The Dutch housing market is NOT further locked-up by the new rules for handing out mortgages: ING statement totally misses the point

Yesterday on March 1, I wrote in An SMS from Ernst about the €130,000 penalty that ING Bank got from the Authority Financial Markets (AFM) for handing out irresponsible mortgages. I stood up for ING, stating that it was almost impossible to hand out a mortgage that is not too high for starters on the housing market, as even the smallest house is incredibly expensive in The Netherlands.

Today, however, ING issued a statement that misses the point totally. Michiel Kwaaitaal , senior manager retail at ING and responsible for marketing on mortgages, states according to the Financial Dagblad (Dutch language): The increasing number of rules prevents more and more people to receive a mortgage

Here are some snips from the article:

“The increasing number of rules prevents more and more people to receive a mortgage. This further locks up the housing markets”. Kwaaitaal observes that politics and supervisors want to further reduce the risks of providing mortgages. “But the arrears on Dutch mortgages are still among the lowest in the world?” […] ING critizes the stricter rules after they received the €130,000 penalty from the AFM[…]

Providing mortgages is more subject to laws and rules than strictly necessary, according to the ING Manager. He points out the stricter rules of budgetting bureau ‘Nibud’ and the increased standards for the ‘National Mortgage Warranty’ (NHG). “And then there is the applicable AFM market standard that limits the provision of jumbo mortgages (mortgages of more than 100% of the execution value of the house)”.

 According to Kwaaitaal, the decision of the AFM to penalize ING discloses that the code of behavior for banks concerning mortgages is further restricted. “There is less room for banks to make their own judgment on risks. Every time something is taken away. It’s like being forced to drive 30 miles everywhere, while 55 miles is normally allowed”.

[…]

 The AFM not only penalized ING for applying criteria that offered too little protection against overcrediting. The bank actually provided too high mortgages to their customers

With 5 of 20 investigated cases the AFM concluded that ING didn’t follow the banking industries’ own code of behavior (GHF). This led directly to mortgages that were too high. Overcrediting varied from 3.2% up to 18.5%.

 The bank continued to claim that the 5 cases were advised “meticulously and in the best interest of the customer”.[…]

I don’t want to judge ING for providing mortgages that were too high. As I wrote yesterday, I can imagine that these mortgages were justified in these situations.

Where Michiel Kwaaitaal of ING is dead wrong, however, is that the AFM rules are responsible for the fact that the mortgage market is locked-up further.

THE main cause for the housing market being locked-up is that the PRICES are TOO HIGH.

I can’t explain to people that in Germany, close to the border with Holland, you buy a residence with 8 rooms and 10,000 Sqr ft of ground for €200,000, while a starters home in The Netherland with 3 rooms and 1350 Sqr ft of ground costs also €200,000

When I tell this to people, they all react like:

-     “houses are scarce here in Holland”

-     “in the provinces Friesland of Groningen houses are much cheaper too, but there is no work”

-     “it is inevitable because so many people are looking for a house”

My standard reaction is: “if houses are that scarce in Holland, why houses with the current prices are often for sale for up to two years or more”. They reply:”you are right, but we can’t lower the price, as we can’t pay off our mortgage then”.

There you got it! The main reason that the Dutch housing market is locked up is: Many people are up to their neck into debt, due to the fact that their mortgage is way too high, but they don’t want to sell their house for a lower sales price as they can’t afford then to pay off their mortgage.

Yes, we have had a housing bubble in The Netherlands before the crisis in 2008, due to the extremely low interest rates of for instance 3,2% on a floating rate mortgage.  Everybody in their right mind knows it!

Icing on the cake is the Mortgage Interest Deduction (or MID) that makes that housing prices in The Netherlands are much higher than in our surrounding countries, as people can borrow more money with the MID, without paying more interest. No right-wing politician wants to get rid of that, as their grassroots support with their million dollar residences will be disproportionately hit by this decision

As a consequence house prices are kept artificially high, as people remain underwater (i.e. current sales value of the house is lower than the mortgage principal), but keep paying their interest on their (interest-only) mortgage.

This asks for an explanation: In contrary to the USA it is impossible in The Netherlands to leave your house key at the bank and wave your mortgage goodbye. The mortgage here is a personal loan and if you don’t pay it off:

-     Either it will be with you for the rest of your life as a residue debt.

-     Or you get declared bankrupt and then you have a cooldown period of at least 5 to 10 years in which you are obliged to repay your debts to a certain amount.

In both cases you get a negative registration at the Bureau of Credit Registration (BKR) also for at least 5 to 10 years, meaning:

-     You can’t get a new mortgage

-     You can’t get any loan whatsoever

-     You can’t get a creditcard

-     You can’t even get a customer card in any shop

-     You can’t buy a mobile phone with a subscription

-     Hence: You are virtually a renegade

This makes that the paying ethics in The Netherlands are extremely high: people don’t want to turn into renegades and keep on paying their (way too high) mortgages, while it would be much better if they could sell their house and start to live cheaper.

The large mortgage banks themselves are also slow with putting pressure on people in arrears. They know very well that currently the mortgages are often way higher than the execution value of the house. People defaulting on a large scale would mean that the banks would have to revaluate their asset portfolio, which would have substantial consequences for the bank’s core tier one capital.

Therefore the banks “help” the people in arrears by temporarily accepting lower payments and not forcing them into a sale under distress.

The result is that the prices remain high, the people remain paying too much on their mortgage and the banks remain covering up the problems of their customers and showing off with the high paying ethics.

That is the recipe for the perfect lock-up of the housing market. The only thing that the new AFM rules do, is emphasizing the problem as-is.

An SMS from Ernst. Short Messages Service (7)

ING penalized for irresponsible mortgage provision (source: www.fd.nl)

The Authority Financial Markets (AFM) in The Netherlands administered a penalty to ING Bank. The bank should pay a total of €130,000 for being careless in providing mortgages.

This was announced by the AFM today. The supervisor for the financial sector guards private customers for overcrediting by their bank.

ING was careless in three separate cases, according to the AFM. ING states that in the meantime it adjusted the credit acceptance policy at the points where the AFM considered it irresponsible.[…]

At least one case concerned the providing of a mortgage to young people, where the parents were the security for the loan. In this case the bank didn’t investigate sufficiently if the parents were creditworhty, before providing the loan. I heard this from a different source on the radio.

In this case it would be easy to blame ING for supplying too high loans to people that can’t afford it. ING got penalized for this fact.

The truth is however that it is virtually impossible for two youngsters that want to buy a house, to afford even the smallest one. At least if they don’t have an exceptionally high income. The locked-up housing market in The Netherlands in combination with the mortgage interest deduction tax break, makes that housing prices in The Netherlands are still in average about 30% too high. Politicians, realtors, the Houseowner association and the large banks all try to keep this status quo. They are frightened for the consequences of a falling housing market for the real estate portfolios and for the current houseowners.

Please read: Prime Minister Rutte, please kill your darling for my reasons to get rid of the mortgage deduction tax break.

ABN AMRO extends private banking in Asia (source www.fd.nl)

ABN AMRO is planning to double the number of private bankers in Asia to 180.

The bank announced this on a press conference in Singaport, according to Bloomberg.

With this extension the bank will anticipate on the rising prosperity in the region.

Currently ABN AMRO’s private banking department in Asia counts 90 employees. This number will double in the coming five years, according to Hans Diederen, responsible for asset management of ABN AMRO in Asia.

“Taiwan and Hongkong dominate the market as it comes to the growing of private wealth, but Singapore and Indonesia are fastgrowing markets”, according to Diederen. ABN AMRO called private banking one of the center areas for growth. In The Netherlands ABN is market leader in this market after the merger with Fortis Bank The Netherlands. The bank also owns large private banks in France and Germany.

Volkswagen purchases car dealer division from Porsche (PHS) (source: Volkskrant)

Volkswagen purchased the car dealer division from Porsche (PHS) for €3.3 bln. Both companies announced that the incorporation of Porsche by the Volkswagen group is one step closer now.

PHS distributes and sells sportscars from Porsche. The €3.3 bln go to the owners of Porsche Holding, the families Porsche and Piech. They use a part of the yields to put new capital into Porsche.

Volkswagen already has an interest of 49.9% in the car plant of Porsche and wants to take over the remainder of the shares. Earlier Porsche tried to take over the much larger Volkswagen group. The German department of Justice is investigating currently whether Porsche tried to manipulate the exchange rates of Volkswagen at the time

The takeover attempt of Volkswagen by Porsche remains an odd story. But there is a big difference between knowing something is wrong there and proving it. I guess we will hear from it in the near future.

In the meantime the victory march of Volkswagen during the last years is quite unique. The company stated a record sales in 2010 of €126.9 bln ($173 bln) and a profit of €7.1 bln ($9.7 bln). Although the Toyota corporation is still substantially bigger with a turnover of $203 bln (€148 bln), the profit is with $2.3 bln (€1.6 bln) a lot less. And it seems that Volkswagen is well on its way to become the biggest car manufacturer in the world.

Italian Banks lobbying to tap surging gold price (source: Financial Times)

Italian banks are trying new ways to increase their core tier one capital ratios. The latest movement is that they want their stakes in the Bank of Italy, which are measured in gold, to be marked-to-market. The Financial Times writes about it:

Italian banks, which by a quirk of law are shareholders in the country’s central bank, are lobbying to have their stakes in the Bank of Italy marked-to-market on the back of surging gold prices in an attempt to ease regulatory pressure on them to raise capital in advance of this summer’s stress tests.

The move comes as Mario Draghi, Bank of Italy governor, over the weekend stepped up pressure on Italian banks, which are some of the lowest capitalised in Europe, to increase their core capital ratios or make clear to the market any plans to do so.

The Bank of Italy currently has a nominal value of just €156,000 ($215,000) divided into 300,000 shares which are distributed among Italy’s retail and savings banks according to their size.

Senior bankers say taking into account the surge in gold prices the Bank of Italy could have a mark-to-market value of about €30bn. Analysts estimate the Italian banking sector has combined recapitalisation needs of much the same amount to comply with new Basel III capital rules.

Of course the Italian banks are right that every possession in gold is now at an all-time high rate and you can’t blame them for wanting to capitalize this fact. But if the gold price drops in the near future, which it probably will, the banks could be in dire straits very quickly.

Remember: with a price of $1420 per troy ounce the gold price is historically high. And there is the chance of a snowball in hell that it will rise much farther in the future and that the gold price will remain very long at this all-time high level.

Curious readers should read the whole article. It proves that banks in Italy (and actually all over Europe) will do everything to cheat on the Basel agreements. And people should remember this and other incidents, when they think of the capitalization of the banks in general. It gives a strange notion to the word “Credit” as in “Credibility” for the banking industry.

Friend or foe: why Europe and the USA should beware of the Chinese friendship

In the practical art of war, the best thing of all is to take the enemy's country whole and intact; to shatter and destroy it is not so good.

Sun Tzu – Approx. 500 BC

Ignorance is the night of the mind, but a night without moon and star.

Confucius

The coming article is not meant as a xenophobic, populistic epic about the Chinese. So please don’t read it in it and… if you do, don’t complain with me. Now we have got that out of the way, here we go…

There IS definitely a movement of the Chinese government towards investing large amounts in Europe and America. If I say it is the Chinese government, that is because nothing happens in China without the government knowing it, approving it and probably paying for it.  So if the ‘Golden Dragon’ company from Guangzhou is buying a large warehouse in the port of Rotterdam, it is the Chinese government buying this warehouse.

And if Geely Cars is buying Volvo, it is the Chinese government buying Volvo. Because China and its government are inseparable.

And did they buy a lot:

Correspondent Garrie van Pinxteren (for the Dutch broadcaster “NOS” and various newspapers) writes this about Chinese investments in Greece (translated to English by me). Here is an extensive abstract of the article. :

-     China invests especially in the port of Piraeus and in shipping. That is a strategic investment. Piraeus should become the Rotterdam of South-Europe. China wants to ship Chinese goods to Europe and Afrika and land them in their own container port. Not really news that makes the Port of Rotterdam smile, dependent as they are from Chinese goods.

But there is a more important reason why Europe should scratch its head. The way China is investing in Greece is very similar with the way they are investing in Africa. It is an investment in a sector that is strategic for Europe. And Greece is not in the position to demand a lot from China.

In Africa the Chinese companies buy more and more farming ground, mines and oil wells to fill in the growing domestic need for food, minerals and energy. China rather invests in getting owner rights in Sudan and Angola than buying their oil on the free market. Besides that it wants to control the transport of Chinese consumer goods and commodities.[…]

With the Chinese investments in the Greek Port, the EU loses strategic influence to China. In the future it is China and not Greece or the EU that calls the shots in Piraeus.[…] Europe should use its economic power over China politically. But as long as Europe doesn’t operate as one unit, this will never happen, as it is too easy to play the “divide and conquer”-game.[…]

If we look how effectively and strategically China is operating, we don’t have another choice than to reinforce the EU. The European Container Terminal in Rotterdam is already owned by a Hongkong Company and in the future we might lose controle over the whole Port of Rotterdam. Politicians that say something else, look so strongely inside that they don’t see the challenges anymore that China is creating.

This is really a good article; that is the reason that I translated it almost integrally.

Other evidence of the growing Chinese influence in Europe

-  (www.nu.nl (no link to the article)) Companies at the Port of Rotterdam have to deal more and more with Chinese companies and this increases the influence of China on the port. A quarter of all containers at Rotterdam is already from China or goes to China. The Chinese want to increase their influence in the crude oil business. Therefore Chinese state companies try to get a positions in the leading three ‘oil ports’, like Rotterdam

-   Looking for Investments, China Turns to Europe

The New York Times writes an absolute must-read article about the growing influence of China in Europe, here printed almost in full:

When Prime Minister Wen Jiabao of China visited Athens last month, he came bearing gifts: billions of dollars worth of business deals and a wave of favorable attention from a crucial foreign investor.

“The support of our Chinese friends is fortunate for us,” Greece’s minister of state, Haris Pamboukis, said by telephone. 

But China had much greater ambitions. Greece is one foothold for China’s broad, strategic push into Europe. It is snapping up assets depressed by the global financial crisis and becoming a significant partner of other hard-hit European nations. Ultimately, analysts say, Beijing hopes to achieve not just more business for its own companies, but also greater influence over the economic policies set in the power corridors of Brussels and Germany. “They are indicating a willingness to stick their nose into Europe’s business,” said Carl B. Weinberg, chief economist of High Frequency Economics. “It’s very clever and sends a clear message,” he added, “that China is a force to be contended with.” […] 

China is leading the charge [of the takeovers in Europe – EL]. It is singling out Greek, Spanish and other downgraded government debt, as well as ports, highways and industries in troubled countries on Europe’s eastern and southern edges. Ireland and Hungary, among others, are also competing to lure Chinese investments, in the hopes that they will create thousands of new jobs. “What is happening is that the Chinese are expanding in Europe as they did in Africa,” said François Godement, a senior policy fellow of the European Council on Foreign Relations. “But in Europe, they’re coming in through countries on the periphery, which is extraordinary.” China is concentrating its efforts on ports in Greece and Italy and highways that link Eastern Europe to Germany and Turkey, and aims to secure larger infrastructure investments over time. It has provided billions of dollars in state financing for key public works projects that support Chinese state-owned companies and Chinese workers. Such moves could give China a bigger presence in the European chain of distribution and production, while allowing it to build a track record of investments that it hopes will also encourage Europe to support its position on divisive currency issues and in trade disputes at the World Trade Organization. During his recent European tour, Mr. Wen reminded politicians in Brussels that China had acted as “a friend” to Greece, Spain, Italy and other troubled European countries in their darkest hour by buying bonds as other investors fled. In return, he admonished regional leaders not to “pressure China on the yuan’s appreciation,” referring to the Chinese currency, formally called the renminbi.

In the past several months, China has pledged to buy Greek bonds when the government starts selling again, and purchased $625 million in Spanish debt. On his visit, Mr. Wen hailed scores of business deals in Italy and Greece, including one that allows a Chinese state firm to run Greece’s top shipping port — one of the largest European gateways for Chinese goods.

For China, plowing a small but growing share of its more than $2.3 trillion in foreign currency reserves into European investments instead of low-yielding United States Treasury bills helps diversify its portfolio. Beijing also hopes that this kind of push helps reduce the international political pressure to raise the value of its currency.

“It’s not a coincidence that China is doing this,” said Jens Bastian, an economist at the Hellenic Foundation for European and Foreign Policy. “They have huge currency reserves, and these countries where they are going right now have a dying need for foreign investment.”

While Chinese foreign direct investment in Europe is still small compared with its investments in other regions, it has grown quickly over the past two years. And this spring Europe overtook the United States as China’s largest trading partner.

Struggling Ireland is also looking for a piece of the action, and moves are afoot to create an “investment gateway to Europe” for China in the town of Athlone, which hopes for the creation of thousands of jobs. Prime Minister Brian Cowen of Ireland said in June that China had vowed to be “as helpful as they can to a friend like Ireland in the difficult times that we have.”

The investments also allow Beijing to advance the interests of Chinese companies as they go global. Mr. Wen last month talked up a $4.5 billion credit line that troubled Greek shipbuilders could tap — but almost exclusively to purchase Chinese-made ships. An additional $5 billion is flowing to Greek coffers from China’s state-run Cosco shipping company, which is leasing Piraeus, the port of Athens, to transform it from Europe’s largest passenger port to a much bigger hub for cargo, with aims to more than double traffic to 3.7 million containers in 2015.

In Italy, Cosco is expanding the port of Naples, while HNA, a logistics, transportation and tourism group based in Hainan Province, China, is in talks to build a giant air terminal north of Rome for cargo arriving from China. Mr. Wen pledged an additional $100 billion in trade with Italy through 2015 and heralded 10 business deals between Chinese and Italian businesses.

Some of China’s investments have already raised eyebrows. Last year, China outbid European companies to build a highway in Poland using a Chinese business and workers — with European subsidies — prompting Chancellor Angela Merkel of Germany to call for reciprocity.

In the coming decade, Europe will be considering numerous new projects, such as clearing the Danube River of wartime ordnance to use it as a transportation passageway; building railways between countries like Germany and Macedonia; and carving new highways from Germany to Turkey, Mr. Bastian said.

“What Europe lacks is a transportation infrastructure network where Western and Eastern Europe meet,” he said. “This is where China is trying to take advantage of their current buildup.”

Still, for all the fears of ulterior motives on China’s part, many Europeans welcome the investment with open arms. China is mainly interested in promoting trade and making money, said Mr. Pamboukis, the Greek minister of state.

China’s investment strategy in Europe is “discreet and well thought-out,” he said. “I don’t think China is coming in here as a Trojan Horse.”

-         (www.europe-nu.nl) Chinese authorities approved the intended takeover of Volvo Cars by the Chinese car manufacturer Geely. […] Earlier the European Commission gave the green light. According to the commission the takeover is not violating the European rules for competition. […] Geely wants to develop a new Volvo factory in China itself. The Chinese car manufacturer expects to sell 150,000 Volvo’s per year in China in 5 years. 

-         Small European companies that sell hi-tech equipment to China are often either forced to deliver blueprints showing their company secrets to the Chinese authorities, or forced to manufacture the equipment in China itself. These companies are not sure then that not a second factory will arise next to “their” factory, that produces exactly the same goods for half the price. 

I am not so sure that China is not trying to come to Europe as a Trojan Horse. Of course it is a defensible strategy when you try to secure your sales channels and supply lines with your own workers through your own ports and highways.

But looking at the wise words of Sun Tsu and Confucius on top of this article it is wise to remember:

-   It is the best thing to take over your enemy’s country whole and intact

-   Ignorance is the night of the mind, but a night without moon and stars

So, in my opinion, it is a good thing if we don’t erect trade barriers towards China. NOBODY is waiting for a trade war with the most patient people in the world. But let’s not be naïve over the intentions of the Chinese people in Europe and let’s not be too glad when our Chinese “friend” with the virtually endless supply of money is willing to help us in our darkest hour. It can be the kind of friend that makes enemies unnecessary.

Therefore I would advice to the European countries and the US:

-   Never give (company) secrets and patents away to China that you can’t miss as a country

-   Never sell properties to China that you can’t do without as a country

-   Never let companies be taken over by China that you consider a strategic asset for your own country.

And in the Netherlands we have a beautiful proverb that goes like this: “when a fox is smoothtalking to you, it is time to watch your geese”

Well, the time to watch our geese is now.