Thursday, April 03, 2008

Financial Times article on Latvia

A commenter on my previous post points to a Financial Times article on Latvian housing market (which does a good job surveying the situation) and asks me to comment on this:
Consequently property prices have fallen by a quarter since last spring but asset quality remains good because only 17 per cent of households – typically the wealthiest – have mortgages, according to Hansabanka.
I think Hansabanka's argument is flawed. What matters is the ratio between the mortgages and the income. Latvia's mortgage debt-to-GDP ratio is around 34%. Combine that with only 17% of households having mortgages and what you get is 17% of households having quite a lot of debt compared to their incomes. Even if those are mostly the wealthiest 17% of people.

There's no sign of large scale problems with Latvian mortgages at the moment, but Hansabanka's claim why problems should not happen looks flawed to me.

1 comment:

hk said...

thanks for the comments. I've checked, US and Britain have 80-90% of mortgage to gdp ratio but lots more people own mortgages, so per person debt is lower.

I disagree with the main premise of the article, that commercial bank ownership of debt is somehow safer. I think it's the opposite, commercial banks will act to maximize profits when times are good and will ask to be bailed out at the first sign of trouble. The US mortgage market is the prime example, commercial lenders inflated this bubble and now if not for government backed enterprises (Fannie May etc) it'd be impossible to get a mortgage. Banks are good at taking risks but need a government in the time of adversity. I wonder if the Latvian govnmt is up to the challenge