we made the pie at home. That’s where the real problem is – Corriere.it
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The case of Italy
Metaphor aside, the rate hike is bringing to the surface a series of issues typical of the country. The most obvious concerns the return of the arruffapopolo who try to score points on the hardship of many families: hence the criticisms of the ECB and the succession of data on Italians who would no longer be able to pay the bank installments. Behind the controversy there are exaggerations, but also historical weaknesses, not always correct behavior of Italian banks towards their customers and some real problems. We see. Italian families are known to have little debt and often own apartments. Among the countries of the European Union, only in Romania, Greece and Slovenia is it estimated that there is a lower share of private individuals with a home loan. Around 2.8 million families are in this situation here but – even if there are no official data – it can be calculated from Bank of Italy data that at least one million families, with around two and a half million residents, have a variable rate mortgage. The latter population is now vulnerable to interest rate increases and to it must be added a few hundred thousand families – often with low incomes – who have taken out small high-interest loans for expenses such as a dentist or an electrical appliance.
The variable node
Real estate mortgages in Italy are worth 424 billion euros, of which those at variable rates probably 157 billion (therefore with an average debt slightly above 150 thousand euros for families subject to variable rates). In addition there are debts for 117 billion of so-called “consumer credit”, often for people who are unable to face an unexpected expense. In theory not much. Not in a country where household disposable income exceeds 1,100 billion. In essence, all household debts are equal to two-thirds of the income that enters their pockets in a year. But, Trilussa would say, those who are starting to suffer don’t know what to do with middle school. Since the initial rate of those who took out a variable mortgage three years ago was 1.2%, in Italy there are families who have seen the installment grow by 30% or more. For speculators on the difficulties of others and the eternal hunters of consensus, there is an electoral market that can be attacked by about two million voters today traversed by fear, anger, insecurities. Indeed, we see that the big hunt has already begun. And it takes the form of continued attacks on the ECB or an alarmist and often misleading use of numbers.
It is worth keeping a cool head and remembering the most recent public data, referring to last April: non-performing household loans were worth 9.3 billion, the lowest figure in the last twelve years, almost a third less than a year and a half ago and four times less than the peaks reached in 2015. But let’s not hide behind middle school: for many families the problem of mortgages exists, all right, just not the one told by the arruffapopolo.
Economic cycles and the role of banks
The graph above comes from the Bank of Italy’s Financial Stability Report at the end of 2019 and shows in green the share of new fixed-rate mortgages taken out in recent years out of total real estate mortgages (therefore, by subtraction, it also reveals the percentage floating rate). The dotted line shows the percentage of fixed and variable rate home loans in terms of existing loan volumes. First red light: still at the end of 2019, after seven years of zero or almost zero rates from the ECB, most of the masses of home mortgages were still at variable rates. Why strange? Now, in Italy bank rates on mortgages really collapsed – let’s say – between 2014 and 2015, thanks to the end of the euro crisis after Mario Draghi’s “Whatever it takes” (the real one) and then with the purchases of government bonds, the “quantitative easing”. The floating rate over the counter was 5% in 2012 and had already dropped to just over 2% in 2015. Meanwhile, the ECB had brought rates literally to zero since 2015, so it no longer had many tools to get you even cheaper mortgages. market. Since a home loan usually lasts ten to fifteen years or more, and therefore goes through various economic cycles, the calculation of probabilities was clear: it was likely from the outset that during the life of your mortgage the ECB would move rates more towards up, rather than down more (since it is difficult to bring rates much below zero). There was much more room to make credit more expensive than to make it cheaper. And there was a clear asymmetry of probabilities between the two scenarios. A rational operator in the second half of the last decade would have had to lock in his favor the low rates at record levels at that time, by taking out a fixed-rate mortgage. He shouldn’t have let himself be blinded by the fact that adjustable mortgages were even cheaper at the time. In fact, choosing the latter offered a small saving in the short term but exposed to large losses at the first change of season, as we have seen recently. And an honest, professional bank consultant, attentive to the client’s interests and able to understand the limits of financial culture should have explained. He had to make people understand the risks of a variable rate mortgage, when ECB rates are at zero and therefore in the future can (almost) only go up.
Financial literacy and confidence
What happened instead? The graph above tells us that throughout the middle of the last decade around 40% of new mortgages – now slightly more, now slightly less – were taken out at variable rates, when rates were already at their lowest and the risk of sharp increases in the future it was at least plausible. Some banks must have behaved superficially, if not downright predatory, towards certain unsuspecting customers. And not for the first time: some have sold ordinary people supposedly cheaper mortgages, just as years earlier they had sold supposedly cheaper subordinated bank bonds. Why isn’t it explained at the counter, often enough, that more convenient conditions always correspond to a higher risk? Then the wounds to the relationship of trust with ordinary people and the prairies open to the usual rabble-rousers have a much higher cost than making money on the single head of the family. Yes, I know: there are subrogations, that is, the option for anyone to switch from a variable rate to a fixed rate (or vice versa). But many debtors not familiar with financial matters have been predictably taken by surprise, reacting slowly and now late. And yes, I know: now banks will offer customers in difficulty to spread the repayment of interest or principal forward in time. But it can only be done on condition that the coating ends up making customers pay something more overall, not what was established in the original contract. There is a lot of fighting these days about the new Rai programs and the new conductors, right or left. I would have a candidate: a new Maestro Manzi who proposes a “Never too late” on everyone’s literacy in family finance. So maybe we’ll save ourselves the next scandal.
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