Bipe: The Wealth has been inexorably increasing in France since the beginning of the 90's
According to Bipe and the French economic news magazine "Challenges", the wealth of French has increased by 0.6% in 2009 to culminate at 10200 billion euros.
More at: http://www.eubrokers.byethost22.com
Friday, December 18, 2009
Saturday, April 25, 2009
Bad Prospects for European Banks?
According to Eric Dor, a Research Director at IESEG, a Business School in Lille, France, the potential losses for the European Banking system could reach $1,600 billion, of which 900 billion would be related to the euro zone.
The European banks turn out to be more dependant on emerging markets than American and Japanese Banks. They might have underestimated the extent of the depreciations. They are significantly exposed to American toxic assets.
The total loss of banks since the beginning of the crisis could attain $4,508 billion on assets from the United States and $898 billion on assets from the rest of the world. American banks would account for $2,212 of the amount and European banks would account for $1,607 billion of the worldwide loss.
The total asset of the banks from the euro zone equals 25,000 billion Euros, that is 2.7 times as much as the annual GDP of the zone. For the whole EU, this figure reaches 41,000 billion euros.
The leverage ratios are too high: 64.4 for Dexia, 59.1 for Deutsche Bank, 46.9 for UBS, 40.5 for Crédit Agricole, 36.1 for BNP or 30.3 for Société Générale.
Loans from European banks to Emerging markets attain, as a whole, 2.550 billion euros which is far more than the loans granted by American or Japanese competitors. EU banks have an exposure of $1,400 billion to the risk of Eastern Europe. And banks from Austria, Italia, France, Belgium, Germany and Sweden detain 84% of the loans.
Goldman Sachs, on March 25, 2009 assessed the potential losses of the Euro Zone banks at $922 billion, that is 10.1% of the Euro zone GDP, of which 1/3 has been recorded in the bank accounts. As a result, almost 600 billion euros of losses would remain to be recorded.
According to AGEFI data released in March 2009 European banks have already acknowledged 234 billion euros in losses since the beginning of the crisis. The equity of European banks only represents 1,000 billion euros after the new flow of capital of 293 billion euros, of which half was provided by the states.
Bloomberg, in January 2009, had evaluated the recorded depreciations at $296.9 billion and capital raises at $333.4 billion.
According to Goldman Sachs, the banks from Euro Zone have already depreciated the equivalent of 346 billion euros of which 117 billion euros represent depreciations for losses on loans, 109 billion euros represent losses on shares and 120 billion euros in foreign recognitions. 569 billion euros of additional asset depreciations might be recorded in the future.
Thus, the total amount of losses for the euro zone bank could be 915 billion euros, 528 in the euro zone entities and 387 in the subsidiaries outside the euro zone. In the euro zone, the losses are distributed as follows: 343 billions on domestic loans, 76 billions on loans to foreign debitors, 57 billions on stocks and 52 billions on debt instruments. The losses for exterior subsidiaries are concentrated in the American subsidiaries for 310 billion euros and Central and Eastern Europe for 77 billion euros.
In the EU, corporate debts reach 95% of GDP compared to 50% in the U.S. This indebtedness level raises concerns in the current economic climate.
The European banks are highly exposed to U.S. toxic assets: 20% of banks in the U.S. territory are subsidiaries of Euro zone banks and according to the IMF, the exposure of European banks equals 75% of that of the U.S. banks. Problem: the U.S. banks have already depreciated $738 billion whereas European banks would have recognized only $294 billion in depreciations.
The failure of AIG would have had a devastating effect on European banks because most of the CDS they had sold ( total: $500 billion covered issued by AIG ) to cover payment default was directed to European banks, that is $300 billion of credit.
Based on an article from Eric Dor from IESEG School of Management ( LEM-CNRS, Université Catholique de Lille ).
The European banks turn out to be more dependant on emerging markets than American and Japanese Banks. They might have underestimated the extent of the depreciations. They are significantly exposed to American toxic assets.
The total loss of banks since the beginning of the crisis could attain $4,508 billion on assets from the United States and $898 billion on assets from the rest of the world. American banks would account for $2,212 of the amount and European banks would account for $1,607 billion of the worldwide loss.
The total asset of the banks from the euro zone equals 25,000 billion Euros, that is 2.7 times as much as the annual GDP of the zone. For the whole EU, this figure reaches 41,000 billion euros.
The leverage ratios are too high: 64.4 for Dexia, 59.1 for Deutsche Bank, 46.9 for UBS, 40.5 for Crédit Agricole, 36.1 for BNP or 30.3 for Société Générale.
Loans from European banks to Emerging markets attain, as a whole, 2.550 billion euros which is far more than the loans granted by American or Japanese competitors. EU banks have an exposure of $1,400 billion to the risk of Eastern Europe. And banks from Austria, Italia, France, Belgium, Germany and Sweden detain 84% of the loans.
Goldman Sachs, on March 25, 2009 assessed the potential losses of the Euro Zone banks at $922 billion, that is 10.1% of the Euro zone GDP, of which 1/3 has been recorded in the bank accounts. As a result, almost 600 billion euros of losses would remain to be recorded.
According to AGEFI data released in March 2009 European banks have already acknowledged 234 billion euros in losses since the beginning of the crisis. The equity of European banks only represents 1,000 billion euros after the new flow of capital of 293 billion euros, of which half was provided by the states.
Bloomberg, in January 2009, had evaluated the recorded depreciations at $296.9 billion and capital raises at $333.4 billion.
According to Goldman Sachs, the banks from Euro Zone have already depreciated the equivalent of 346 billion euros of which 117 billion euros represent depreciations for losses on loans, 109 billion euros represent losses on shares and 120 billion euros in foreign recognitions. 569 billion euros of additional asset depreciations might be recorded in the future.
Thus, the total amount of losses for the euro zone bank could be 915 billion euros, 528 in the euro zone entities and 387 in the subsidiaries outside the euro zone. In the euro zone, the losses are distributed as follows: 343 billions on domestic loans, 76 billions on loans to foreign debitors, 57 billions on stocks and 52 billions on debt instruments. The losses for exterior subsidiaries are concentrated in the American subsidiaries for 310 billion euros and Central and Eastern Europe for 77 billion euros.
In the EU, corporate debts reach 95% of GDP compared to 50% in the U.S. This indebtedness level raises concerns in the current economic climate.
The European banks are highly exposed to U.S. toxic assets: 20% of banks in the U.S. territory are subsidiaries of Euro zone banks and according to the IMF, the exposure of European banks equals 75% of that of the U.S. banks. Problem: the U.S. banks have already depreciated $738 billion whereas European banks would have recognized only $294 billion in depreciations.
The failure of AIG would have had a devastating effect on European banks because most of the CDS they had sold ( total: $500 billion covered issued by AIG ) to cover payment default was directed to European banks, that is $300 billion of credit.
Based on an article from Eric Dor from IESEG School of Management ( LEM-CNRS, Université Catholique de Lille ).
Tuesday, February 24, 2009
Financial Trouble in Countries from East Europe represents a Significant Threat to Western Economies
Countries from Eastern Europe have borrowed $1.7 trillion or $1,700 billion abroad, much on short-term maturities. They must, reimburse this year the equivalent of a third of the region's GDP that is $400 billion.
Russia, which to a large extent depends on oil and gas exports, undergoes the burden of $500 billion dollars in debts of its oligarchs. It has used 36% of its foreign reserves since August 2008 in order to defend the rouble.
The banks of Austria have lent €230 billion to Countries of East Europe which accounts for 70% of Austria's GDP. Bad debt will represent 10% and could even reach 20%.
In Poland, 60% of mortgages are in swiss francs and the Zloty has been going down.
Hungary, the Balkans, the Baltics and Ukraine are not well, as well.
The debt from East Europe is mostly owed to banks of West Europe, especially Austria, Sweden, Greece, Italia and Belgium. 74% of the $4.9 trillion or $4,900 billion portfolio of loans feeding the emerging markets.
Spain is closely linked to Latin America; Britain and Switzerland are strongly involved in Asia.
The European Central Bank might have to purchase bonds in large quantities.
East Europe might need $400 billion to cover loans and boost the economy.
The IMF appears weak with its $200 billion or €155 billion.
Italy's public debt is following a rocketing trajectory, reaching 112% of GDP next year.
To get more information on that news go to:
http://www.telegraph.co.uk/finance/comment/ambroseevans-pritchard
In-depth economic analysis and statistics at: http://webcurve.swiftphp.com
Russia, which to a large extent depends on oil and gas exports, undergoes the burden of $500 billion dollars in debts of its oligarchs. It has used 36% of its foreign reserves since August 2008 in order to defend the rouble.
The banks of Austria have lent €230 billion to Countries of East Europe which accounts for 70% of Austria's GDP. Bad debt will represent 10% and could even reach 20%.
In Poland, 60% of mortgages are in swiss francs and the Zloty has been going down.
Hungary, the Balkans, the Baltics and Ukraine are not well, as well.
The debt from East Europe is mostly owed to banks of West Europe, especially Austria, Sweden, Greece, Italia and Belgium. 74% of the $4.9 trillion or $4,900 billion portfolio of loans feeding the emerging markets.
Spain is closely linked to Latin America; Britain and Switzerland are strongly involved in Asia.
The European Central Bank might have to purchase bonds in large quantities.
East Europe might need $400 billion to cover loans and boost the economy.
The IMF appears weak with its $200 billion or €155 billion.
Italy's public debt is following a rocketing trajectory, reaching 112% of GDP next year.
To get more information on that news go to:
http://www.telegraph.co.uk/finance/comment/ambroseevans-pritchard
In-depth economic analysis and statistics at: http://webcurve.swiftphp.com
Saturday, December 13, 2008
The Economic Turmoil raises the Growing Problem of Indebtedness
The World Economy is currently facing what we could call a credit crunch. The banks are no longer healthy. The years of cheap credit belong to the past. It is time now to analyse what's really going on.
The past ten years have been phenomenal for the banks and the housing market. Unfortunately or fortunately, most of the increase in real estate prices in most developed countries has been totally artificial. Today, the banks pay the price of this great monetary illusion. Let's remember that real estate prices had more than doubled from 1998 to 2007 in countries like France ( +150%), Spain, Ireland or England. On the other hand, Germany and Japan have not faced the housing bubble ( for specific reasons ).
As we've said, most of the rise was non-natural because the rise in salaries had had a slower pace. The rise in housing prices is due to monetary expansion thanks to an apparent cheap cost of credits. This monetary expansion has fueled an unprecedented speculative phenomenon in the housing sector. Some real estate investors who had borrowed money could only reimburse the banks if the prices continued to go up.
In other words, the real estate market had turned into a Casino Economy: it was often buying accomodations to make money.
Robert Peston, a BBC business editor, notes that if you combine Consumer, corporate and public sector debt in the U.K. , the ratio of borrowings to annual economic output is a bit over 300 per cent or more than £4,000 billion. The indicators of indebtedness and its evolution are striking: the gross foreign current liabilities of U.K.'s banks rose from £1,100 billion in 1997 to £4,400 billion this year which represents around three times the size of U.K.'s annual economic output.
This debt is to a large extent the recycled savings of other countries, especially China and its massive surpluses as well as other Asian economies and the Middle East. China detains, today, £1,400 billion in foreign exchange reserves. There is now an imbalance between savings in the East and the indebtedness of major developed countries ( France, U.K. , U.S., Spain...). Western countries tend to generate budget deficits, trade deficits whereas China or India tend to generate massive trade surpluses.
Zhou Xiaochuan, governor of the Chinese central bank warned:"Overconsumption and a high reliance on credit is the cause of the US financial crisis" and " the US should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits".
The past ten years have been phenomenal for the banks and the housing market. Unfortunately or fortunately, most of the increase in real estate prices in most developed countries has been totally artificial. Today, the banks pay the price of this great monetary illusion. Let's remember that real estate prices had more than doubled from 1998 to 2007 in countries like France ( +150%), Spain, Ireland or England. On the other hand, Germany and Japan have not faced the housing bubble ( for specific reasons ).
As we've said, most of the rise was non-natural because the rise in salaries had had a slower pace. The rise in housing prices is due to monetary expansion thanks to an apparent cheap cost of credits. This monetary expansion has fueled an unprecedented speculative phenomenon in the housing sector. Some real estate investors who had borrowed money could only reimburse the banks if the prices continued to go up.
In other words, the real estate market had turned into a Casino Economy: it was often buying accomodations to make money.
Robert Peston, a BBC business editor, notes that if you combine Consumer, corporate and public sector debt in the U.K. , the ratio of borrowings to annual economic output is a bit over 300 per cent or more than £4,000 billion. The indicators of indebtedness and its evolution are striking: the gross foreign current liabilities of U.K.'s banks rose from £1,100 billion in 1997 to £4,400 billion this year which represents around three times the size of U.K.'s annual economic output.
This debt is to a large extent the recycled savings of other countries, especially China and its massive surpluses as well as other Asian economies and the Middle East. China detains, today, £1,400 billion in foreign exchange reserves. There is now an imbalance between savings in the East and the indebtedness of major developed countries ( France, U.K. , U.S., Spain...). Western countries tend to generate budget deficits, trade deficits whereas China or India tend to generate massive trade surpluses.
Zhou Xiaochuan, governor of the Chinese central bank warned:"Overconsumption and a high reliance on credit is the cause of the US financial crisis" and " the US should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits".
Sunday, February 24, 2008
Economic Scenarii
January 31, 2008: Assessing the Characteristics of the Real Estate Market: A New Economy ?
The activity on the housing market has been very intense in most western countries over the past 10 years. In France, for instance, prices have increased by roughly 150% between 1998 and 2008. Or In the Republic of Ireland, prices had tripled from 2000 to 2006. How to explain that sharp rise ? Will the housing market continue to grow ?
A Rise In Demand
Prices of properties are the outcome of the confrontation of supply and demand. The demand has been very dynamic over the past few years which explains why prices have gone up. In spite of a remarkably dynamic construction market, that's the excess of demand to supply which has triggered this uncommon boom. But why a boom in demand ?
Is it linked to the new tendancy in family situations ? Indeed, there are more and more people who are single, unmarried or divorced and hence, they buy houses or flats for one person. This increase in individualism implies more accommodations available on the market. In reality, this factor is marginal in explaining this inexorable increase in prices.
Economic Expansion and Cheaper and Cheaper Credits
The key factors appear to be the monetary policy led by the central banks of western countries as well as the economic expansion of the late 90's. The root to the acceleration of the rise pace turns out to be the interest rates of the Federal Reserve in the United States. And the rise has been amplified by mimetic phenomena such as speculation ans strategic investments which explains the exponential shape of the price curve over the past few years.
Sharp Increase in the Monetary Mass
The banks play a key role on the property market: they have made the Real Estate boom possible thanks to large injections of monetary mass into the world economy via credits or loans. Households as well as investors have had the opportunity to borrow money from the banks at very low costs. The outcome is a sharp increase in the mass of credit: in the eurozone, for instance, the rise of credits, from 1999 to 2007, is estimated to be 30% ( from about 140% of GDP to about 180% of GDP ) and in the United States,during the same period, the increase reaches 40% ( from about 100% of GDP to about 140% of GDP ) according to Natixis and Coface.
Booming Real Estate Market
As we've said, the root to the attractivity of the loans is the accomodating monetary policy led by the major central banks over the past few years. The cost of credits granted by the banks is closely linked to key interest rates of the central banks because it is the cost at which commercial banks can borrow money. If the Federal Reserve, in the United States, decides to lower its key interest rate, the natural consequence for the commercial banks will be, by economic mechanisms, cheaper credits ( if there is no defiance on the part of the banks regarding the health of the economy ). For instance, from mid 2000 to mid 2003, the key interest rate of the Federal Reserve of Alan Greenspan went down, gradually and significantly, from 6.5% to only 1% which engendered a sharp rise in prices on the housing market in the U.S. as well as a booming construction industry. Then, from mid 2003 to July 2006, this interest rate started to climb again, up to 5.25%. Ever since, the U.S. property market has reached its peak and is currently in turmoil with an apparent excess of accommodations. Prices have started going down.
In Europe, the dynamism of real estate is still present. The European Central Bank had led an accomodating monetary policy by gradually lowering its key interest rate. But since 2006, it has tightened its monetary policy by gradually raising the key interest rate. As a result, the costs of loans have gone up. In spite of the successive interest rate rises, the housing market is still rising today, though at a lower pace. Why is the property market still going up ?
Rising Speculation
It could seem to be paradoxical that the rise in prices on the real estate market is not stopped by rising costs in loans. The ECB has successively raised its main interest rate from 2% at the end of 2005 to 4% in June of 2007 and the rise is still there. Isn't it a paradox ? In appearance ! Because, new factors have been added into the game: the rise has called the rise. Those factors have appeared thanks to the great financial prospects offered by the housing market. Those factors which follow the same financial logic, that is maximizing profits ( capital gain, return ), include the phenomena of mimetism, speculation and strategic investments.
Today, almost everybody in France, have become aware that prices in Real Estate have been skyrocketing with a sharp acceleration over the past few years ( 2002-2006 ). The reasoning is as follows: it has been going up for the past 10 years, so it is likely that it will continue to go up and it will be possible for us to make significant profits by selling the accomodation at a higher price than the price at which we bought it.The outstanding and sustained rise in prices on this market has clearly made possible the emergence and the development of speculation, to a certain extent, similar to the financial bubble of the late 1990's and the famous leap of tech stocks.
Financialisation of the Property Market
Real Estate is more than ever an asset: one of the marking characteristics of the housing market, over the past few years, has been the "financialisation" of real estate. Any household can invest on the real estate market without needing to mobilise the equivalent of the price of a house. Indeed, some investment companies invest in the real estate market for you and divide their asset into shares that are then sold on the market. Hence, you can be the owner of a fraction of a lodging which is being rent to households so that you receive a portion of the renting each year. That's purely an investment for you: it is similar to a stock with its dividends but the shares tend to be less liquid than a corporation stock. The price of the share depends on the market price of the accomodation. In France, the investment funds that manage real estate assets are the SCPI ( Société Civile de Placement Immobilier or Real Estate Common Funds of Investment ) and OPCI. The development of that investment activity due to rising prices is one of the factors which can explain the acceleration of the rise.
Amplifying Factors
In a context of cheap and declining credits, many households had had the opportunity to run into debt to become the owner of the accomodation. It was tempting for them to borrow money in order to buy a "roof" because, in parallel with rising prices, the prices in renting were also going up (so that the return for the investors in rental activity was not altered). Why continuing to rent, at a growing price, a flat or a house if we can buy the same thing at a cheaper periodical cost ( the periodical cost of the loan ) ? In France, one of the countries where the property rate is weaker ( about 50% ), many households have taken advantage of cheap credits, contributing to increase the property rate. However, they have had to face other categories of buyers, the investors and the speculators. A lot of households made the choice of investing in real estate with the goal of hiring the properties because the renting enabled them to completely reimburse the cheap credit they had obtained. And furthermore, some of them intended to sell the property some time later with a capital gain because they were aware that the prices were going up at an outstanding pace. Many have thought that the rise in raw materials and the construction index were fully responsible for this rise.They bet it would continue to climb. Among the investors, there were also the investment companies which invest on a large scale in real estate. The real estate asset is more and more important in the portfolio of hedge funds: that's not a surprise and that's one of the main characteristics of the financialisation of real estate.
Devastating Subprimes
In the United States, notably, numerous households have taken incredible risks by contracting credits with variable rates. It was also tempting to obtain this range of credits because the federal monetary policy had been more and more expansionnist ( the key interest rates hadn't stopped going down since mid 2000 ). So, the households bet it would continue to go down and hence, their credit would be cheaper and cheaper. Unfortunately, that's not what happened and in a context of a tightened monetary policy on the part of the Federal Reserve, the crisis of subprimes emerged. In France, the variable rates are less wide-spread than in the United States. So, in a context of growing interest rates, a relatively small amount of borrowers is affected by the increase in the price of that kind of loans.
Growing Securitization, "Titrisation"
The durable rise in the mass of credits in the United States and in the European Union is accompanied by a massive process of securitization of debt. The banks have the opportunity to turn a significant quantity of debt into Asset-backed securities ( ABS ). This process of "titrisation" allows the banks which don't want to bear the risk of bad debt to transfer it to investors . Thus, the credit which is turned into securities won't have any balance sheet impact. It will be "off balance sheet". In other words, it will have, nearly, no influence on the financial health, on the profits of the bank. A special entity called a "Special Purpose Vehicule" is created for the process of securitization.
The ABS include home equity loans, the auto loans, the credit card receivables as well as the student loans. The home equity loans are the largest class within the ABS market. A large variety of ABS have been developed and notably the Collaterised Debt Obligations or CDO.
In the United States, a growing fraction of loans has been turned into ABS over the past few years according to data released by Natixis and Coface. It represented about 60% of credits in 1999 and about 70% in 2007. In the European Union, the credits have also strongly risen but the proportion of ABS remains relatively stable over time.
The Real Estate market has benefited from this rise in the quantity of ABS. If CDO hadn't been developed, the banks would have been forced to renounce to grant risky credits and the amount of transactions on the housing market would be lowered. No doubt that the rise in prices on this sector would have been slown down to a certain extent.
A Real Estate Bubble ?
Are there fundamental reasons for the rise in the real estate market ? In other words, are there structural phenomena which are likely to account for this rise ? In certain regions like the French Riviera in France, it is tempting to say that the rise is explained by the demographic pressure. The population is getting older and many people are willing to come to the french riviera when they retire. Hence, many retired persons decide to settle in this region which is indeed a factor which brings prices higher. Furthermore, thanks to globalization, prices of air travel are going down which favours more and more tourism on the French Riviera. At the end of the day, prices on the french Riviera have roughly been multiplied by 1.5 since 1998.
Nevertheless, these strong factors seem to be insufficient to account for this unprecedented rise in housing prices. Monetary and speculative factors appear to be the prime factors because the prices of accomodations go well beyond the purchasing power of medium households. Big social distorsions are beginning to appear with a growing number of households who doesn't have the budget anymore to find a lodging. In other words, a growing fraction of the budget of households is occupied by lodging expenditures. The growth in the real estate market is also likely to disrupt other markets such as the car industry since it swallows a growing fraction of the budget of households.
Real Estate Prospects: From Excess of Demand to Excess of Supply ?
The economy, now, shows signs of slowdown, partly due to rising interest rates. It's very likely that investors ans speculators are going to progressively disinvest on the real estate market. The reason is that most of them don't believe that this sector will continue to go up. A growing number of them doesn't bet, notably, on the fact that the banks will continue to help maintain the monetary expansion we have observed over the past few years. Why ? because the commercial banks fear the impact of the slowdown on bad debt. Probably that they have provided the economy with an exaggerated amount of credit because the relative economic wealth is growing slower than prices on the real estate market.
So, one can expect a stabilization of prices in the short run followed by a sharp decrease in prices due to psychological factors ( massive withdrawal of investors and speculators ) and in the long run a progressive decrease towards the long term trend of the price curve.One can note, moreover, that the potential of decrease is amplified by the construction boom of the past few years which had mostly benefited to investors ans speculators. In other words, the current underconstruction problem will paradoxically become an overconstruction problem once most investors and speculators will have disinvested on real estate or withdrawn from this sector. Hence, very severe real estate and building industry crisis could occur because of the past overheated real estate market.
The activity on the housing market has been very intense in most western countries over the past 10 years. In France, for instance, prices have increased by roughly 150% between 1998 and 2008. Or In the Republic of Ireland, prices had tripled from 2000 to 2006. How to explain that sharp rise ? Will the housing market continue to grow ?
A Rise In Demand
Prices of properties are the outcome of the confrontation of supply and demand. The demand has been very dynamic over the past few years which explains why prices have gone up. In spite of a remarkably dynamic construction market, that's the excess of demand to supply which has triggered this uncommon boom. But why a boom in demand ?
Is it linked to the new tendancy in family situations ? Indeed, there are more and more people who are single, unmarried or divorced and hence, they buy houses or flats for one person. This increase in individualism implies more accommodations available on the market. In reality, this factor is marginal in explaining this inexorable increase in prices.
Economic Expansion and Cheaper and Cheaper Credits
The key factors appear to be the monetary policy led by the central banks of western countries as well as the economic expansion of the late 90's. The root to the acceleration of the rise pace turns out to be the interest rates of the Federal Reserve in the United States. And the rise has been amplified by mimetic phenomena such as speculation ans strategic investments which explains the exponential shape of the price curve over the past few years.
Sharp Increase in the Monetary Mass
The banks play a key role on the property market: they have made the Real Estate boom possible thanks to large injections of monetary mass into the world economy via credits or loans. Households as well as investors have had the opportunity to borrow money from the banks at very low costs. The outcome is a sharp increase in the mass of credit: in the eurozone, for instance, the rise of credits, from 1999 to 2007, is estimated to be 30% ( from about 140% of GDP to about 180% of GDP ) and in the United States,during the same period, the increase reaches 40% ( from about 100% of GDP to about 140% of GDP ) according to Natixis and Coface.
Booming Real Estate Market
As we've said, the root to the attractivity of the loans is the accomodating monetary policy led by the major central banks over the past few years. The cost of credits granted by the banks is closely linked to key interest rates of the central banks because it is the cost at which commercial banks can borrow money. If the Federal Reserve, in the United States, decides to lower its key interest rate, the natural consequence for the commercial banks will be, by economic mechanisms, cheaper credits ( if there is no defiance on the part of the banks regarding the health of the economy ). For instance, from mid 2000 to mid 2003, the key interest rate of the Federal Reserve of Alan Greenspan went down, gradually and significantly, from 6.5% to only 1% which engendered a sharp rise in prices on the housing market in the U.S. as well as a booming construction industry. Then, from mid 2003 to July 2006, this interest rate started to climb again, up to 5.25%. Ever since, the U.S. property market has reached its peak and is currently in turmoil with an apparent excess of accommodations. Prices have started going down.
In Europe, the dynamism of real estate is still present. The European Central Bank had led an accomodating monetary policy by gradually lowering its key interest rate. But since 2006, it has tightened its monetary policy by gradually raising the key interest rate. As a result, the costs of loans have gone up. In spite of the successive interest rate rises, the housing market is still rising today, though at a lower pace. Why is the property market still going up ?
Rising Speculation
It could seem to be paradoxical that the rise in prices on the real estate market is not stopped by rising costs in loans. The ECB has successively raised its main interest rate from 2% at the end of 2005 to 4% in June of 2007 and the rise is still there. Isn't it a paradox ? In appearance ! Because, new factors have been added into the game: the rise has called the rise. Those factors have appeared thanks to the great financial prospects offered by the housing market. Those factors which follow the same financial logic, that is maximizing profits ( capital gain, return ), include the phenomena of mimetism, speculation and strategic investments.
Today, almost everybody in France, have become aware that prices in Real Estate have been skyrocketing with a sharp acceleration over the past few years ( 2002-2006 ). The reasoning is as follows: it has been going up for the past 10 years, so it is likely that it will continue to go up and it will be possible for us to make significant profits by selling the accomodation at a higher price than the price at which we bought it.The outstanding and sustained rise in prices on this market has clearly made possible the emergence and the development of speculation, to a certain extent, similar to the financial bubble of the late 1990's and the famous leap of tech stocks.
Financialisation of the Property Market
Real Estate is more than ever an asset: one of the marking characteristics of the housing market, over the past few years, has been the "financialisation" of real estate. Any household can invest on the real estate market without needing to mobilise the equivalent of the price of a house. Indeed, some investment companies invest in the real estate market for you and divide their asset into shares that are then sold on the market. Hence, you can be the owner of a fraction of a lodging which is being rent to households so that you receive a portion of the renting each year. That's purely an investment for you: it is similar to a stock with its dividends but the shares tend to be less liquid than a corporation stock. The price of the share depends on the market price of the accomodation. In France, the investment funds that manage real estate assets are the SCPI ( Société Civile de Placement Immobilier or Real Estate Common Funds of Investment ) and OPCI. The development of that investment activity due to rising prices is one of the factors which can explain the acceleration of the rise.
Amplifying Factors
In a context of cheap and declining credits, many households had had the opportunity to run into debt to become the owner of the accomodation. It was tempting for them to borrow money in order to buy a "roof" because, in parallel with rising prices, the prices in renting were also going up (so that the return for the investors in rental activity was not altered). Why continuing to rent, at a growing price, a flat or a house if we can buy the same thing at a cheaper periodical cost ( the periodical cost of the loan ) ? In France, one of the countries where the property rate is weaker ( about 50% ), many households have taken advantage of cheap credits, contributing to increase the property rate. However, they have had to face other categories of buyers, the investors and the speculators. A lot of households made the choice of investing in real estate with the goal of hiring the properties because the renting enabled them to completely reimburse the cheap credit they had obtained. And furthermore, some of them intended to sell the property some time later with a capital gain because they were aware that the prices were going up at an outstanding pace. Many have thought that the rise in raw materials and the construction index were fully responsible for this rise.They bet it would continue to climb. Among the investors, there were also the investment companies which invest on a large scale in real estate. The real estate asset is more and more important in the portfolio of hedge funds: that's not a surprise and that's one of the main characteristics of the financialisation of real estate.
Devastating Subprimes
In the United States, notably, numerous households have taken incredible risks by contracting credits with variable rates. It was also tempting to obtain this range of credits because the federal monetary policy had been more and more expansionnist ( the key interest rates hadn't stopped going down since mid 2000 ). So, the households bet it would continue to go down and hence, their credit would be cheaper and cheaper. Unfortunately, that's not what happened and in a context of a tightened monetary policy on the part of the Federal Reserve, the crisis of subprimes emerged. In France, the variable rates are less wide-spread than in the United States. So, in a context of growing interest rates, a relatively small amount of borrowers is affected by the increase in the price of that kind of loans.
Growing Securitization, "Titrisation"
The durable rise in the mass of credits in the United States and in the European Union is accompanied by a massive process of securitization of debt. The banks have the opportunity to turn a significant quantity of debt into Asset-backed securities ( ABS ). This process of "titrisation" allows the banks which don't want to bear the risk of bad debt to transfer it to investors . Thus, the credit which is turned into securities won't have any balance sheet impact. It will be "off balance sheet". In other words, it will have, nearly, no influence on the financial health, on the profits of the bank. A special entity called a "Special Purpose Vehicule" is created for the process of securitization.
The ABS include home equity loans, the auto loans, the credit card receivables as well as the student loans. The home equity loans are the largest class within the ABS market. A large variety of ABS have been developed and notably the Collaterised Debt Obligations or CDO.
In the United States, a growing fraction of loans has been turned into ABS over the past few years according to data released by Natixis and Coface. It represented about 60% of credits in 1999 and about 70% in 2007. In the European Union, the credits have also strongly risen but the proportion of ABS remains relatively stable over time.
The Real Estate market has benefited from this rise in the quantity of ABS. If CDO hadn't been developed, the banks would have been forced to renounce to grant risky credits and the amount of transactions on the housing market would be lowered. No doubt that the rise in prices on this sector would have been slown down to a certain extent.
A Real Estate Bubble ?
Are there fundamental reasons for the rise in the real estate market ? In other words, are there structural phenomena which are likely to account for this rise ? In certain regions like the French Riviera in France, it is tempting to say that the rise is explained by the demographic pressure. The population is getting older and many people are willing to come to the french riviera when they retire. Hence, many retired persons decide to settle in this region which is indeed a factor which brings prices higher. Furthermore, thanks to globalization, prices of air travel are going down which favours more and more tourism on the French Riviera. At the end of the day, prices on the french Riviera have roughly been multiplied by 1.5 since 1998.
Nevertheless, these strong factors seem to be insufficient to account for this unprecedented rise in housing prices. Monetary and speculative factors appear to be the prime factors because the prices of accomodations go well beyond the purchasing power of medium households. Big social distorsions are beginning to appear with a growing number of households who doesn't have the budget anymore to find a lodging. In other words, a growing fraction of the budget of households is occupied by lodging expenditures. The growth in the real estate market is also likely to disrupt other markets such as the car industry since it swallows a growing fraction of the budget of households.
Real Estate Prospects: From Excess of Demand to Excess of Supply ?
The economy, now, shows signs of slowdown, partly due to rising interest rates. It's very likely that investors ans speculators are going to progressively disinvest on the real estate market. The reason is that most of them don't believe that this sector will continue to go up. A growing number of them doesn't bet, notably, on the fact that the banks will continue to help maintain the monetary expansion we have observed over the past few years. Why ? because the commercial banks fear the impact of the slowdown on bad debt. Probably that they have provided the economy with an exaggerated amount of credit because the relative economic wealth is growing slower than prices on the real estate market.
So, one can expect a stabilization of prices in the short run followed by a sharp decrease in prices due to psychological factors ( massive withdrawal of investors and speculators ) and in the long run a progressive decrease towards the long term trend of the price curve.One can note, moreover, that the potential of decrease is amplified by the construction boom of the past few years which had mostly benefited to investors ans speculators. In other words, the current underconstruction problem will paradoxically become an overconstruction problem once most investors and speculators will have disinvested on real estate or withdrawn from this sector. Hence, very severe real estate and building industry crisis could occur because of the past overheated real estate market.
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