Introducing Housing Finance in Emerging Markets Global Findings & Outlook for Turkey

1. Introducing Housing Finance in Emerging Markets Global Findings & Outlook for Turkey IFC & Dunya Housing Finance Conference December 3-4, 2007Istanbul Hans-Joachim Dübel Finpolconsult.de, Berlin

2. The expanding world of emerging market housing finance Sources: World Bank, Finpolconsult.

3. Why some early birds were not immediately successful Housing loan to GDP and per capita GDP trajectories in Latin American markets • Macroeconomic crisis • Indexed instruments may not help • Crowding out by gov • High real interest rates • Legal reform backlog • Weak institutions • Directed credit systems (subsidies/regulations) • Volatile funding sources • International bank financing, rather than long-term portfolio/direct investment • Immature domestic capital markets  Successful reforms ~ 95-05 Sources: World Bank, Finpolconsult.

4. Real interest rates are the key driver Real interest rates and housing loan to GDP ratio ~ 2005 • Market rates, not directed rationing) • Sufficient domestic savings volume (Asia) • Credible savings instruments • Long-term bonds • Long-term deposits • Credible intermediaries Sources: World Bank, IMF, Finpolconsult.

5. Markets develop more affordable products over time Loan maturities and loan-to-value ratios in selected emerging markets • With stabilization, competition, transparency • Maturities, LTVs increase • Shortening time scale. • LTV increase through • Bank self-insurance • Mortgage insurers • Contract savings/piggybacks • Maturity increase through • Capital markets • Intermediary ALM • Public policy role? • Interest deduction raises leverage • Rather proper regulation Sources: Merrill Lynch, Finpolconsult.

6. Bond market development enhances liquidity, risk management options Liquidity • Chile, Malaysia with long-term bond market strategies • Mexico hitting liquidity wall (as earlier Spain), introduces covered bonds Risk management • Still imperfect, e.g. Spain swaps fixed-rate cedulas back to floating-rate loans (Basel II deficiencies) • Ideally incentives for fixed-rate lending as low credit risk product Ratio of private sector loans to liquid liabilities in selected emerging markets Sources: IMF, Finpolconsult.

7. Limited charter competition, alternative distribution models improve access • Commercial banks with access barriers, institutional constraints • Some charter competition by finance companies • Diversify from commercial bank/ developer origination • Finance companies • Brokers • Correspondents • Requires regulation/consumer protection framework • Minimum standards for mortgage origination • Minimum risk management quality Share of non-bank, non-insurance distribution in emerging markets ~2005 Sources: Merrill Lynch, Finpolconsult.

8. Housing finance grows with income.. Per capita GDP and housing loan to GDP ratio ~ 2005 Sources: World Bank, Finpolconsult.

9. In Emerging Markets, housing finance goes mainly into investment, not consumption Household consumption to GDP ratio and housing loan to GDP ratio ~2005 • Supporting factors: • Growth • Migration • Urbanization • Upgrading • Cohabitation/household division • Repetition of US debacle unlikely in EMs Sources: United Nations, World Bank, Finpolconsult.

10. HOWEVER: too much, too fast, may be unhealthy Investment and housing lending in Thailand 1987-2005 Causes for lending/price cycles • Fixed exchange rate policies attract investors with risk amnesia (Thailand, Mexico). • Lobbyist pressure to reduce lending/bond market standards, tax deductions • Conflict of interest between intermediaries and consumers/investors (US), esp. re house prices. • Severe distortions in urban land and housing markets limiting supply. Sources: United Nations, World Bank, Finpolconsult.

11. SOME initial house price appreciation is unavoidable, in fact desired ! Mumbai property prices and house price income relation 1995-2005 • Housing finance permanently reduces funding costs • initial house price increase. • production signal to developer industry sets virtuous cycle in motion. • Distinct from price cycle • caused by fluctuations in interest rates • change in mortgage instrument (fixed-float). • Emerging market experience is divided: • Initial adjustment (Mumbai) • Bubbles (Shanghai, Kiev) • Bubbles occur without housing finance (Moscow) Source: Parekh.

12. Rational supply side policies help to avoid crises, improve focus of investment Mexico – house price to minimum salary ratio in different market segments • Access to developer finance • Developer focus on lower-middle income segments • Crisis often related to overbuilding in high-income • Mexico, Malaysia low-income industries with public stimulus • Thailand (Brazil upcoming) market solutions. • Pitfalls: • Mass housing loan/production subsidies may cause misallocation (vacancies, defaults) • Mass housing planning/agency problems (land hoarding) Source: BBVA.

13. Outlook for Turkey – European comparators Turkey scenarios, Greece & Italy historic development compared • Growth, demand pressure, supply constraints drive prices, lending volumes. • Loan instrument reduces growth • Turkey: fixed, short maturities • Greece: float, long maturities • Funding/hedging strategies • Current: Euro bonds/bank lines or deposits plus swaps • Future: domestic bonds/deposit mix • Distribution strategies • Non-bank so far limited to developers • Excessive regional focus (means price risk) Source: Guerlesel, EMF, Finpolconsult.

14. Turkey – challenges Lending/demand-side policies • Develop local bond markets, reduce dependence on foreign lending, swaps • Avoid subsidization of mortgages, rather reduction of transactions costs and macro/banking sector stability • Strengthen public risk monitoring Investment/supply-side policies • Zoning/infrastructure policies responsive to demand • Liberalize land market, reform of mass housing policy framework • Unauthorized housing issue, building standards

15. END Hans-Joachim (Achim) Dübel Finpolconsult.de aduebel@finpolconsult.de www.finpolconsult.de