central bank of iceland households and housing markets in financial crises the icelandic version...
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Central Bank of Iceland
Households and housing markets in financial crisesThe Icelandic version
Þorvarður Tjörvi ÓlafssonEconomist, Central Bank of [email protected]
Nordic conference in Reykjavik: The Financial Crisis, the Property Market and Home Ownership November 26, 2009
Overview of presentationTwo main subjects
1. The financial crisis in Iceland in an international perspective, especially with regard to households and housing markets
2. The effects of the financial crisis in Iceland on the housing sector and households’ economic situation
The financial crisis in Iceland in an international perspective
International perspectiveIt is well-known that Iceland had the largest banking system ever to have gone through a crisis …
Chile
('81
)
Equa
dor (
'98)
Finl
and
('91)
Indo
nesi
a ('9
7)
Kore
a ('9
7)
Mal
aysi
a ('9
7)
Mex
ico
('94)
Nor
way
('87
)
Russ
ia ('
98)
Swed
en ('
91)
Thai
land
('97
)
Turk
ey ('
00)
Ven
ezue
la ('
94)
Japa
n ('9
1)
Icel
and
('07)
0
100
200
300
400
500
600
700
800
900% of GDP
Commercial banks' assets as % of GDP a year before the onset of various crises
Sources: Bank of England, Central Bank of Iceland.
Switz
erla
nd UK
Irel
and
Fran
ce
Ger
man
y
Spai
n
Japa
n
Aus
tral
ia
Cana
da
Ital
y
US
Icel
and
0
100
200
300
400
500
600
700
800
900
1000 % of GDP
Banking group assets as % of GDP in the current global crisis
Sources: Bank of England, Central Bank of Iceland.
1. Total consolidated banking group assets fro domestically owned banking sector only. This includes assets of domestic banks held abroad. End-2007 except UK (end 2008) and Iceland (June 2008).
International perspective … the most indebted private sector …
Russ
ia ('
98)
Turk
ey ('
01)
Arg
entin
a ('0
1)
Ecua
dor (
'99)
Mex
ico
('94)
Indo
nesi
a ('9
7)
Nor
way
('87
)
Finl
and
('91)
Swed
en ('
91)
Thai
land
('97
)
Icel
and
('08)
0
100
200
300
400
500
600
Chart Title
% of GDP
Private sector lending as % of GDP in a few crisis countries
Sources: Reuters EcoWin, Central Bank of Iceland.
1.The year in parentheses represents the onset of the crisis in the country concerned.
Finl
and
Ger
man
y
Swed
en
Spai
n
Switz
erla
nd UK
Den
mar
k
USA
Icel
and
0
100
200
300
400
500
Chart Title
% of GDP
Private sector lending as % of GDP in a few countries in the current global crisis
Sources: Bank of England, Reuters EcoWin, Central Bank of Iceland.
1.The value is for 2007.
International perspective … and widespread foreign-currency borrowing
Arg
entin
a ('0
0)
Thai
land
('96
)
Kore
a ('9
6)
Braz
il ('0
1)
Uru
guay
('01
)
Icel
and
('08)
0
50
100
150
200
250
300
350% of GDP
Corporate foreign currency debt to GDP in a few crisis countries
Sources: IMF, Central Bank of Iceland.
Households Businesses Municipalities0
10
20
30
40
50
60
70
80
Chart TitleProportion of total foreign-denominated debt in some of Iceland's key sectors
%
Source: Central Bank of Iceland.
1. Figures for households and municipalities are as of year-end 2008, and figures for businesses are as of June 2009.
International perspective Loss of household wealth will be in the high-end relative to other crises as house prices decline …
USA
(192
9)M
alay
sia
(199
7)Th
aila
nd (1
997)
Kore
a (1
997)
Arg
entin
a (2
001)
Nor
way
(189
9)Sw
eden
(199
1)Sp
ain
(197
7)H
isto
rical
ave
rage
Japa
n (1
992)
Nor
way
(198
7)In
done
sia
(199
7)Fi
nlan
d (1
991)
Colu
mbi
a (1
998)
Icel
and
(200
8)Ph
ilipp
ines
(199
7)H
ong
Kong
(199
7)
-60
-50
-40
-30
-20
-10
0
Chart Title
%
Real house price declines in a few crisis countries
Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland.
1.Central Bank of Iceland baseline forecast.
USA
Ital
y
Nor
way
Finl
and
Aus
tral
ia
Cana
da
Swed
en
Den
mar
k
UK
Fran
ce
Irel
and
New
Zea
land
Spai
n
Icel
and
-40
-20
0
20
40
60
80
Change in real house prices (Q1/2001-Q3/2006)
Real house prices falls from recent peak
Real house price rises and subsequent falls in the current global crisis
Sources: IMF, Central Bank of Iceland
%
International perspective … and financial assets collapse
Arg
entin
a (2
001)
Hon
g Ko
ng (1
997)
Nor
way
(198
7)Sw
eden
(199
1)H
isto
rical
ave
rage
Phill
ippi
nes
(199
7)Ja
pan
(199
2)Fi
nlan
d (1
991)
USA
(192
9)Co
lum
bia
(199
8)Sp
ain
(197
7)M
alay
sia
(199
7)In
done
sia
(199
7)Ko
rea
(199
7)Th
aila
nd (1
997)
Icel
and
(200
8)
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Chart Title
%
Real equity price declines in a few crises countries
Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland.
1.Central Bank of Iceland baseline forecast.
USA
Ital
y
Nor
way
Finl
and
Aus
tral
ia
Cana
da
Swed
en
Den
mar
k
UK
Fran
ce
Irel
and
New
Zea
land
Spai
n
Icel
and
-100
-50
0
50
100
150
200
250
300
350
Change in real equity prices (Q1/2001-Q3/2006)
Real equity prices falls from recent peak
Real equity price rises and subsequent falls in the current global crisis
Sources: IMF, Central Bank of Iceland
%
International perspectiveIcelandic households were vulnerable to the effects of the crisis due to high indebtedness
Kore
a ('9
7)
Finl
and
('91)
Swed
en ('
91)
Nor
way
('87
)
Icel
and
('08)
0
50
100
150
200
250% of disposable income
Household debt as % of disposable in-come in a few crisis countries
Sources: Riksbanken, Norges Bank, BIS, Central Bank of Iceland
Fran
ce
Euro
are
a
Spai
n
Aus
tral
ia
New
Zea
land
USA
Nor
way
Irel
and
Icel
and
Den
mar
k
0
50
100
150
200
250
300
2002 2007
% of disposable income
1. Values for Iceland are for 2002 and 2008.
Household debt as % of disposable in-come in the current global crisis
Sources: OECD, Central Bank of Iceland.
International perspective Icelandic households have been more affected by depreciation than FX borrowers in other countries
Latv
ia
Esto
nia
Hun
gary
Lith
uani
a
Rum
enia
Pola
nd
Bulg
aria
Icel
and
Slov
ak R
epub
lic
Czec
h Re
publ
ic
0102030405060708090
100
2003 2008
Share of loans (%)
Share of banks' household loans in for-eign currency in a few countriesComparison between 2003 and 2008
Sources: Magyar Nemzeti Bank, Central Bank of Iceland.
Latv
ia
Esto
nia
Hun
gary
Lith
uani
a
Rum
enia
Pola
nd
Bulg
aria
Icel
and
Slov
ak R
epub
lic
Czec
h Re
publ
ic
-60
-50
-40
-30
-20
-10
0
10
20
Chart Title
Exchange rate changes from July 2007 to October 2009BIS broad nominal effective exchange rate indicies
Sources: BIS, Central Bank of Iceland.
%
International perspective The increase in unemployment is expected to be relatively high …
Mal
aysi
a (1
997)
Indo
nesi
a (1
997)
Japa
n (1
992)
Phili
ppin
es (1
997)
Thai
land
(199
7)
Hon
g Ko
ng (1
997)
Nor
way
(198
7)
Kore
a (1
997)
Arg
entin
a (2
001)
His
toric
al a
vera
ge
Swed
en (1
991)
Icel
and
(200
8)
Spai
n (1
977)
Colu
mbi
a (1
998)
Finl
and
(199
1)
USA
(192
9)
0
5
10
15
20
25
Chart Title
Percentage points
Unemployment increases in a few crises countries
Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland.
1.Central Bank of Iceland baseline forecast.
Nor
way
Den
mar
k
Swed
en
Finl
and
UK
New
Zea
land
Fran
ce
USA
Icel
and
Irel
and
Spai
n
0
2
4
6
8
10
12
14
Chart Title
Percentage points
Expected unemployment increases from 2007 to 2010 in the current global crisis
Sources: IMF.
International perspective … and the drop in GDP large
Nor
way
('87
)
Phili
ppin
es ('
97)
Swed
en ('
91)
Hon
g Ko
ng ('
97)
Colu
mbi
a ('9
8)
Kore
a ('9
7)
His
toric
al a
vera
ge
Mal
aysi
a ('9
7)
Icel
and
('08)
Finl
and
('91)
Thai
land
('97
)
Indo
nesi
a ('9
7)
Arg
entin
a ('0
1)
USA
('29
)
-30
-25
-20
-15
-10
-5
0 0
1
2
3
4
5
Peak-to-trough decline in GDP per capita (left)Duration (right)
%
Real GDP per capita cycles in a few crises countries
Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland.
1.Central Bank of Iceland baseline forecast.
Number of years
Nor
way
New
Zea
land
Den
mar
kSp
ain
Euro
are
aN
ethe
rland
sU
nite
d Ki
ngdo
mSw
eden
Ger
man
yJa
pan
Finl
and
Hun
gary
Irel
and
Icel
and
Rom
ania
Esto
nia
Latv
iaLi
thua
nia
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
Forecast for GDP growth in 2009
Source: IMF.
Volume change on a year earlier (%)
The effects of the financial crisis on the housing market and households’
economic situation
The Icelandic housing marketRelatively short duration of real house price declines and inflation playing a large role in the adjustment
Mal
aysi
a (1
997)
Icel
and
(200
8)
Spai
n (1
977)
Swed
en (1
991)
Arg
entin
a (2
001)
Kore
a (1
997)
Thai
land
(199
7)
Indo
nesi
a (1
997)
Nor
way
(198
7)
Hon
g Ko
ng (1
997)
Colu
mbi
a (1
998)
Finl
and
(199
1)
His
toric
al a
vera
ge
Nor
way
(189
9)
Phili
ppin
es (1
997)
USA
(192
9)
0
1
2
3
4
5
6
7
8
Chart Title
Number of years
Duration of real house price declines in a few crisis countries
Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland.
1.Central Bank Iceland baseline forecast.
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
50
75
100
125
150
175
200
225
250
Nominal house price level CPI level
Real house price level
House price levels
Index = 100 in 2000
Sources: Statistics Iceland, Central Bank of Iceland.
The Icelandic housing marketDysfunctional market
2000
2000
2000
2000
2001
2001
2001
2001
2002
2002
2002
2002
2003
2003
2003
2003
2004
2004
2004
2004
2005
2005
2005
2005
2006
2006
2006
2006
2007
2007
2007
2007
2008
2008
2008
2008
2009
2009
2009
2009
0
500
1000
1500
2000
2500
3000
3500
4000
4500
-4
-2
0
2
4
6
8
Turn-over on the residential housing market (left)
Quarterly growth in household debt in real terms (right)
Number of contracts
Turn-over on the residential housing market and quarterly growth in household debt in real terms
Sources: Icelandic Property Registry, Central Bank of Iceland
Volume change on a year earlier (%)
Aug/
'04
Nov
/'04
Feb/
'05
May
/'05
Aug/
'05
Nov
/'05
Feb/
'06
May
/'06
Aug/
'06
Nov
/'06
Feb/
'07
May
/'07
Aug/
'07
Nov
/'07
Feb/
'08
May
/'08
Aug/
'08
Nov
/'08
Feb/
'09
May
/'09
Aug/
'09
0
500
1000
1500
2000
2500
3000
3500
-4
6
16
26
36
46
56
Number of new mortgage loans at DMI
Swaps as a portion of total turnover
Number of loans
Number of new mortgage loans issued at DMI and share of swaps in total turnover
Sources: Icelandic Property Registry, Central Bank of Iceland
%
Icelandic households: Aggregate dataChanges in net wealth and real disposable income
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
-60
-40
-20
0
20
40
60
House prices Housing stock Financial assetsDebt Net wealth
Sources: Statistics Iceland, Central Bank of Iceland.
Developments in household net wealth and contribution of underlying components 2000-20121
Volume change on a year earlier (%)
1. Central Bank of Iceland baseline forecast 2009-2012. The contribution of the main underlying factors in the yearly changes in net wealth is calculated based on each factor's weight in new wealth. The combined contribution does of un-derlying factor does not add up to the total change due to rounding.
´00 ´01 ´02 ´03 ´04 ´05 ´06 ´07 ´08 ´09 ´10 ´11 ´12-30
-20
-10
0
10
20
30
Prices Taxes Other income
Employment Nominal wages Real disposable income
Sources: Statistics Iceland, Central Bank of Iceland.
Volume change on a year earlier (%)
1. Central Bank baseline forecast 2009-2012. The contributions of the main underlying factors in the yearly changes in real disposable income is calculated based on each factor’s weight in disposable income. The combined contribu-tion of underlying factors does not add up to the total change due to rounding and incomplete income accounts for households.
Developments in real disposable income and contribution of underlying components
Icelandic households: Aggregate dataLeverage is high in international comparison but it decreased in the boom as expected …
Ital
y
Fran
ce
Ger
man
y
Japa
n
UK
USA
Cana
da
Aus
tral
ia
New
Zea
land
Icel
and
1.0
1.1
1.2
1.3
1.4
1.5
Chart TitleHousehold leverage in the current global crisis
%
1. Total household assets as proportion of net wealth at year-end 2007
Sources: OECD, Reserve Bank of Australia, Reserve Bank of New Zealand, Central Bank of Iceland.
95 96 97 98 99 00 01 02 03 04 05 06 07 081.0
1.1
1.2
1.3
1.4
1.5
1.6
Chart TitleIcelandic households’ leverage 1995-2008
Ratio
1. Total household assets as proportion of net wealth based on the Central Bank of Iceland estimate of asset and net wealth except for 2008 where leverage growth in based on tax authority data
Sources: Central Bank of Iceland, Icelandic tax authorities (RSK).
Icelandic households: Aggregate data… but leverage has become much more dependant on exchange rate movements• In the run-up to the crisis,
household assets increased even faster than debt and households’ equity position improved and leverage decreased
• But the large depreciation and asset destruction has pushed leverage up and balance sheet restructuring has begun
95 96 97 98 99 00 01 02 03 04 05 06 07 08-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0 -30
-25
-20
-15
-10
-5
0
5
10
15
Growth in household leverage (left)Nominal exchange rate changes (reverse right axis)
Household leverage growth and ex-change rate movements%
1. Household leverage growth is based on the Central Bank of Iceland estimate of asset and net wealth except for 2008 where leverage growth in based on tax authority data
Sources: Central Bank of Iceland, Icelandic tax authorities (RSK).
%
Icelandic households: Micro dataThe Central Bank of Iceland household sector project
• Assessing the extent of debt problems in the private sector, their effects on the crisis dynamics and developing the policies needed to limit the severity of the crisis is a daunting challenge
• One of many preconditions for success is access to valuable data on household and corporate sector balance sheets
• The Central Bank has assembled a unique database for households and an analysis on the household balance sheet and debt servicing capabilities is ongoing– See e.g. chapter 2.2. in Central Bank of Iceland Financial
Stability 2009
Icelandic households: Micro dataThe Central Bank of Iceland household sector project
• The database contains financial data on all individual customers of the commercial banks, savings banks, smaller financing undertakings, pension funds and the Housing Financing Fund (HFF)
• Income data from the tax authorities (RSK) • Data on unemployment from the Directorate of Labour• The data are encrypted and have been processed in a
format which is not personally identifiable• This data base is unique for a country experiencing a
financial crisis and offers many possibilities for analyses and projections
Icelandic households: Micro data The largest share of household liabilities is mortgage debt which is mainly in ISK …
Note: Combined household debt in the database is 1557 b.kr. Student loans , loans from some smaller pension funds and more complete data on loans backed by securities are missing from the database. According to tax returns for the year 2008, total household debt amounted to 1683 b.kr., which is ca. 200 b.krk. lower than according to credit system data for September 2008.
Mortgage debt:
1.329,7 b.kr.;
86% of total debt
Auto loans: 127,1 b.kr.; 8% of total
debt
Overdraft: 53,8 b.kr.; 3% of total debt
Loans backed by securities: 46,7 b.kr.;
3% of total debt
Household debt by category
Source: Central Bank of Iceland.
Icelandic households: Micro data … FX borrowing is more widespread in auto loans than in mortgages
Households with only ISK
auto loans; 7.189
; 16%
of households with car
loans
Households with only FX auto loans;
28.571; 65% of households with car
loans
Households with
mixed auto
loans; 8.592
; 19%
of households with car
loans
Less than 7 thousand households have foreign currency mortgages
But 37 thousand households have foreign currency auto loans
Icelandic households: Micro dataHouseholds with FX mortgages have experienced the greatest increase in debt levels • Housing liabilities have more
than doubled for 43% of households with pure FX mortgages and risen more than 50% for roughly half of households with mixed mortgages– Relatively few households
• Less impact for households with indexed ISK mortgages but a third has nevertheless experienced more than 30% increase
Dec
reas
ed
0-25
%
25-5
0%
50-7
5%
75-1
00%
100-
125%
125-
150%
Ove
r 150
%
0
5
10
15
20
25
30
35
40
45
Households only with ISK mortgagesHouseholds only with foreign currency mortgagesHouseholds with mixed mortgages
Share of households (%)
1. All loans backed with residential housing collateral are defined as mortgage loans.
Change in outstanding amount of mortgages from date of origin to year-end 2008
Source: Central Bank of Iceland.
Icelandic households: Micro data… and so have the great number of households with FX auto loans • Liabilities due to car
loans have risen by more than 50% for roughly half of households with pure FX auto loans– Relatively many
households
Dec
reas
ed
0-10
%
10-2
0%
20-3
0%
30-4
0%
40-5
0%
50-6
0%
60-7
0%
70-8
0%
80-9
0%
90-1
00%
Ove
r 100
%
0
10
20
30
40
50
60
70
80
90
Households only with ISK auto loansHouseholds only with foreign currency auto loansHouseholds with mixed auto loans
Share of households (%)
Change in outstanding amount of auto loans from date of origin to year-end 2008
Source: Central Bank of Iceland.
Icelandic households: Micro dataThe highest-income group carries a smaller share of debt than is common abroad• The distribution of debt
is well in line with income distribution and the share of debt borne by higher-income groups is smaller than is often the case in other countries
0-15
0 t.
kr.
150-
250
t.kr
.
250-
350
t.kr
350-
500
t.kr
500-
650
t.kr
.
over
650
t.kr
.
0
5
10
15
20
25
Share of combined debt Share of households
%
Mortgage, auto and overdraft debt as per cent of annualised disposable income
Source: Central Bank of Iceland.
1. Based on outstanding amounts of loans at year-end 2008 and income data from PAYE records in February 2009.
Icelandic households: Micro dataA large share of total debt is in the hands of very indebted households
0-50
%
50-1
00%
100-
200%
200-
300%
300-
400%
400-
500%
500-
600%
600-
700%
700-
800%
800-
900%
900-
1000
%
Ove
r 100
0%
0
2
4
6
8
10
12
14
16
18
20
6.6
9.0
17.616.5
13.6
10.1
6.6
4.53.0
2.1 1.6
8.8
Share of households (%)
Mortgage, auto and overdraft debt as per cent of annualised disposable income
Source: Central Bank of Iceland.
1. Based on outstanding amounts of loans at year-end 2008 and income data from PAYE records in February 2009.
• 63% of households have debt less than 400% of annual disposable income but for roughly 1/4 of households the ratio is above 500%– Smaller share with > 500% than
in Norway prior to the banking crisis
• Households owing more than 600% of disposable income carry 39% of total debt
Icelandic households: Micro dataRoughly 20% of households were in negative housing equity at year-end 2008• Likely that around a third of
homeowners will go into negative territory in the coming years as nominal house prices continue to fall
0-10
%10
-20%
20-3
0%30
-40%
40-5
0%50
-60%
60-7
0%70
-80%
80-9
0%90
-100
%10
0-11
0%11
0-12
0%12
0-13
0%13
0-14
0%O
ver 1
40%
0
1
2
3
4
5
6
7
8
9
10Share of households (%)
1. Based on outstanding amount of mortgage debt and Land Reg-istry value of residential property in December 2008.
Mortgage debt as a share of housing wealth at year-end 2008
Source: Central Bank of Iceland.
Icelandic households: Micro data20-26% of households with debt service ratio above common danger points• Households that have to use
more than 30-35% of their disposable income to service their mortgage debt are often considered at risk
• 20% of households need to devote more than 35% of their income to service their mortgage debt
• 35-40% of households with FX mortgages or mixed mortgages
0-10
%
10-2
0%
20-3
0%
30-4
0%
40-5
0%
50-6
0%
60-7
0%
70-8
0%
80-9
0%
Ove
r 90%
0
5
10
15
20
25
30
35
Share of households (%)
1. Mortage debt at beginning of the year as a service ratio from PAYE records in February 2009. Excludingsome households with mortgage loans where interest or principal payments have been frozen.
Mortgage debt service ratio
Source: Central Bank of Iceland.
Final remarks
Final remarksUnemployment and debt restructuring will be major determinants of the scope of financial distress• Households have sustained severe blows as a result of
the banks’ and the currency’s collapse• The pre-crisis spree of FX borrowing has proven
extremely costly for many, and banks were far too liberal in issuing FX loans
• Various evidence indicates that 20-25% of households are in financial difficulties and that this figure will rise if no action is taken
• Household debt restructuring has begun• The scope of financial distress will be determined by
unemployment and the success of debt restructuring