Central Bank of Iceland

Households and housing markets in financial crisesThe Icelandic version

Þorvarður Tjörvi ÓlafssonEconomist, Central Bank of Icelandthorvardur.olafsson@sedlabanki.is

Nordic conference in Reykjavik: The Financial Crisis, the Property Market and Home Ownership November 26, 2009

Overview of presentationTwo main subjects

1. The financial crisis in Iceland in an international perspective, especially with regard to households and housing markets

2. The effects of the financial crisis in Iceland on the housing sector and households’ economic situation

The financial crisis in Iceland in an international perspective

International perspectiveIt is well-known that Iceland had the largest banking system ever to have gone through a crisis …

Chile

('81

)

Equa

dor (

'98)

Finl

and

('91)

Indo

nesi

a ('9

7)

Kore

a ('9

7)

Mal

aysi

a ('9

7)

Mex

ico

('94)

Nor

way

('87

)

Russ

ia ('

98)

Swed

en ('

91)

Thai

land

('97

)

Turk

ey ('

00)

Ven

ezue

la ('

94)

Japa

n ('9

1)

Icel

and

('07)

0

100

200

300

400

500

600

700

800

900% of GDP

Commercial banks' assets as % of GDP a year before the onset of various crises

Sources: Bank of England, Central Bank of Iceland.

Switz

erla

nd UK

Irel

and

Fran

ce

Ger

man

y

Spai

n

Japa

n

Aus

tral

ia

Cana

da

Ital

y

US

Icel

and

0

100

200

300

400

500

600

700

800

900

1000 % of GDP

Banking group assets as % of GDP in the current global crisis

Sources: Bank of England, Central Bank of Iceland.

1. Total consolidated banking group assets fro domestically owned banking sector only. This includes assets of domestic banks held abroad. End-2007 except UK (end 2008) and Iceland (June 2008).

International perspective … the most indebted private sector …

Russ

ia ('

98)

Turk

ey ('

01)

Arg

entin

a ('0

1)

Ecua

dor (

'99)

Mex

ico

('94)

Indo

nesi

a ('9

7)

Nor

way

('87

)

Finl

and

('91)

Swed

en ('

91)

Thai

land

('97

)

Icel

and

('08)

0

100

200

300

400

500

600

Chart Title

% of GDP

Private sector lending as % of GDP in a few crisis countries

Sources: Reuters EcoWin, Central Bank of Iceland.

1.The year in parentheses represents the onset of the crisis in the country concerned.

Finl

and

Ger

man

y

Swed

en

Spai

n

Switz

erla

nd UK

Den

mar

k

USA

Icel

and

0

100

200

300

400

500

Chart Title

% of GDP

Private sector lending as % of GDP in a few countries in the current global crisis

Sources: Bank of England, Reuters EcoWin, Central Bank of Iceland.

1.The value is for 2007.

International perspective … and widespread foreign-currency borrowing

Arg

entin

a ('0

0)

Thai

land

('96

)

Kore

a ('9

6)

Braz

il ('0

1)

Uru

guay

('01

)

Icel

and

('08)

0

50

100

150

200

250

300

350% of GDP

Corporate foreign currency debt to GDP in a few crisis countries

Sources: IMF, Central Bank of Iceland.

Households Businesses Municipalities0

10

20

30

40

50

60

70

80

Chart TitleProportion of total foreign-denominated debt in some of Iceland's key sectors

%

Source: Central Bank of Iceland.

1. Figures for households and municipalities are as of year-end 2008, and figures for businesses are as of June 2009.

International perspective Loss of household wealth will be in the high-end relative to other crises as house prices decline …

USA

(192

9)M

alay

sia

(199

7)Th

aila

nd (1

997)

Kore

a (1

997)

Arg

entin

a (2

001)

Nor

way

(189

9)Sw

eden

(199

1)Sp

ain

(197

7)H

isto

rical

ave

rage

Japa

n (1

992)

Nor

way

(198

7)In

done

sia

(199

7)Fi

nlan

d (1

991)

Colu

mbi

a (1

998)

Icel

and

(200

8)Ph

ilipp

ines

(199

7)H

ong

Kong

(199

7)

-60

-50

-40

-30

-20

-10

0

Chart Title

%

Real house price declines in a few crisis countries

Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland.

1.Central Bank of Iceland baseline forecast.

USA

Ital

y

Nor

way

Finl

and

Aus

tral

ia

Cana

da

Swed

en

Den

mar

k

UK

Fran

ce

Irel

and

New

Zea

land

Spai

n

Icel

and

-40

-20

0

20

40

60

80

Change in real house prices (Q1/2001-Q3/2006)

Real house prices falls from recent peak

Real house price rises and subsequent falls in the current global crisis

Sources: IMF, Central Bank of Iceland

%

International perspective … and financial assets collapse

Arg

entin

a (2

001)

Hon

g Ko

ng (1

997)

Nor

way

(198

7)Sw

eden

(199

1)H

isto

rical

ave

rage

Phill

ippi

nes

(199

7)Ja

pan

(199

2)Fi

nlan

d (1

991)

USA

(192

9)Co

lum

bia

(199

8)Sp

ain

(197

7)M

alay

sia

(199

7)In

done

sia

(199

7)Ko

rea

(199

7)Th

aila

nd (1

997)

Icel

and

(200

8)

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

Chart Title

%

Real equity price declines in a few crises countries

Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland.

1.Central Bank of Iceland baseline forecast.

USA

Ital

y

Nor

way

Finl

and

Aus

tral

ia

Cana

da

Swed

en

Den

mar

k

UK

Fran

ce

Irel

and

New

Zea

land

Spai

n

Icel

and

-100

-50

0

50

100

150

200

250

300

350

Change in real equity prices (Q1/2001-Q3/2006)

Real equity prices falls from recent peak

Real equity price rises and subsequent falls in the current global crisis

Sources: IMF, Central Bank of Iceland

%

International perspectiveIcelandic households were vulnerable to the effects of the crisis due to high indebtedness

Kore

a ('9

7)

Finl

and

('91)

Swed

en ('

91)

Nor

way

('87

)

Icel

and

('08)

0

50

100

150

200

250% of disposable income

Household debt as % of disposable in-come in a few crisis countries

Sources: Riksbanken, Norges Bank, BIS, Central Bank of Iceland

Fran

ce

Euro

are

a

Spai

n

Aus

tral

ia

New

Zea

land

USA

Nor

way

Irel

and

Icel

and

Den

mar

k

0

50

100

150

200

250

300

2002 2007

% of disposable income

1. Values for Iceland are for 2002 and 2008.

Household debt as % of disposable in-come in the current global crisis

Sources: OECD, Central Bank of Iceland.

International perspective Icelandic households have been more affected by depreciation than FX borrowers in other countries

Latv

ia

Esto

nia

Hun

gary

Lith

uani

a

Rum

enia

Pola

nd

Bulg

aria

Icel

and

Slov

ak R

epub

lic

Czec

h Re

publ

ic

0102030405060708090

100

2003 2008

Share of loans (%)

Share of banks' household loans in for-eign currency in a few countriesComparison between 2003 and 2008

Sources: Magyar Nemzeti Bank, Central Bank of Iceland.

Latv

ia

Esto

nia

Hun

gary

Lith

uani

a

Rum

enia

Pola

nd

Bulg

aria

Icel

and

Slov

ak R

epub

lic

Czec

h Re

publ

ic

-60

-50

-40

-30

-20

-10

0

10

20

Chart Title

Exchange rate changes from July 2007 to October 2009BIS broad nominal effective exchange rate indicies

Sources: BIS, Central Bank of Iceland.

%

International perspective The increase in unemployment is expected to be relatively high …

Mal

aysi

a (1

997)

Indo

nesi

a (1

997)

Japa

n (1

992)

Phili

ppin

es (1

997)

Thai

land

(199

7)

Hon

g Ko

ng (1

997)

Nor

way

(198

7)

Kore

a (1

997)

Arg

entin

a (2

001)

His

toric

al a

vera

ge

Swed

en (1

991)

Icel

and

(200

8)

Spai

n (1

977)

Colu

mbi

a (1

998)

Finl

and

(199

1)

USA

(192

9)

0

5

10

15

20

25

Chart Title

Percentage points

Unemployment increases in a few crises countries

Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland.

1.Central Bank of Iceland baseline forecast.

Nor

way

Den

mar

k

Swed

en

Finl

and

UK

New

Zea

land

Fran

ce

USA

Icel

and

Irel

and

Spai

n

0

2

4

6

8

10

12

14

Chart Title

Percentage points

Expected unemployment increases from 2007 to 2010 in the current global crisis

Sources: IMF.

International perspective … and the drop in GDP large

Nor

way

('87

)

Phili

ppin

es ('

97)

Swed

en ('

91)

Hon

g Ko

ng ('

97)

Colu

mbi

a ('9

8)

Kore

a ('9

7)

His

toric

al a

vera

ge

Mal

aysi

a ('9

7)

Icel

and

('08)

Finl

and

('91)

Thai

land

('97

)

Indo

nesi

a ('9

7)

Arg

entin

a ('0

1)

USA

('29

)

-30

-25

-20

-15

-10

-5

0 0

1

2

3

4

5

Peak-to-trough decline in GDP per capita (left)Duration (right)

%

Real GDP per capita cycles in a few crises countries

Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland.

1.Central Bank of Iceland baseline forecast.

Number of years

Nor

way

New

Zea

land

Den

mar

kSp

ain

Euro

are

aN

ethe

rland

sU

nite

d Ki

ngdo

mSw

eden

Ger

man

yJa

pan

Finl

and

Hun

gary

Irel

and

Icel

and

Rom

ania

Esto

nia

Latv

iaLi

thua

nia

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

Forecast for GDP growth in 2009

Source: IMF.

Volume change on a year earlier (%)

The effects of the financial crisis on the housing market and households’

economic situation

The Icelandic housing marketRelatively short duration of real house price declines and inflation playing a large role in the adjustment

Mal

aysi

a (1

997)

Icel

and

(200

8)

Spai

n (1

977)

Swed

en (1

991)

Arg

entin

a (2

001)

Kore

a (1

997)

Thai

land

(199

7)

Indo

nesi

a (1

997)

Nor

way

(198

7)

Hon

g Ko

ng (1

997)

Colu

mbi

a (1

998)

Finl

and

(199

1)

His

toric

al a

vera

ge

Nor

way

(189

9)

Phili

ppin

es (1

997)

USA

(192

9)

0

1

2

3

4

5

6

7

8

Chart Title

Number of years

Duration of real house price declines in a few crisis countries

Sources: Reinhart, C.M. and K.S. Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press; Central Bank of Iceland.

1.Central Bank Iceland baseline forecast.

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

50

75

100

125

150

175

200

225

250

Nominal house price level CPI level

Real house price level

House price levels

Index = 100 in 2000

Sources: Statistics Iceland, Central Bank of Iceland.

The Icelandic housing marketDysfunctional market

2000

2000

2000

2000

2001

2001

2001

2001

2002

2002

2002

2002

2003

2003

2003

2003

2004

2004

2004

2004

2005

2005

2005

2005

2006

2006

2006

2006

2007

2007

2007

2007

2008

2008

2008

2008

2009

2009

2009

2009

0

500

1000

1500

2000

2500

3000

3500

4000

4500

-4

-2

0

2

4

6

8

Turn-over on the residential housing market (left)

Quarterly growth in household debt in real terms (right)

Number of contracts

Turn-over on the residential housing market and quarterly growth in household debt in real terms

Sources: Icelandic Property Registry, Central Bank of Iceland

Volume change on a year earlier (%)

Aug/

'04

Nov

/'04

Feb/

'05

May

/'05

Aug/

'05

Nov

/'05

Feb/

'06

May

/'06

Aug/

'06

Nov

/'06

Feb/

'07

May

/'07

Aug/

'07

Nov

/'07

Feb/

'08

May

/'08

Aug/

'08

Nov

/'08

Feb/

'09

May

/'09

Aug/

'09

0

500

1000

1500

2000

2500

3000

3500

-4

6

16

26

36

46

56

Number of new mortgage loans at DMI

Swaps as a portion of total turnover

Number of loans

Number of new mortgage loans issued at DMI and share of swaps in total turnover

Sources: Icelandic Property Registry, Central Bank of Iceland

%

Icelandic households: Aggregate dataChanges in net wealth and real disposable income

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-60

-40

-20

0

20

40

60

House prices Housing stock Financial assetsDebt Net wealth

Sources: Statistics Iceland, Central Bank of Iceland.

Developments in household net wealth and contribution of underlying components 2000-20121

Volume change on a year earlier (%)

1. Central Bank of Iceland baseline forecast 2009-2012. The contribution of the main underlying factors in the yearly changes in net wealth is calculated based on each factor's weight in new wealth. The combined contribution does of un-derlying factor does not add up to the total change due to rounding.

´00 ´01 ´02 ´03 ´04 ´05 ´06 ´07 ´08 ´09 ´10 ´11 ´12-30

-20

-10

0

10

20

30

Prices Taxes Other income

Employment Nominal wages Real disposable income

Sources: Statistics Iceland, Central Bank of Iceland.

Volume change on a year earlier (%)

1. Central Bank baseline forecast 2009-2012. The contributions of the main underlying factors in the yearly changes in real disposable income is calculated based on each factor’s weight in disposable income. The combined contribu-tion of underlying factors does not add up to the total change due to rounding and incomplete income accounts for households.

Developments in real disposable income and contribution of underlying components

Icelandic households: Aggregate dataLeverage is high in international comparison but it decreased in the boom as expected …

Ital

y

Fran

ce

Ger

man

y

Japa

n

UK

USA

Cana

da

Aus

tral

ia

New

Zea

land

Icel

and

1.0

1.1

1.2

1.3

1.4

1.5

Chart TitleHousehold leverage in the current global crisis

%

1. Total household assets as proportion of net wealth at year-end 2007

Sources: OECD, Reserve Bank of Australia, Reserve Bank of New Zealand, Central Bank of Iceland.

95 96 97 98 99 00 01 02 03 04 05 06 07 081.0

1.1

1.2

1.3

1.4

1.5

1.6

Chart TitleIcelandic households’ leverage 1995-2008

Ratio

1. Total household assets as proportion of net wealth based on the Central Bank of Iceland estimate of asset and net wealth except for 2008 where leverage growth in based on tax authority data

Sources: Central Bank of Iceland, Icelandic tax authorities (RSK).

Icelandic households: Aggregate data… but leverage has become much more dependant on exchange rate movements• In the run-up to the crisis,

household assets increased even faster than debt and households’ equity position improved and leverage decreased

• But the large depreciation and asset destruction has pushed leverage up and balance sheet restructuring has begun

95 96 97 98 99 00 01 02 03 04 05 06 07 08-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0 -30

-25

-20

-15

-10

-5

0

5

10

15

Growth in household leverage (left)Nominal exchange rate changes (reverse right axis)

Household leverage growth and ex-change rate movements%

1. Household leverage growth is based on the Central Bank of Iceland estimate of asset and net wealth except for 2008 where leverage growth in based on tax authority data

Sources: Central Bank of Iceland, Icelandic tax authorities (RSK).

%

Icelandic households: Micro dataThe Central Bank of Iceland household sector project

• Assessing the extent of debt problems in the private sector, their effects on the crisis dynamics and developing the policies needed to limit the severity of the crisis is a daunting challenge

• One of many preconditions for success is access to valuable data on household and corporate sector balance sheets

• The Central Bank has assembled a unique database for households and an analysis on the household balance sheet and debt servicing capabilities is ongoing– See e.g. chapter 2.2. in Central Bank of Iceland Financial

Stability 2009

Icelandic households: Micro dataThe Central Bank of Iceland household sector project

• The database contains financial data on all individual customers of the commercial banks, savings banks, smaller financing undertakings, pension funds and the Housing Financing Fund (HFF)

• Income data from the tax authorities (RSK) • Data on unemployment from the Directorate of Labour• The data are encrypted and have been processed in a

format which is not personally identifiable• This data base is unique for a country experiencing a

financial crisis and offers many possibilities for analyses and projections

Icelandic households: Micro data The largest share of household liabilities is mortgage debt which is mainly in ISK …

Note: Combined household debt in the database is 1557 b.kr. Student loans , loans from some smaller pension funds and more complete data on loans backed by securities are missing from the database. According to tax returns for the year 2008, total household debt amounted to 1683 b.kr., which is ca. 200 b.krk. lower than according to credit system data for September 2008.

Mortgage debt:

1.329,7 b.kr.;

86% of total debt

Auto loans: 127,1 b.kr.; 8% of total

debt

Overdraft: 53,8 b.kr.; 3% of total debt

Loans backed by securities: 46,7 b.kr.;

3% of total debt

Household debt by category

Source: Central Bank of Iceland.

Icelandic households: Micro data … FX borrowing is more widespread in auto loans than in mortgages

Households with only ISK

auto loans; 7.189

; 16%

of households with car

loans

Households with only FX auto loans;

28.571; 65% of households with car

loans

Households with

mixed auto

loans; 8.592

; 19%

of households with car

loans

Less than 7 thousand households have foreign currency mortgages

But 37 thousand households have foreign currency auto loans

Icelandic households: Micro dataHouseholds with FX mortgages have experienced the greatest increase in debt levels • Housing liabilities have more

than doubled for 43% of households with pure FX mortgages and risen more than 50% for roughly half of households with mixed mortgages– Relatively few households

• Less impact for households with indexed ISK mortgages but a third has nevertheless experienced more than 30% increase

Dec

reas

ed

0-25

%

25-5

0%

50-7

5%

75-1

00%

100-

125%

125-

150%

Ove

r 150

%

0

5

10

15

20

25

30

35

40

45

Households only with ISK mortgagesHouseholds only with foreign currency mortgagesHouseholds with mixed mortgages

Share of households (%)

1. All loans backed with residential housing collateral are defined as mortgage loans.

Change in outstanding amount of mortgages from date of origin to year-end 2008

Source: Central Bank of Iceland.

Icelandic households: Micro data… and so have the great number of households with FX auto loans • Liabilities due to car

loans have risen by more than 50% for roughly half of households with pure FX auto loans– Relatively many

households

Dec

reas

ed

0-10

%

10-2

0%

20-3

0%

30-4

0%

40-5

0%

50-6

0%

60-7

0%

70-8

0%

80-9

0%

90-1

00%

Ove

r 100

%

0

10

20

30

40

50

60

70

80

90

Households only with ISK auto loansHouseholds only with foreign currency auto loansHouseholds with mixed auto loans

Share of households (%)

Change in outstanding amount of auto loans from date of origin to year-end 2008

Source: Central Bank of Iceland.

Icelandic households: Micro dataThe highest-income group carries a smaller share of debt than is common abroad• The distribution of debt

is well in line with income distribution and the share of debt borne by higher-income groups is smaller than is often the case in other countries

0-15

0 t.

kr.

150-

250

t.kr

.

250-

350

t.kr

350-

500

t.kr

500-

650

t.kr

.

over

650

t.kr

.

0

5

10

15

20

25

Share of combined debt Share of households

%

Mortgage, auto and overdraft debt as per cent of annualised disposable income

Source: Central Bank of Iceland.

1. Based on outstanding amounts of loans at year-end 2008 and income data from PAYE records in February 2009.

Icelandic households: Micro dataA large share of total debt is in the hands of very indebted households

0-50

%

50-1

00%

100-

200%

200-

300%

300-

400%

400-

500%

500-

600%

600-

700%

700-

800%

800-

900%

900-

1000

%

Ove

r 100

0%

0

2

4

6

8

10

12

14

16

18

20

6.6

9.0

17.616.5

13.6

10.1

6.6

4.53.0

2.1 1.6

8.8

Share of households (%)

Mortgage, auto and overdraft debt as per cent of annualised disposable income

Source: Central Bank of Iceland.

1. Based on outstanding amounts of loans at year-end 2008 and income data from PAYE records in February 2009.

• 63% of households have debt less than 400% of annual disposable income but for roughly 1/4 of households the ratio is above 500%– Smaller share with > 500% than

in Norway prior to the banking crisis

• Households owing more than 600% of disposable income carry 39% of total debt

Icelandic households: Micro dataRoughly 20% of households were in negative housing equity at year-end 2008• Likely that around a third of

homeowners will go into negative territory in the coming years as nominal house prices continue to fall

0-10

%10

-20%

20-3

0%30

-40%

40-5

0%50

-60%

60-7

0%70

-80%

80-9

0%90

-100

%10

0-11

0%11

0-12

0%12

0-13

0%13

0-14

0%O

ver 1

40%

0

1

2

3

4

5

6

7

8

9

10Share of households (%)

1. Based on outstanding amount of mortgage debt and Land Reg-istry value of residential property in December 2008.

Mortgage debt as a share of housing wealth at year-end 2008

Source: Central Bank of Iceland.

Icelandic households: Micro data20-26% of households with debt service ratio above common danger points• Households that have to use

more than 30-35% of their disposable income to service their mortgage debt are often considered at risk

• 20% of households need to devote more than 35% of their income to service their mortgage debt

• 35-40% of households with FX mortgages or mixed mortgages

0-10

%

10-2

0%

20-3

0%

30-4

0%

40-5

0%

50-6

0%

60-7

0%

70-8

0%

80-9

0%

Ove

r 90%

0

5

10

15

20

25

30

35

Share of households (%)

1. Mortage debt at beginning of the year as a service ratio from PAYE records in February 2009. Excludingsome households with mortgage loans where interest or principal payments have been frozen.

Mortgage debt service ratio

Source: Central Bank of Iceland.

Final remarks

Final remarksUnemployment and debt restructuring will be major determinants of the scope of financial distress• Households have sustained severe blows as a result of

the banks’ and the currency’s collapse• The pre-crisis spree of FX borrowing has proven

extremely costly for many, and banks were far too liberal in issuing FX loans

• Various evidence indicates that 20-25% of households are in financial difficulties and that this figure will rise if no action is taken

• Household debt restructuring has begun• The scope of financial distress will be determined by

unemployment and the success of debt restructuring