Europe

IUHF World Congress - a fantastic success

November 2006

The International Union for Housing Finance is a sometimes understated institution. It has around 160 members – all either mortgage lenders or institutions with an interest in mortgage finance – from 55 countries around the world. It hosts a website (www.housingfinance.org), publishes a regular quarterly journal, Housing Finance International, and a newsletter, and perhaps most importantly organises, with significant help from host institutions around the world, a World Congress every two years.

In September 2006 the Union was honoured to be the guest of the Canada Mortgage and Housing Corporation (CMHC), which generously hosted the 26th World Congress in Vancouver, British Columbia.

The World Congress featured a variety of speakers (57 to be precise) and attracted 230 individuals from 46 different countries and nearly 130 different institutions. Virtually every presentation can be found on a special website – http://congress. housingfinance.org/Presentations.php. This article gives a flavour of the overall event, by concentrating on some of the key sessions.

Housing bubbles or fundamental change?

The keynote opening session of the Congress was on the question of whether recent rapid increases in house prices all over the world represented a housing bubble

which was about to burst with calamitous consequences for relatively indebted owner-occupiers, or whether current house price levels were a natural economic reaction to long-term expectations of low interest rates.

Interestingly, the financial supplement to Canada’s National Post that very morning had carried a report from the Royal Bank of Canada singling out the Vancouver housing market as “unsustainable”. The researchers said that a typical family would now have to spend over 72 per cent of their pre-tax income to meet all the expenses of owning an average two-storey home. They felt that Vancouver was now passing even the frenzy of the 1990s and that “these are the most stressful conditions Vancouver has been dealing with on record” (see picture on page 50). Clearly house price tensions are not just being felt in various hotspots around the UK.

Professor Robert Shiller of Yale University was the first speaker. His view was that there was a serious risk of a worldwide recession in housing finance markets in 2007. Not only is there unprecedented volatility over time there is increasingly less difference between the behaviour of various markets across the world. The same factors seem to be affecting all markets; it was probable that a recession in one major market would be accompanied by recessions in many others.

Professor Shiller made the important point that by far the greatest risk facing homeowners was a fall in the value of their house. It was odd that financial markets had developed in such a way so as to provide, as a matter of routine, insurance for homeowners against risks such as burglary, flooding and fire, but had not developed a service to provide protection against what was now a much more important risk – an unanticipated decline in the value of their most important asset. Indeed, improved fire-detection and security devices had reduced the risks that homeowners traditionally insured against.

Professor Shiller also pointed out that speculation in housing as an asset had increased worldwide. There was a sharp increase in many markets, for example, in what in the UK is termed buy-to-let lending. Professor Shiller felt that current trends were unsustainable. His solution – on which he was actively working – was the creation of liquid financial markets in which people were able to trade house prices. His firm has developed house price futures markets for 10 US cities. Homeowners could buy the appropriate instrument on these markets – possibly through a financial intermediary – and protect themselves against the consequences of house price falls. The futures markets for the contracts which were currently traded in the US on house prices were predicting house price reductions of 6 to 8 per cent in each of the relevant cities by next August.

The other speaker in this session was Jim Power, a leading media commentator in the Republic of Ireland. He presented a case study on the Irish experience. Strong economic growth, a fall in interest rates and unemployment, a reversal of previous emigration trends towards net inward migration and the development of a much more competitive mortgage market had led to a strong growth in housing market activity. Ireland has a population of just 4.2 million and in recent years has completed around 80,000 new houses per year, a remarkable statistic to UK eyes, which has a population 14 times as great as Ireland, but struggles to complete three times as many new dwellings each year. His overall conclusion was that the Irish housing market experience was justified by solid fundamentals and that the risks of a significant recession – a bursting of the balloon – were relatively low.

Risks

During the panel discussion with which the Congress ended, there was further discussion of the general upbeat attitude that had characterised some of the other presentations during the conference, and the question arose as to whether the overall sense of optimism was justified. What were the risks that might bring down the market?

One American speaker felt that there were two worldwide issues; the first was sub-prime credit losses. In very few countries had this market experienced a recession. There was no historical precedent that had enabled lenders to judge whether the additional rates of interest which they were charging for such lending fully reflected the risk being taken on. There was a view that risk-based premiums were being ‘competed away’ in an unwise manner.

The second concern was about the impact on markets of speculative investment flows into the housing market, which could much more easily be reversed than the typical long-term owner occupier commitment to housing. The Building Societies Association’s chairman, Matthew Bullock, added a further risk that might possibly dent the overall optimistic scenario. Lenders in every country would need to consider the likely regulatory reaction to a downturn. Would politically sponsored regulatory amendments to foreclosure procedures, for example, make it more difficult for lenders to realise their security on non-performing loans? It is quite possible that in the event of widespread foreclosure action, political pressure would come to bear on governments to enable homeowners to stay in their homes even when loans were not being serviced.

Other speakers emphasised the impact of what some called “bubble economics” on the housing options available to lower income groups, which were generally felt to have deteriorated in the developed world in recent years, and in the high levels of financial sophistication now required by even the average homeowner to be fully aware of the range of mortgage options available.

Globalisation

Anish Shah from GE Money made a very effective speech on global trends and the effect they would have on local housing markets. There was increasing globalisation of consumers, for example – a strong increase in cross-border labour movement, especially to and within the European Union, and strong non-resident demand for housing in France and Spain. (Observers of the British market will be familiar with the extent to which the media now markets the opportunity to purchase houses in a wide range of countries throughout Europe and beyond.)

Secondly, lenders are globalising – HSBC, GMAC-RFC, Deutsche Bank, ABN AMRO and Shah’s own organisation were just a few names using technology as a key factor to enable them to move into new markets at relatively low costs. GE Money operated in only four countries in January 2003, but in 32 by September 2006. Moreover, innovative products for consumers that worked in one market were becoming increasingly replicable in other markets. There were, however, risks. Lenders needed stronger risk management to take account of the remaining differences in local markets. It was dangerous to assume that one market would behave in exactly the same way as another with which the lender was more familiar, and affordability issues, which differ hugely between countries, would play a key role.

The third global worldwide trend was towards transparency. There was, however, a common danger that regulators would encourage over-transparency and thus reduce the extent of understanding on the part of consumers already overwhelmed by the amount of information available.

Conclusion

A short article like this enables the reader to obtain only a brief taste of the rich variety of comment and opinion available in Vancouver. Other sessions which there is not space to describe here covered the role of government, housing finance from a consumer perspective, regulation, innovation (where the UK’s Mike Lazenby of Kent Reliance and Larry Banda from Nationwide made very effective presentations), Basel II, secondary mortgage markets, and the role of mortgage lenders at a time of natural disasters. Readers are encouraged to go to the International Union website for a mixture of presentations and pictures that fully reflect the rich diversity of this event.

Adrian Coles is secretary general of the International Union for Housing Finance and director general of the Building Societies' Association