Average Interest Rate On Home Loan - Lending standards have been relaxed. However, there is a lack of data for a full international assessment of credit standards. This special feature uses a new euro area dataset from a dedicated dataset of key institutions supervised by banking supervisors to analyze trends in real estate lending standards and draw conclusions for financial stability. First, lending standards for residential real estate in the euro area, in particular debt-to-income ratios, were eased in 2016-2018. Given the significant deterioration in the eurozone's economic outlook since the outbreak of the coronavirus, this weakness seems particularly significant. . Second, lending standards tend to be looser in countries that have experienced strong real estate growth, suggesting that real estate risks are increasing in some euro area countries. Third, lender standards deteriorated less in countries with borrower-centric macroprudential policies, highlighting the importance of early macroprudential policy action to help prevent vulnerabilities from building up in the real estate sector.
The global financial crisis of 2008-09 showed that a real estate boom can come to an abrupt end and lead to financial crises with huge economic costs. Based on data from 17 countries over the past 140 years, Jordá et al. (2015) show that credit-induced housing price bubbles are a particularly dangerous phenomenon: they increase the likelihood of financial crises, and when they collapse, they are associated with deeper recessions and slower recovery.
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A credit-driven real estate boom often goes hand in hand with a loosening of lending standards. For example, Kelly et al. (2019) document significantly higher loan-to-collateral (LTV) and loan-to-income (LTI) ratios and extended debt maturities in eurozone countries that experienced ups and downs in house prices in the 2000s. Experienced.
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Moreover, as shown by Gaudêncio et al. (2019) for euro area countries, high LTV ratios, high LTI ratios and long loan maturities increase the likelihood of borrower insolvency.
While real estate market cycles vary across euro area countries, many have experienced real estate booms over the years. In 2019, the European Systemic Risk Board (ESRB) assessed residential property risks and issued five alerts and six country-specific recommendations.
While the easing of lending standards during the last expansion phase of the home loan cycle is often cited as one of the key weaknesses, data on the details of the easing of lending standards is lacking. Cross-country evidence is lacking.
This special feature analyzes trends in residential lending standards and financial stability implications in euro area countries based on a unique set of data. The data was collected by the Banking Supervision in 2019 from key directly supervised institutions and contains information on standards for granting new loans for 2016-2018.
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The main conclusion of the analysis is that the standards of lending for residential real estate by major institutions have loosened in recent years, especially in countries that have experienced real estate booms. First, in 2016-2018, standards for lending to residential property in the euro area, and in particular the LTI, eased. Second, lending standards tend to be lower in countries that have experienced a significant property boom, as evidenced by high property prices and rising mortgage lending. Third, lenders' standards deteriorated less in countries where macroprudential policy is borrower-oriented. The findings suggest that real estate risks have increased in some euro area countries in recent years and that early macro-prudential policy action can help reduce such risks.
The rest of this special feature is organized as follows. Section 2 provides an overview of the dataset and recent trends in residential lending standards. Section 3 links these trends to general macro-financial developments. Section 4 analyzes the impact of borrower-centred macroprudential policy on lending standards. Section 5 ends.
The analysis is based on data collected by the Banking Supervision on the terms and conditions of granting new loans by the largest banks in the euro area in 2016-2018. The dataset includes 145 mortgage loan portfolios by country, representing around 75% of the total euro housing loan market. Area.
Although the scope of the data varies from country to country, in most cases the dataset covers between 60% and 100% of the national home loan market. The dataset includes loan characteristics (e.g. maturity), key risk indicators (e.g. LTV, LTI and LSTI ratios), risk parameters (e.g. expected loss) and loan price spreads for new loans. Provides a comprehensive overview.
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The new loan volume includes used and unused amounts as well as renegotiations with the active participation of customers and does not include non-performing or foreclosed exposures.
From 2016 to 2018, the new dataset shows that there was a general easing of lending standards for residential real estate at major institutions in the euro area. The average LTV, LTI and LSTI ratios increased in 2016-2018 (see Chart A.1), indicating a weakening. Credit standards While the average LTV and LSTI ratios increased slightly from 80.3% to 81.0% and from 24.0% to 24.4%, respectively, the average LTI ratio increased significantly from 4.0 to 4.4. Data shows that households borrowing to buy a house or apartment in the euro area in 2018 borrowed an average of 81% of the total. purchase price, or 4.4 times their annual disposable income, and 24.4 percent. of their income on debt service. .
Source: SSM Credit Underwriting 2019 Data Collection Exercise. Note: Data aggregated from banking microdata weighted by relative share of total new residential lending activity in the euro area.
The significant increase in the average LTI was accompanied by a decrease in the length of maturity and interest rates. The average debt maturity increased from 19.8 to 22.1 years in 2016-2018 (see Figure A.1). Over the same period, the average mortgage rate in the dataset fell from 2% to 1.8%. Thus, a significant easing of the average LTI translated into only a slight easing of the average LSTI.
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But longer maturities also come with risks: (i) They reduce the annual repayment of the loan and therefore increase the Loss Given Default (LGD). and (ii) may lead to increased borrowers' interest rate risk if accompanied by a shorter period of fixation of the interest rate.
Lending standards vary significantly across euro area countries, with more stringent standards in countries more severely affected by the euro area sovereign debt crisis. For example, between 2016 and 2018, the average LTV and average LTI ratios varied between 53% and 87%, respectively, and 3.1 and 6.7 across euro area countries (see Chart A.2, left-hand panel). Three broad groups of countries can be distinguished: (i) countries with high average LTV and LTI ratios (AT, BE, DE, LU, SI, SK); (ii) countries with high average LTV but low average LTI (EE, FR, IE, LT, NL, PT); and (iii) countries with low average LTV and LTI ratios (CY, ES, GR, IT).
Interestingly, the lowest average LTV and LTI ratios are observed in countries that have been characterized by high non-performing loans (NPL) ratios in recent years.
The average LTI increased in most euro area countries, while the average LTV increased in more than half of the countries. The increase in the average LTI in 2016-2018 was mainly in the range of 0.1 to 0.9 (see Chart A.2, right-hand panel). This means that when buying a house or flat, households borrowed on average from 10% to 90% of their annual income. In total, nine euro area countries saw both average LTV and average LTI ratios increase between 2016 and 2018 (AT, BE, DE, ES, FR, IE, IT, PT, SK), with average LTV I ratios increasing . Range from 0.5 percentage point (p.p.) to 4 p.p. However, average credit standards can hide significant areas of risk. From a financial stability point of view, it is especially important to focus on loans with high LTV or LTI ratios, as they are generally riskier with other parameters unchanged.
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The share of new loans with LTV ratios above 80% or LTI ratios above 5 is increasing across the euro area and is significant in many countries. For more than half of all RRE loans in 2018, households borrowed more than 80% of the purchase price of a house or flat (see Figure A3, left-hand panel). In addition, for more than a third of all RRE loans in 2018, households borrowed more than five times their annual disposable income (see Figure A.3, right-hand panel).
Bank credit spreads fell over the same period as residential lending standards eased in the euro area. The average spread between 2016 and 2018 ranged from 76 to 20 basis points for real estate loans in the euro area compared to the cost of financing (i.e. the cost of financing the liquidity used to grant the loan, taking into account the reference rate). (pb.) down. to 56 bp (see Figure A.4, left-hand panel). The decline in average spreads over funding costs is visible across all risk classes of borrowers, which is reflected in banks' own estimates of expected losses (see Figure A.4, right-hand panel). Risk-adjusted remuneration (i.e. the difference between the spread and the expected
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