit in South Eastern Europe: a cause for concern?’, BIS for NE countries
� Housing market exposure represents a source of vulnerability in the context of fast expansion of debt and rising house prices
� Much debate concerns single eurozone countries� In the NE, despite the increasing demand for housing connected to expectations of rising
incomes in the catching-up with EU, better provision of housing credit and current demographic trends we do not see signals of potential real estate bubbles given the still limited supply of new homes
y = 1.19x + 32.3
0
20
40
60
80
100
-10 -5 0 5 10 15 20
Hou
sing
loan
s
20
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
2000
q01
2000
q03
2001
q01
2001
q03
2002
q01
2002
q03
2003
q01
2003
q03
2004
q01
2004
q03
-45%
-20%
5%
30%
55%trade balance/GDP - RXcredit cyclefactor2
Latvia
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2000
q01
2000
q03
2001
q01
2001
q03
2002
q01
2002
q03
2003
q01
2003
q03
2004
q01
2004
q03
-40%
-20%
0%
20%
40%trade balance/GDP - RXcredit cyclefactor2
Turkey
-4.0
-2.0
0.0
2.0
4.0
2000
q01
2000
q03
2001
q01
2001
q03
2002
q01
2002
q03
2003
q01
2003
q03
2004
q01
2004
q03
-20%
0%
20%trade balance/GDP - RXcredit cyclefactor2
Romania
-6,000
-3,000
0
3,000
6,000
2000
q01
2000
q03
2001
q01
2001
q03
2002
q01
2002
q03
2003
q01
2003
q03
2004
q01
2004
q03
-20%
0%
20%
trade balance/GDP - RXcredit cyclefactor2
IN THE NE SOME CONCERNS ON THE MACRO SIDE
Note: the series on real credits to individuals and trade balance have been seasonality adjusted using the census X11 additive method. The trend have been extracted using Hodrick and Prescott (HP) filter with a smoothing parameter of 1600. Factor 2 represents in all graphs the absolute threshold used to identify credit booms episodes (1.75 times std of the cycle). Consumption booms have been identified using the same criteria and are represented in all graphs by grey areas.
Sources: Trade data: IMF- DOTS based on country’s declarations of exports and imports and Eurostat. Credit Data: UniCredit New Europe Research Network database.
-30.0
-20.0
-10.0
0.0
10.0
20.020
00q0
1
2000
q03
2001
q01
2001
q03
2002
q01
2002
q03
2003
q01
2003
q03
2004
q01
2004
q03
-45%
-30%
-15%
0%
15%
30%
trade balance/GDP - RXcredit cyclefactor2
Romania Turkey Latvia
Estonia Croatia
-0.2
0.0
0.2
0.4
2000
q01
2000
q03
2001
q01
2001
q03
2002
q01
2002
q03
2003
q01
2003
q03
2004
q01
2004
q03
-30%
0%
30%
60%
trade balance/GDP - RXcredit cyclefactor2
Bulgaria
21
Stylised facts
Liquidity constraints and the role of credit
Sustainability and risks of retail lending growth
Conclusions
AGENDA
22
CONCLUSIONS
� Similar trends in the retail lending market, although NE starts from a much lower base. Fast growth, driven by the mortgage market, with decrease of liquidity constraints and improvement in supply conditions
� Evidence of liquidity constraints in some old EU and most of NE countries. Relaxation of constraints and increasing access to credit markets explain most of the current accelerated growth of household credit
� No major concerns for sustainability at the enlarged European level, but a number of issues to monitor
� Micro/Macro issues in few NE countries
� Real estate market pressures in the Eurozone