Celebrating diversity

17 Oct 2016 | Richard Kemmish


If you aren’t familiar with the European Mortgage Federation’s annual review of Europe’s mortgage markets – Hypostat - I strongly recommend that you should be. Every year that it comes out it is both a useful reference tool and a reminder of what a wonderfully diverse continent Europe is.
 
We know that we as a market need to arrive at a balance between greater standardisation of our product across Europe and covered bond regimes whose differences reflect national specificities, whether they are cultural, legal or practical. This publication serves as a reminder of how different the underlying mortgage markets are and, by highlighting the biggest areas of difference a pointer toward which factors are the most sensitive when it comes to over-zealous harmonisation or most amenable to improvement.

To take some of the most interesting differences:

The home rental market ranges from nearly half of all properties in one country to less than 4% in another. This has practical implications – for example on the ability to use rental yields as a means to value properties included in cover pools – and political and economic ones, rising house prices benefit all voters, or are a source of wealth transfer from one half of society to the other. 
 
House prices do change. Over the countries surveyed by the EMF over the last ten years the biggest year-on-year gain was over 49%, the biggest fall, 37%. Don’t try telling me that rating agency stress test market value declines are too onerous. Or that indexation of property values in the pool isn’t vital in some countries, but less important in a country where that range has only been from – 0.5% to +4.5%.

The average mortgage compared to disposable income similarly varies enormously, from less than one month’s wages to nearly two years. When euro rates start to rise again that is going to have vastly different implications for mortgage affordability in different countries, and thus on cover pool credit.

The greatest indicator of the importance of covered bonds is, perhaps, availability of finance for EU citizens to buy their own home. Residential loans outstanding per capita is a reasonable proxy of this. There is a debate to be had about how much is too much, the average Dane for example had over €53,000 euros outstanding, the average Swedish and Dutch citizens are not far behind. Is that too much? That is a matter for each country to decide. But there is less debate at the other end of the spectrum, the average Romanian has just €700 of mortgage debt. Clearly indicative of the average citizen being unable to finance their home. 
 
Finally, a number we should all be familiar with, total covered bonds range from 140% of GDP to 0%.

These differences could be interpreted as an argument against standardisation of covered bonds – you can’t standardise such vastly different markets – or in favour of more standardisation – some countries clearly need to improve mortgage availability and thus wholesale funding of banks. But they can’t be ignored.


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