By now you’ve perhaps heard about the ticking, aging timebomb underneath Japanese government bonds. Or predictions of a negative savings rate. Or sovereign downgrades.
But what of the super safe Japanese mortgage market?
In a note out on Wednesday, Credit Suisse performs a “mulitfaceted analysis” of the mortgage business. It’s a comprehensive survey that remains cautiously optimistic but suggests some potentially worrying trends that are worth keeping an eye on.
Here’s a bit of context to start with (click to expand):
A couple of things to note here. First, largely due to demographics, mortgage balances have been gradually falling overall for a while, and bank mortgages are due to decline from 2017.
Second, since 2000 the loan balance has declined sharply at the Japan Housing Finance Agency (the erstwhile Government Housing Loan Corporation) as it moved into the securitisation business and was subject to competition from banks engaged in more aggressive campaigns to entice borrowers.
In response, according to this figure from the CS report, it began to offer more “competitive” mortgages with teaser and/or floating rates and loan-to-value ratios of up to 100 per cent:
The analysts point out that even as total balances are set to decline in absolute terms, mortgages will be increasingly important to Japanese banks as the downward trend in corporate loans continues. Cue further competition for a shrinking market.
Given all this, Credit Suisse is a little worried:
Meanwhile, when it comes to risks associated with mortgages, investors need to pay particular attention to the growing risk of default on floating-rate loans when market rates rise. On this front, we think banks whose mortgages center on fixed-interest products are relatively immune to this risk. On the other hand, we think banks should have sufficient core deposits to absorb the interest rate risk associated with fixedrate mortgages.
It reckons that the interest rate risk for fixed-rate mortgages is “considerable” but manageable, whereas the credit risk is not as low as previously thought.
Text and charts from the report:
Figure 27 shows change in the mortgage default ratio at the JHFA. This illustrates that the default ratio has turned upward sharply for recently agreed loans after being low for a long period. We believe this is because loan inspection conditions have recently been eased considerably.
Figure 28 shows loan-to-value (LTV) and Figure 29 debt-to-income (DTI) for mortgages at the JHFA, illustrating that loan terms have progressively eased the more recent the loan. In particular, there was a sharp increase in the proportion of loan cases with LTV of 95–100% in 2H 2009, and we think this has a strong connection with the rapid increase in default ratio of loans agreed in 2009.
Before punctiliousness triumphs, we’ve noticed the low numbers on the axis of the first chart, too. And as the authors claim, default rates are still at near historic lows and banks’ earnings have seldom deteriorated on the back of credit risk.
Though over the last few years we’ve become a little more sceptical of using historical default trends in housing markets.
Full report in the usual place.
Related links:
Jumping JGB rates – FT Alphaville
Japan’s savings rate about to go negative, Goldman says - FT Alphaville
A ticking, aging time-bomb in JGBs – FT Alphaville