The news that Wells Fargo, the US bank that is the world’s biggest lender by market value, targets millennials with its mortgage loans is seen as a sign that we’ve finally gotten over the crisis that nearly brought down the world economy in 2007-2009.
The Financial Times reported that the head of the bank’s home finance business said he was keen to lend more to first-time buyers, who, the paper said, have so far “put off settling down.”
But what is good for America is not necessarily good for the world. While in the US there has been some deleveraging and restructuring that allows the housing market to re-start from a cleaner basis, it is not the case in the rest of the world.
Conventional wisdom is that the Bank of England will do anything in its power to keep the show on the road, by maintaining interest rates low despite rising inflation, like it has done before.
However, the central bank’s control over interest rates that are ultimately charged by commercial banks is limited; this is a fact that more people should think of before taking out a mortgage.
Comparing the balance sheet of banks in the US, UK, Sweden and Australia, as well as those in Europe, shows that, while in the US the percentage of mortgages in total bank loans has shrunk since the financial crisis, in the UK, Sweden and Australia it has increased rapidly, while in Europe it has also been on the rise.
Data analysed by Oxford Economics shows that in Australia, the UK and Sweden, housing loans as a percentage of total bank loans have increased since the crisis, just at a time when they have fallen in the US.
It is easy to see from this chart that Australia is the country with the fastest growth, with housing loans exceeding 70% of total lending.
In the UK, growth has been particularly fast in the past years, when housing loans have reached 60% of total bank loans.
In Sweden, growth has only recently exceeded 50%.
On the other hand, the percentage of home loans to total loans in the US may look high but it has in fact been falling. It was 57% last year compared with 64% in 2006, at the height of the housing boom.
Seeing how housing loans as a percentage of total lending change can act as an early warning for problems in the banking sector if there is a downturn, according to Oxford Economics analyst Gabriel Stein.
Right now, the data seem to show an inconvenient truth: while US banks have been dealing with the heritage of bad housing loans, European ones still have many on their books.
Sheltered by ever-rising home prices and spurred to lend by low interest rates, banks in Europe, and especially in the UK, have been dishing out mortgage loans, with the buy-to-let market particularly hot.
It’s true that there have been some recent attempts to make banks take more prudential measures when lending for house purchases and that a chilly wind is blowing through the buy-to-let sector coming from Basel. Whether these have been enough we will see as soon as interest rates increase.