In: Root » Legal and finance » Market and Finances
There are multiple and well-known negative consequences of poor access to housing finance. On the other hand, international experience and research in high-income economies shows that a well-functioning mortgage market will provide large external benefits to the national economy: efficient real estate development, construction sector employment, easier labour mobility, capital market development, more efficient resources allocation and lower macroeconomic volatility. From the perspective of world history, urbanization is a new story and the second half of the 20th centurywas marked bythe urbanization take-off. What differentiates urbanization in the 21st centuryfrom the past is that it will be totallydominated byurbanization in emerging markets.2 Most of world population growth over the next three decades will take place in developing economies and 95% of that growth is projected to be in cities. As a result, the latent demand for the efficient real estate finance systems needed to manage the production and trading of urban assets in the cities of developing economies is strong. Pressure to act is high because the lead time for the diffusion of an alreadyknown financial innovation in a new market is often of the order of 5-7 years during which time a city population will greatlyexpand. The existence of mortgage finance as usuallydefined maystretch back four centuries, yet systematic comparative finance across housing finance systems is quite recent. In particular, comparative finance work of a systematic nature on the organization, structure and performance of housing finance systems4 in emerging markets is verynew. Even for higher income emerging economies, there are veryfew comparative studies. When it comes to what to do in emerging financial markets, views of mortgage market development policies remain framed bythe experience of a few high-income economies, especiallybythe remarkable rate of innovation in the US financial markets during the last 30 years. However, in shaping a mortgage finance development strategyfor an emerging market, can a direct transfer of institutional arrangements found in advanced economies be readilysuitable? Whyis it that so manyattempts to introduce mortgage securitization in emerging economies have met with so little success? The absence of comparative studies of mortgage finance systems in emerging economies might be attributed to their potential cost, the scarcityof relevant skills, the lack of private profit incentives for global investors to fund such work and, from the viewpoint of regulators, to the perceived lack of systemic risks that a fragile housing finance system might create for regional or global financial markets. The situation might change for middle-income emerging economies. A new driver for more comparative analysis of housing finance systems is the potential impact of real estate assets volatilityon the stabilityof domestic financial systems. Another is the approval of the Basel Capital Accord II on 26th June 2004 for implementation by2007. This second Basel Accord is expected to have strong direct and indirect effects worldwide on mortgage finance systems through its new rules on credit risk, interest risk and securitization that are embedded in its 'three pillars' of internal banking risk management, banking supervision and financial market development. Given that almost all the major innovations in mortgage finance have originated in high-income countries, how can this technical capital be brought to bear on the design of suitable strategies to develop mortgage markets in a given emerging economy? We can expect such strategies to be shaped by two core factors: the current scale and development depth of the domestic financial markets, and the degree of organization of housing markets in the cities of the country. The aim of this chapter is to map out some important structural differences between emerging markets and developed economies.
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