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Gareth Morgan, September 2008
Over recent years – beginning in the early 1990s, there has been the makings and then the achievement of a marked over-investment in housing – a level of investment in this asset class that is unsustainable through a full economic cycle. Indicators of this have been obvious for several years and include record house price-to-income ratios and mortgage servicing-to-income ratios.
What has caused this? In short it’s been due to
(a) a fall in interest rates
(b) a marked relaxation of mortgage lending criteria
The fall in nominal interest rates came about as a result of disinflation. Indeed real rates fell as well as inflation came under control and central banks were able to ease rates. The relaxation of lending criteria by the finance sector has been huge and it hasn’t been uncommon to see mortgages equal or greater than the market value of the house, The banking sector has taken the view that if a mortgage can no longer be serviced then a forced sale at or near market value would pretty well enable full recovery of their loan and as this occurs in so few cases anyway a few losses on realisation is a small price to pay for the expanded business and profits that has arisen from the boom in mortgage lending that relaxed lending criteria has facilitated.
It’s become apparent however that the demand for (bigger and more expensive) housing – is pretty elastic to the simple calculation of ability-to-finance, and as a result prices have rocketed. Banks have increasingly tapped offshore savings in order to provide the liquidity to fuel the demand. Inevitably the quality (asset backing) of the lending has deteriorated as more and more loans are at or near full market value of the property. There has been no central bank response to prevent the relaxation of lending criteria – in effect the quality of the banks’ assets has been allowed – even encouraged – to deteriorate. We have seen central bank negligence in the extreme.
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Cheers
Marc
Over recent years – beginning in the early 1990s, there has been the makings and then the achievement of a marked over-investment in housing – a level of investment in this asset class that is unsustainable through a full economic cycle. Indicators of this have been obvious for several years and include record house price-to-income ratios and mortgage servicing-to-income ratios.
What has caused this? In short it’s been due to
(a) a fall in interest rates
(b) a marked relaxation of mortgage lending criteria
The fall in nominal interest rates came about as a result of disinflation. Indeed real rates fell as well as inflation came under control and central banks were able to ease rates. The relaxation of lending criteria by the finance sector has been huge and it hasn’t been uncommon to see mortgages equal or greater than the market value of the house, The banking sector has taken the view that if a mortgage can no longer be serviced then a forced sale at or near market value would pretty well enable full recovery of their loan and as this occurs in so few cases anyway a few losses on realisation is a small price to pay for the expanded business and profits that has arisen from the boom in mortgage lending that relaxed lending criteria has facilitated.
It’s become apparent however that the demand for (bigger and more expensive) housing – is pretty elastic to the simple calculation of ability-to-finance, and as a result prices have rocketed. Banks have increasingly tapped offshore savings in order to provide the liquidity to fuel the demand. Inevitably the quality (asset backing) of the lending has deteriorated as more and more loans are at or near full market value of the property. There has been no central bank response to prevent the relaxation of lending criteria – in effect the quality of the banks’ assets has been allowed – even encouraged – to deteriorate. We have seen central bank negligence in the extreme.
Read more...
Cheers
Marc
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