6  Financial liberalisation and housing wealth

Housing is an important component of households’ balance sheets, both on the asset side and the liability side. Housing markets across countries differ in part because of variations in regulations of the rental sector, differences in the tax treatment of owner-occupied housing and mortgage debt, and demographic factors. Another important factor is the availability of mortgage debt.

In the regulatory environment prevailing in most countries during the 1970s, financial institutions usually had only limited scope to increase mortgage lending, even if a higher value of assets could have been used to secure loans. Mortgage lending was generally restricted to specialised institutions that were prohibited from engaging in other activities. Direct quantitative limits were imposed on mortgage loans or the funding capacity of these institutions, and the terms and conditions of mortgage lending were quite regulated.

Financial reforms since the 1980s have significantly reduced legislative constraints on institutional lending and therefore household borrowing. By the mid-1980s, financial markets were almost completely freed from interest rate and quantitative controls in Canada, the United States, the United Kingdom, New Zealand and Australia. In some continental European countries and Japan, deregulation has tended to be less comprehensive and slower.

In countries where liberalisation was completed by the mid-1980s, competition in the mortgage market rose quickly as new entrants started competing for market share.

• In Canada, competition in the market for mortgages has been relatively strong since ceilings on interest rates on loans and restrictions on commercial banks’ involvement in mortgage financing were abolished in the late 1960s, permitting banks to invest in non-insured mortgages (Freedman 1998).
• In the United States, the reduction of preferential tax treatment in favour of thrifts, the elimination of interest rate ceilings and government measures to develop secondary markets in mortgage bonds increased competition between banks and thrifts for customers in the early 1980s (OECD 2000).[20]
• In the United Kingdom, banks also entered the mortgage market in the early 1980s as credit controls were lifted and restrictions on mortgage lending for non-housing purchases were abolished (OECD 2000).
• In New Zealand, all interest rate controls and ratio controls on banks were removed by 1985 and limits on foreign ownership in New Zealand financial institutions abolished in 1986 (Evans et al. 1996).
• In Australia, ceilings on interest rates and quantitative bank lending guidance were removed and foreign banks had entered the Australian banking sector by 1986 (Drake 1997 and Nevile 1997).

In Germany, although the financial system was largely liberalised in the early 1970s with the removal of interest rate restrictions, competition on the funding side of the banking sector has remained somewhat distorted. This is largely because public sector financial institutions, which account for a large share of the residential mortgage market, continue to benefit from advantageous financing conditions due to the perception of public guarantees (OECD 2000).

The reform process was less comprehensive and competitive pressures less intense in France and Italy, and in Japan (OECD 2000).

• In France, deregulation allowed commercial banks to compete in the mortgage market after 1987, but restrictions on interest rates remained for longer. Although lending became competitive, funding sources were not and public sector financial intermediaries continue to benefit from significant advantages.
• In Italy, quantitative ceilings on bank loans were abolished in 1983, but re-imposed temporarily in 1986 and 1987. In 1994, important restrictions in the banking sector were removed and all types of credit institutions were allowed to issue mortgage bonds and make long-term loans. Nonetheless, banks are still subject to various procedural and lending restrictions on mortgage activities, limiting their ability to engage in mortgage lending.
• In Japan, interest rate deregulation started in the early 1980s, but restrictions were not completely eliminated until the mid-1990s. Credit controls were gradually lifted in the early 1990s.

The varying degree of financial deregulation has led to differences in housing markets. Levels of owner occupation and the stock of outstanding mortgage debt to household disposable income are markedly different across countries, reflecting differences in the availability of mortgage debt (see table 4). Owner occupation rates and mortgage debt to household disposable income tend to be lower in countries where mortgage markets are less competitive and where other institutional and historical circumstances tend to restrain home ownership (France, Germany, Italy and Japan).

Owner occupation rates vary between around 40 percent in Germany and around 70 percent in Australia and New Zealand. In the United Kingdom, the United States and Italy, about 67 percent of households occupy their own house. Although Italy’s owner occupation rate is amongst the highest, its debt to disposable income ratio is low. At 22 percent, Italy has the lowest debt to disposable income ratio followed by France and Japan with 53 percent. New Zealand has the largest stock of mortgage debt to household disposable income, at 114 percent, followed by the United Kingdom with 104 percent.

The varying degree of financial deregulation across countries is also reflected in the loan-to-value ratios. In the United Kingdom and the United States, first-time borrowers are able to finance close to 100 percent of the purchase price of homes (Miles 1994). In Australia and New Zealand, home buyers are able to finance up to about 95 percent. In Canada the maximum loan to value ratio must not exceed 95 percent[21]. In contrast, loans in Italy and Germany rarely cover more than 50-60 percent of the value of the house and in Japan, down-payments rates of 40 percent on first-time purchases are usual. In France, loans can only be made up to a maximum of 80 percent if they are eligible for refinancing on the secondary market (Miles 1994).

Source: Australian Bureau of Statistics, Statistics Canada, INSEE, Statistisches Bundesamt Deutschland, Instituto Nazionale di Statistica, Japanese Statistics Bureau & Statistics Center, Statistics New Zealand, United Kingdom National Statistics, Datastream, OECD, Reserve Bank of Australia, Reserve Bank of New Zealand and The Treasury.

* Long-term loans

** Medium- and long-term loans

Finally, another factor that has contributed to higher mortgage debt to disposable income ratios in some countries is the scope for explicit equity withdrawal. Explicit equity withdrawals mean that households can take out loans backed by the collateral of a house for purposes other than a house purchase. In the United Kingdom and the United States, mortgage products, which allow households to consume part of their housing equity, were first offered in the 1980s. In the United States, home equity lines of credit are taken up on a substantial scale. Explicit equity withdrawals are also likely to be important in New Zealand. The tendency in New Zealand for small business loans secured on housing has accelerated in recent years and some banks estimate that possibly between 10 and 20 percent of household loans secured on housing are for business purposes (Thorp and Ung 2000).