Is Bermuda in a housing bubble?

Remember when we noted how Bermuda's housing market could be in a precarious position due to bank lending practices?  Well here's an interesting chart created from data discovered in the Bermuda Monetary Authority's Regulatory Updates going back to 2001.  Apparently Bermuda's borrowing rate has significantly outpaced our savings rate over the last few years which this writer believes may have caused a significant bubble in Bermuda's housing market.

 

 

The above chart is compiled from the  "BD$ Deposit and Loan Profile - Combined Banks and Deposit Companies (unconsolidated)" section.  Note how from Q1 2000 to Q1 2004 there was not a great deviation between the total amount saved vs. the total  amount borrowed.  Subsequently, note how from Q1 2004 to Q1 2008 there is a huge deviation between the total  amount saved vs. the total amount borrowed as well as a massive spike in the amount borrowed. Indeed, from Q1 2004 to Q1 2008 the savings amount fluctuated approximately around 3.5 billion BD$ while the borrowed amount rose nearly $1.8 billion BD$.

Now, if you follow the pretty steady trend of Q1 2000 to Q1 2004 it is not hard to note that if that trend had continued, the total amount borrowed should have been closer to 3.3 billion BD$ rather than 4.3 billion BD$.

So here's the billion dollar question:  What happens when you flood a very small and supply constrained housing market with an extra billion dollars in borrowed capital? 

Comments

[Observer]

Great information. Thanks for posting! And on top of that just who exactly are we borrowing all this money from and what are the terms of repayment? I would hate to think that Bermuda is borrowing billions of dollars, which we cannot repay. What's worse, does the lender know that we cannot repay? And if so, why do they lend anyway?

[Denis Pitcher]

Observer,

These charts show savings and lending practices among local banks.

While I am no expert on banking or finance, my guess is that these banks work similarly to traditional banks in that money taken in as savings is subsequently loaned out with the bank making money on the differential in savings interest rates vs. loans interest rates (about 5% or more).

The distinction with the above chart is that the total amount borrowed outstretches the total amount saved meaning that money is coming from somewhere off island.

Coincidentally, the drastic change in that chart begins at around the same time as HSBC bought out the Bank of Bermuda. HSBC certainly would be in the position to leverage banking assets off island to increase lending in the local market.