This is a very healthy sign for the mortgage market, and in our opinion it could mean that 2010 might mark the low point for credit that we have been watching out for.
In 2009 KBC under-lent, they had €1bn and didn’t lend out anywhere near that, they are also here to stay, and prior to the crisis they had about 1/8th of the market share. The fact that they are rolling out a higher loan to value is a very confident sign that
Banks have a few internal policy tools to control lending
1. Curtailing the amount of lending – we see that already, mortgage lending is about 85% down from the peak of 40bn p.a. , peak wasn’t exactly a gauge of normal, but half of that would be normal, and even on that basis it’s down 75% – that story still has to play out
2. Rate increases: this has the same effect as central bank rate increases, it reduces lending and everybody has increased their margins by at least 1% in the last year, you and me have covered this several times together before
3. The last thing is the LTV or ‘Loan to Value’, which is essentially saying how many euro a bank will lend per hundred of purchase price, in the past KBC would finance 80 euro for every 100 the borrower had to come up with the other 20, now they will lend 90 per hundred which is a confident sign – because when banks are concerned about an economy in decline they don’t make this kind of move, certainly the wouldn’t if they thought there was far more to go on the downside
This ends the duopoly of AIB and BOI – for over the last year they are basically the only two lenders, although EBS stayed in the game for a while, they had to cut back to 85% and AIB and BOI unfairly got €1bn each to lend to first time buyers specifically in 2009 – giving them an unfair advantage over other banks .
[don’t forget: they may not have had high rates for ftb’s but direct branch biz was kept alive that shouldn’t have been while un-bailed out rivals were forced to close branches and the ftb’s also bought associated product with high margin – banks focus continually on internal conversion rates – they make sure to keep you once they have you so it was in fact a huge market distortion to give the big two money for first time buyers].
For sure, property prices are related to nothing else but what the banks are ABLE and willing to lend out in each particular case. It’s not inconceivable either that they have now accumulated enough funding through the various recapitalisations; NAMA and the taxpayer making good on the worst and most uncollectable of their loans; and their ability to borrow whatever they need from the ECB with the backing of the state. If they have, and they are able to fund plentiful purchasers at a certain price level, then that repairs their balance sheets in terms of the property collateral they hold. All well and good… Is it? Ricardo pointed out that “No wealth can be created by banking operations. Rather, they are an important device to bring about a better arrangement of productive forces”… By using their newly acquired ‘capital’ to continue funding inflated property purchases (taking the base value as being the mean between 1973 and 1997, adjusted for inflation, because the property boom quite obviously goes back to 1997 if you investigate the data), they are continuing with the decimation of our productive forces. It can only end in tears further down the line…
Or is it that KBC having absorbed significant losses for the last two years and heading for €1b profits this year, are thinking that :
i) Ireland is a great place to make some money. We have no idea at what rate they will ultimately lend, certainly no trackers, indemnity bonds are a given and no doubt some other high cost low value product tucked in at the back of it.
ii) They do not have large tranches of former development land not fit even for agricultural use and can focus on obtaining a larger share of a less risky market.
iii) They have had enough of the Irish navel gazing and are trying to change the chicken little outlook that has pervaded our society for the last two years. (unlikely as they are a bank)
iv) They can set their own agenda without having to hear the words “we bailed you out and so can tell you how to run your business”
On the whole it is a very positive move. Anything that increases spending is fine by me. By my reading money under deposit has increased by over 400% over the last two years. That would say to me that there is plenty of money but nobody is willing to spend due to fear of loss. The next sure fire get rich quick scheme like the last property pyramid scheme we had will make a fortune.
Ultimately when confidence returns so will bragging about the top of the range SUV, holiday home in Marbella and yacht in the Maldives as nobody really cares that you may have earned 5.23%aer less dirt on your deposit and you cannot flaunt a deposit certificate.
What the rest of us have to look forward to is : complaining that you make more than us, have more holidays than us, own more property than us, particularly as we knew you when you didn’t have an arse in your trousers and we certainly will look forward to seeing said SUV being towed away on the back of a truck.