Big numbers

03 Jun 2014 | Richard Kemmish


“A billion dollars here, a billion dollars there, pretty soon you’re talking real money” – Senator Everett Dirksen (in 1967)

The World Bank likes to deal in big numbers too. According to an excellent recent blog post by Simon Walley from their Housing Finance Programme, the world needs 565 million new houses by 2030, partly as a result of population growth but mainly due to increased urbanisation of the existing population (the world’s rural population will actually start to fall over the next few years. The audience for The Archers is as high as it will ever be). 

Assume that the average house in an ‘emerging market’ (whatever that means nowadays) costs about $20,000 to build (which is roughly accurate). You can also safely assume that most of those in need of new housing have precious little equity to invest in their new home (let’s reconsider those 60% LTV caps). Whilst you are at it assume that the relevant governments are incentivised to fund as much of the house building as possible from the private sector. They can’t afford to fund the housing themselves and they accept the idea of greater civic involvement of home owners (people with mortgages don’t start riots).

What do you get? A need for about $10 trillion of capital over the next 15 years.  More or less all of that has to come from the capital rich, ageing populations of the developed world to what are generically known as Emerging Markets.

Currently, despite the combination of low interest rate environments and greater life expectancy in the developed world (think you’ve got a nice lump sum in your pension fund? Take a look at that projected annuity rate), only 2% of pension funds assets are invested in emerging markets (again, thanks to the World Bank for that statistic). Presumably this is due to the perceived high level of riskiness of the governments and corporates there.

I think you can see where I am going with this.

Emerging Market covered bonds, even if you use the broadest (most outdated) definition of that concept represent about 0.5% of the total €3tn in our market. If you use a more up to date definition (for example, exclude countries with a GDP per capita of more than €10k) and exclude local currency covered bonds (in their own way very useful but doing nothing to increase the necessary cross border flow of capital) and you are left with almost nothing.  

There are 206 countries in the world. 169 of them don’t have a covered bond law. Yet.


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