The European Central Bank’s attempt to resuscitate the 17-member euro economy with record-low interest rates is fueling a debt boom in its most creditworthy country and exposing a growing disconnect in monetary policy.
In Helsinki, about 1,500 kilometers (930 miles) northeast of the Frankfurt offices of ECB President Mario Draghi, household debt has surged to a record as Finns take advantage of the lowest mortgage rates in the euro area to buy property. Citizens of crisis-stricken countries from Greece to Portugal are either unable to get loans or forced to pay much higher rates.
“The ECB has cut interest rates to almost zero, and now they see it feeding through in parts of the euro area -- in Finland, Germany, Austria and France -- but not everywhere,” said Holger Sandte, chief European analyst at Nordea Bank AB, the biggest bank in the Nordic region. “The reading of the ECB is that the transmission mechanism isn’t working properly.”
Europe’s second year of recession is putting pressure on the central bank to consider further reducing its benchmark rate, which is already at a record, to stimulate the $9.5 trillion economy with a population of 331 million. That threatens to fuel imbalances, and potential property bubbles, in countries with already low rates, while failing to pass through to consumers and small businesses most in need of help.
The ECB’s “toolbox is largely empty,” Sandte said. It could cut rates further or devise a lending program with the European Investment Bank for small businesses, he said. “But if you ask me whether these are strong, powerful instruments, I have to say unfortunately not.”
Europe’s debt crisis has already damaged Finland’s export-driven economy as output among its 16 peer members shrinks. In 2009 the economy slowed 8.5 percent and will only grow 0.3 percent in 2013, compared with a 0.4 percent contraction for the euro area.
At the same time, mortgage costs for the 5.4 million Finns living in the northernmost part of the single-currency union have fallen to 1.5 percent on average, according to data compiled by the ECB. New home loans at floating rates are 1.97 percent, the lowest in the euro area, in comparison with 5.14 percent in Cyprus, the highest, and an average of 2.87 percent for the 17-member region.
That’s helped home prices in Finland advance. They gained 1.4 percent in May from the prior year and are up about 35 percent since 2000. Mortgages have grown 130 percent in the past decade. In Spain, where home prices are 39 percent below the 2007 peak after its real estate bubble burst, lenders issued 65,914 mortgages in the first quarter, down 73 percent from the same period five years earlier.
“The indebtedness of Spanish homes is still relatively large, house prices are still correcting and unemployment is still high, so mortgage numbers are going to be low,” said Daragh Quinn, a bank analyst at Nomura International in Madrid.
Still, the level of effectiveness of the ECB’s efforts is a concern to its policy makers.
“Accommodative monetary policy still feeds through slowly and unevenly into private sector financial conditions across euro area countries,” ECB Governing Council member Erkki Liikanen said in an e-mailed response to questions on June 19. Differences in the transmission of policy for housing loan interest rates are smaller than for corporate loans, he said.
In Finland, mortgages account on average for about 75 percent of a home’s value and banks still give out 100 percent loans. For those loans, the underlying value of the property is calculated at about 70 percent, and the rest is backed by insurance paid for by the debtor or other collateral.
“Low rates have boosted demand and kept it strong also throughout the changing business cycles,” said Kari Kauniskangas, chief executive officer of YIT Oyj (YTY1V), Finland’s biggest residential builder. “It’s been an important factor contributing to the good development in the Finnish housing market.”
Nona Buchert, a realtor with ReMax Kotikorttelit Oy, reiterated that as she showed a ground-floor apartment in a 1920s art nouveau-style building in Helsinki, listed at 428,000 euros ($558,000).
“The general idea that interest rates are low means there is a constant supply of buyers looking for a home,” she said.
The property with wooden floors had two rooms and a white, modern kitchen, is priced at 7,443 euros per square meter, typical for the city-center district of Ullanlinna replete with pastel-colored old stone apartment buildings.
The lowest price paid for a two-bedroom home of 70 square meters to 90 square meters (750 square feet to 970 square feet) in the Ullanlinna area near the sea was 346,000 euros in the past 12 months, while the most expensive flat sold for 892,000 euros.
In Leppaevaara, an area of buildings mostly built after 1990 that lies a 12-minute train ride away from central Helsinki, apartments that size fetched on average 268,000 euros. Similar ones being built by the sea in the Kalasatama district, an old port area under redevelopment near the city center, go for more than 420,000 euros.
“Finns aren’t showy -- they buy a home to fulfill a need,” Kauniskangas said in an interview on June 18.
That need -- combined with low rates -- has still sent home prices in the fastest-growing capital city area 49 percent higher than in 2000. It’s also propelled household debt in the only stable AAA rated euro country to a record 119 percent of disposable income, topping the regional average of 99 percent.
The ratio will rise to 122 percent this year, the Finance Ministry forecast on March 27.
Commerzbank AG analysts wrote last month that Finland, and neighboring Sweden, are the most likely places to see a property crash. “We should soon see a correction in prices,” the bank wrote in a May 17 report.
Finnish authorities are considering ways to prick potential bubbles, including a proposal to hand the financial watchdog powers to enforce a binding loan-to-value cap at 80 percent, compared with its current 90 percent non-binding recommendation.
More than a third of home loans exceeded the guideline last year, according to the Financial Supervisory Authority. The Finnish central bank last month echoed the calls, saying the watchdog ought to be able to cap mortgages on a case-by-case basis.
Finland’s debt challenge isn’t just down to Draghi’s policies as countries outside the euro area also viewed as havens navigate similar challenges. Home prices in central Stockholm are up 35 percent since early 2009 and Swedish household lending has surged. Danes are now the most indebted people in the world with personal debt of 267 percent of income, compared with 94 percent in the U.S., according to data compiled by Bloomberg.
Record low interest rates are also helping limit the damage to crisis-hit countries such as Spain, where borrowing costs on existing floating-rate mortgages have helped affordability and prevented a bigger surge in delinquencies. The average rate for existing mortgages is 2.41 percent.
The differing interest rates on new loans, though, are raising concerns among policy makers. “Prolonged periods of diverging trends in the costs of funding within the euro area could indicate the emergence of some friction in the transmission of monetary policy,” the European Commission said in a report on March 27.
“The challenge in the euro area is breaking the spiral of weak economic activity and tight funding conditions, faced in particular by small and medium-sized enterprises,” Liikanen said. “The euro-area economy will gain strength gradually as the health of the banking sector is restored, the decline in housing prices in the crisis countries peters out and the level of private debt is reduced.”
Still, “balance sheet adjustment is a slow process,” he said. “The crisis cannot be resolved by monetary policy means alone.”
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