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The Financial Crisis: Stability through the Bauspar System

This article explores the role of the Bauspar system in providing stability during the financial crisis. It analyzes the German housing market and finance system, the policies for fostering savings for housing, and the preconditions for a successful Bauspar system. The article concludes by highlighting the importance of sustainable housing finance.

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The Financial Crisis: Stability through the Bauspar System

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  1. The financial crisis: stabilty through the Bauspar system Andreas J. Zehnder Managing Director of the European Federation of Building Societies (EFBS) Brussels, Belgium 1

  2. Outline • The financial crisis revisited • The German housing market and housing finance system • Bausparen • Policies for fostering savings for housing • Preconditions for a Bauspar system • Conclusion – sustainable housing finance

  3. 1. The financialcrisisrevisited The global financial crisis and the European sovereign debt crisis originated in the United States US housing finance system is at the core of the crisis • Low-interest rate policy of the US Federal Reserve caused real interest rates to be negative • US Mortgage loans became more affordable • Demand for property rose, prices increased, a building boom began • People believed that this situation would last forever • Speculation and over-investment in property were the result • Indebtedness of private households rose 3

  4. 1. The financialcrisisrevisited • US House prices rose quickly: From 1995 to 2007 by 135%! • Share of risky mortgages (less than 3% down payment) rose: From 4% in 1995 to 40% in 2007 • US household income did not keep pace with house prices: House prices outpaced income by 70% • US household debt as a % of disposable income rose: From 80% in 1995 to 127% in 2007 US household debt as % of disposable income

  5. 1. The financialcrisisrevisited US lenders are also responsible for the house price bubble: • Lax underwriting standards • Inflated appraisal prices • Aggressive lending practices and high loan-to-value ratios • Very relaxed prudential and monitoring standards Why did US lenders not care about the quality of the loans? Lenders could offload all risks to the investors of MBS, CDOs… Originate-to-distribute-model This ishowthe US housingmarketcouldinfect global financialmarkets Loan Loan Loan MBS $$$ $$$ $$$ $$$

  6. 1. The financialcrisisrevisited Collapse of the financial sector of the countries of the European periphery not centered at the first place on the proliferation of complex financial products or of exposure to US housing market • Spain and Ireland among the European countries with biggest markets for MBS but share of MBS on outstanding mortgage loans still below 25% in 2007 • Spanish and Irish banks did not have high exposure to US subprime mortgage market Plain vanilla property bubble Causes: • Negative real interest rates (caused by weak US monetary policy) • Unprecedented competition in financial sector; financial innovation • Spirit of optimism and economic growth omitted risks

  7. 1. The financialcrisisrevisited House price indices Spain and Ireland (1999=100) House prices in Spainand Ireland rose very fast (increase by 160% in 8 years!)… only to fall shortly after the US market crashed The German market rose only very modest, broadly in line with the inflation rate (increase by 12% in 9 years)… it was not affected by the financial crisis

  8. 2. The German housingmarketandhousingfinancesystem There are many reasons for the stability of the German housing market: • Very good housing supply (80 million inhabitants and 40 million housing units) • Negative demographic trend for young households • Newly build housing units matched demand • Real income of households is stagnating since 1996 • Well developed rental market • Government policies do not push for owner occupation • Structure of housing finance market; attitude of borrowers and lenders

  9. 2. The German housingmarketandhousingfinancesystem Typical financing example for the purchase of an apartment in Germany: Price for the apartment: 100.000 € Mortgage loan (first mortgage) 50.000€ Bauspar loan (second mortgage) 22.000 € Bauspar contract sum 40.000 € Bauspar savings 18.000 € Total equity capital Other equity 10.000 € C Itisimportantthatthebuyerbringsownequity – itis a form ofself-commitmentand a riskbufferforlenderandborrower

  10. 2. The German housingmarketandhousingfinancesystem German mortgage lenders can use many different funding instruments of which non dominates – this has several advantages: • Only a set of funding channels is able to meet the needs of lenders and borrowers properly • At various points in time some markets are more functional than others (e.g. markets for MBS and unsecured debt shut down in financial crisis) • High flexibility, competitive mortgage rates all time

  11. 3. Bausparen – central role in Germany • The Bausparkassen take a central position in the German mortgage process: • Traditional providers of the second mortgage • They provide also all other kinds of mortgage products • Market share in 2010: 24% • Bausparkassen are very flexible to adapt their business to changes in the interest rate environment, the overall economic situation or the behavior and needs of the customers

  12. 3. Bausparen – howitworks Loans are funded only by savings and amortisation payments → closed circuit Excess liquidity can be invested only within narrow limits (gilt-edged investments) Safety is the top priority. Loans are funded by savings and amortisation payments Bauspar bank Saver becomes debtor and pays the loan back (interest + amortisation) People with Bauspar contract save

  13. 3. Bausparen – howitworks 40 30 Contract sum in % 20 Deposit/ Saver‘s effort 10 Duration Bank‘s output/ Loan 10 20 30 40 50 60 Allocation phase Savings phase Loan phase Conclusion of contract Customer saves and recieves interest on deposit Right of payoff of contract sum (deposit +loan) Payback of loan

  14. 3. Bausparen – thebalancesheetstructure Balance sheet of all Bausparkassen 1990 Total balance: 86 billion Euros: Average interest rate: 10% (fixed 5 years) Balance sheet of all Bausparkassen 2010 Total balance: 196 billion Euros: Average interest rate: 3.5% (fixed 5 years) Other assets Other liabilities Other assets 22% 26% Other liabilities 32% 48% Advance loans Traditional business of providing second mortgages: 78% 21% Traditional business of providing second mortgages: 52% Bauspar loans/ collective loans Bauspar deposits Advance loans Bauspar deposits 68% 38% 57% 74% Bauspar loans 14% assets liabilities assets liabilities When interest rates are high, traditional business is strong When interest rates are low, other mortgage businesses become more important; also Bauspar savings become more attractive

  15. 3. Bausparen – safehaven in timesofcrisis 2008 was one of the best years for the Bauspar industry – while the rest of the financial industry was crumbling: Bausparen is valued by the people for its stability and safety Bausparen attracts in unstable times and times with low interest rates many savings: Bauspar deposits increased within 3 years (2008-2011) by 20 billion Euro or 16%! The large reservoir in Bauspar savings enables Bausparkassento provide all customers readily with cheap mortgages when interest rates and the demand for Bauspar loans rise again . 2011 Bauspar deposits 2008/2011: 2008 120 billion Euro 140 billion Euro + 16% 15

  16. 4. Policiesforfosteringsavingsforhousing The German government supports and encourages savings and equity formation: • Savings bonus on Bauspardeposits as tax free surplus on savings expenditures tied to a future usage for housing (with income ceiling) • Employee savings allowancegranted as tax free surplus to savings expenditures made for certain investment products including Bausparcontracts (with income ceiling) Bonus on savings as best way to support equity generation: • Increases savings efforts → national savings rate may rise • Transparent → easily budgeted, low administrative expenses • Socially reasonable → resources can be concentrated on target group • Demand subsidy → empowers families to make their own choices • Perfect complement to Bauspar system → increases acceptance and eases access for new customers

  17. 5. Preconditionsfor a Bausparsystem The Bauspar system is a very robust and safe system but there are preconditions for its successful establishment: • Stable macroeconomic environment • Low inflation rate (<10%) • Well-functioning banking law • Strong supervisory authority for credit institutions • Special Bauspar Act (optional, but recommended) • Savings bonus (optional, but recommended)

  18. 6. Conclusion – sustainable housing finance Latin America has avoided so far the high leverage and indebtedness so characteristically for households in the United States. It should stay on track and opt for a save and sustainable housing finance system. Vengan a Austria!

  19. Questions? Thank you for your attention! Contact details European Federation of Building Societies Andreas J. Zehnder Rue Jacques de Lalaing 28 B- 1040 Brussels Tel.: +32/2/231.03.71 Email: zehnder@efbs.org 19

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