Making Mortgages Accessible: Housing Affordability and the EU Green Deal with Geert Van Kerckhoven from Oper

[MUSIC PLAYING] There are two things in the market that are challenging. First, it's just the affordability of houses. And a second one is that in Europe, we have now the Green Deal, where by 2030 we want to reduce carbon emissions. So if we want to get to the targets that the EU has asked from its member states, we need to renovate 220 million homes. That's Gerd von Kiekhoven from OPER. Gerd is here to chat about the topic we've never explored before on Fintech files-- mortgages. This season, we're honing in on social impact of Fintech. And I want to know what you're thinking. What do mortgages have to do with social impact? It turns out, a lot. This episode, "Good Breaks Down by Housing, Affordableity is Crucial for Building Wealth." We also dive into the impact of the EU Green Deal on housing. Europe is pushing to reduce carbon emissions across residential properties. This means retrofitting older homes to be more sustainable. You often can't even get approved for a mortgage if you don't agree to renovate older properties. This makes the housing affordability even more of a challenge, especially for first-time home buyers. This is Bianca's conversation was good. Enjoy. Welcome to Fintech Files. I'm so excited to have you here in this episode, talking to us about something that most of us usually cringe and have some sort of lots of emotions around when it comes to mortgages. So why did you become passionate about the field? I think, as a first homeowner, I remember having all sorts of emotions is quite a moment that most of us can't forget, right? You're halfway through trying to understand what the heck all the terms are and making sure you can afford it. I love solving problems, and I love building things. And at a certain point in time, I got a lot of donate knowledge about it. And so for me, if you look at the process of applying for a home loan or a mortgage, inherently, it is not that complex. But because it is such a big decision, it creates a lot of anxiety. It's very funny. My co-founder is currently going through a mortgage process. He's, I think, in Europe, top 10 experts when it comes to lending. He's one of the best. I cannot tell you the anxiety level that he has. We have therapy sessions. Now in the evening, we are talking through his mortgage case. Like, how can he make it work? Should he sell his existing property? So even that person gets anxious from the process. And I think because it is a big step, because a second problem as well is that loan advisors-- it's a scarce resource. So the people advising you in the bank are not always really big experts. And there's a lot of red tape through regulations, rightfully so, that is there. We just create a lot of complexity in the process. So you're taking a huge decision. You don't get all the clear information you need. And you need to do things you don't understand why you need to do them. And actually, nobody really understands why we're doing them. I think those three really create a clunky process today. So if you can help me explain, because it sounds like you're in your co-founder not only do therapy in your own case, but you set out a company offered to do this. So tell our fintech file listeners out there, what is it in a really simple way? So at Oprah, we build a technology that basically helps banks to sell mortgages to their clients. In its most simple way, that's how I can explain it. So basically, we provide them with all the software for the borrower to basically go to their website, do an affordability assessment all the way to signing actually the contract. We develop software for the loan advisor to help him giving better advice to the clients, and also to, let's say, head office to take better credit decisions. When you think about this challenge and the sudden challenges that the European market is facing, the housing market is one that screams pretty lovely. And as first time home buyers, beyond the general anxiety that we just discussed that even your expert co-founder has, what are some of the biggest things of impacting the accessibility of home ownership today? I think today there are two things in the market that are challenging. First is, as interest rates have increased, or at least now we're getting into a more volatile interest rate environment, it's just the affordability of houses. So today, first time home buyers have a really, really hard time of acquiring property and getting it financed. And one of the predictions that we had for this year was that we would see much more governmental plans coming up, but that hasn't really materialized. So today, if you're like lower middle class, I feel home ownership can be a very meaningful way of building wealth, but it's just really, really hard if you can't do the down payment. So that's a huge challenge which I see in Europe, and which will probably need governments, public sector, as well as private sector to find solutions for that. And banks are getting creative around more, say, flexible mortgage products. But I mean, it remains hard also given the regulations that came after the financial crisis. I think that is one. And a second one is, I think, a very big paradox today, and it's a very tricky discussion as well, is that in Europe, we have now the Green Deal, where by 2030 we want to reduce carbon emissions, et cetera. So we want to become much more energy efficient, much more self-sustaining to fight global warming, which is, I think, an amazing cause. The only thing is that has also a really big impact on housing markets. So if we want to get to the targets that Europe has asked, or the EU has asked from its member states, we need to renovate 220 million homes. That's a huge assignment. And so again there, that means that governments will say-- and that's actually happening in a few European countries-- hey, Bianca, you want to buy a new property in France? Oh, it's an old apartment. Yeah, we're only going to give you a mortgage if you renovate it. But the renovation cost is going to be incredibly high, so your affordability will go down. So we're having already today young families of difficulties acquiring that first property. And in order to meet-- this is going to sound a bit doomsday, but in order to meet the Green Deal, we'll also impose a lot of requirements, which will make properties even less affordable. But how bad is housing affordability in Europe really? According to the VN, over a third of lower income households experience housing stress. The severity varies from country to country, but many households pay almost half of the income on housing. A common piece of financial advice has historically been to not spend more than a third of your total income on housing. It leaves little room for other living expenses, like food and transportation. You also don't have much left to save for unexpected expenses or retirement. To try to cool housing costs, interest rates went up significantly across Europe since the pandemic. Although this helps bringing housing prices down, the overall costs for buyers still go up. With these rising interest rates, affordability issues are not going to change. What can technology do? Can technology really be that pixie dust that magic can happen? What I would say is in our control today is also in on-the-fields helping loan advisors and borrowers to have clarity of what is feasible and what is not feasible. And what I, for example, see today-- and this is really something in Europe which is a real issue-- is that I'm a young family. I go to my bank, to my home bank. I say, hey, we would love to acquire this apartment. And on the other side, there is a loan advisor that-- or let's say a bank advisor that also does a lot of other products, like investment products, payments, whatever. And they just say, yeah, I don't think it will be feasible. Save a little bit more for the future, blah, blah, blah. And the poorer just goes back, or the family just goes back, and they're just going to rent for another six months. Well, actually, if you think about it, if I look at what the bank could offer, we could have offered them a mortgage. We could have offered them something. We could have helped them. And I think there with our technology, we invested a lot of money in helping borrowers easily calculate different affordability scenarios themselves. But also-- and that's actually what most of our R&D went into-- is helping loan advisors have better advisory conversations. So to really help them think through, like, look, this is the current income. This is our financial situation. These are the assets we have. This is the assets we will have. What can we advise you to do so? [MUSIC PLAYING] What Gertz is describing here is often called a stress test. The stress test is a way for banks to access if someone will pay their mortgage in different scenarios. So for example, what if interest rates rise? What if living costs goes up? What if you lose your job? The purpose is to ensure that banks will still receive their payments, and that the borrower won't take on unnecessary debt. But when it comes to planning for the future, they use climate targets at another layer. What if I get newer windows? What about if I improve the insulation? These are the kinds of questions that home buyers can ask that will help access a long-term affordability of housing. [MUSIC PLAYING] We can also think about, hey, you know, you can afford a property of the 250,000 euros. But if you want to acquire this property, we might also buy investing in heat pumps or in solar panels. You could also drive your energy costs down. So we could also fund that. And then long term, you would also pay less energy costs, et cetera. So that planning, we all provide today to banks with our technology to help them provide a much better service to their clients. And that's just a great example. You kind of just walked us through how the loan advisor can really use this, right? Because the bank effectively has an asset that they want to sell. They want to sell cash, right? Where do you think is the awareness of the market today? When you're having these conversations with the banks and with the clients, obviously, I think society as a whole is outraged about affordability. So I think you can read that on the protest or news. But how is the business world realizing the opportunity they have in their books? Yeah, there's, of course, also a third department, which often plays a role, and that is, of course, a risk, which especially after the financial crisis sometimes really pushes the brakes. We have a strong presence in the dark region. So Germany, Austria, Switzerland. And what you there have, and I really-- I mean, just for me as clients, I really love to work with. There are a lot of regional banks. And so banks that operate in a certain province. And what you-- and often do some real estate, fund the local SMEs. With them, you can really have that conversation. Because they are like, look, you live in a city we service. We help everybody in the city. Like, that's our duty. And that means we don't have perfectly standardized mortgages. That means sometimes we kind of tailor certain mortgages products to somebody. But we want to help every family within the risk category. The only thing is the issue that this-- so they're very receptive to the storyline that I just told you. Because if you talk to sea level and to board level, they're like, yeah, that's our duty. That's what we do. We make sure we realize dreams. The only thing is they still on the field have to find the people that can give that advice, that can do that manufacturing, that can do that tailoring of lending products. And there, especially with a lot of renovation guidelines today, energy efficient subsidies, et cetera, it just becomes incredibly hard. And there, I think, with technology, we can play a huge role. But housing and also residential housing has today a huge impact on the gas emission we today have within Europe. And when you talk about residential housing, so that's a bit how it drills back to our industry. Because what a lot of governments have been doing is been imposing the banks to not lend money to just acquire an energy-unefficient house like an old castle without having the duty to renovate. And this is maybe also interesting for a lot of people, because I sometimes hear that's something that doesn't really exist, for example, in the US market. But in Europe today, I mean, I sit now in Belgium. If I want to buy an old castle that basically runs on coal, if I go to my bank, they would not finance it, unless I do a commitment to put a energy-efficient heating installation. So let's break down a bit what this castle example would actually look like. Imagine an old castle built centuries ago. It's got thick stone walls, drafty windows, and an ancient heating system running on coal. Sounds charming, right? Well, it's basically an emissions nightmare, not to mention super expensive to maintain. But by retrofitting homes with modern upgrades like heat pumps, insulation, and energy-efficient windows, we can drastically cut the carbon footprint. Heat pump can reduce carbon emissions by at least 20%, complete with a gas boiler. This makes homes greener and more affordable in the long run. But there is still the issue of immediate affordability. The only thing is, if you add the concept of renovations and rebuilding certain houses, you add costs to the housing price. So a priori, my analysis is that interest rates rise, affordability becomes more tricky. If house prices stabilize and become more expensive because of renovation duties, affordability goes through the roof. So what do we need to change to meet these ambitions and this just divergence of, we kind of want to go here, we understand this is where we need to go, if there is a new set of homeowners that could lead this green transition. Here they are, but if they can't even afford to be part of it, so what needs to happen? First and foremost, I think we need to safeguard first-time home buyers, in a sense. I don't think we need to make first-time home buying extremely accessible to European families. And there, again, it's going to be a combination of private and public initiatives. A second pillar where I think we can work on, but again, I'm not a policymaker, is people who have paid down quite a lot of home equity, who might sit in houses that aren't so energy efficient, stimulate them and also inform them to be able to do re-upptakes on their mortgage in order to do certain energy efficient works. And it's tricky, because you need to make sure they do the appropriate kind of works. You need to make sure that you're not just subsidizing a construction industry, but I feel like certain investments could be do, like installing a heat pump and basically being able to use your existing mortgage to do that, because that way you're basically renovating. You're basically asking people to make a positive change to housing to people who are financially already further in their journey. I think if we work on that angle, we are at the same time renovating the properties we need to renovate, and we're safeguarding, first, the second time home buyers. So they can take that step in wealth, build up wealth, and then pay back to the community. Probably advocates of the Green Deal will say that goes way too slow, but that's also why I'm on technology and not on the policymaking side. - What are some of the top cool things you've been seeing being implemented in ways of towards this contribution or home contribution towards whether it's carbon emissions or just reduction of our footprint in this planet? - We basically look at the property as a living object throughout time. And with that, I mean, I buy a property today, I wanna live there for 20 years with my family, so I'm going to continuously improve its energy efficiency with, let's say, doing improvements here and there, but okay, that's one part, but then tying the financial product to it. Meaning that you basically say, hey, today we spent $500 on energy expense, we're gonna bring it back to 300 because of all energy efficient measures we take, and then the financing is going to basically cover for that for a certain while. So you get active cashflow planning on a property, and because you're making these investments, you're not only driving your monthly expenses, your monthly family expenses down, but we also make a forecast on what the property value would be. So we basically say, hey, by doing these measures, the property that was initially worth $200, is now gonna be worth $300. So you're basically looking at the property as a living asset. - What's really when you look ahead beyond these critical developments in mortgage and the housing sector and the awareness we have to have to not over-stimulate just the construction industry, but doesn't there have to be this change in awareness and perspective? - Doesn't that also tie it back to financial awareness, which sometimes I feel is missing. You have this life path, but sometimes I think basic financial education on why owning a property and paying down, for example, a mortgage or investing certain amounts of your funds in long-term funds makes sense, the definition of compounding of interest. And it's a feeling that that's something, you know, you do it because other people are doing it and you need to do it. But sometimes, you know, it still strikes me that I need to, two very intelligent people have to explain the power of compounding, which I think is a basic notion of creating wealth for you and your next generation. Compound investing comes up a lot on the podcast and it is a crucial thing to understand, especially for younger generations who want to invest in their retirement. The concept is simple. When you invest money, you earn returns. Those returns get added to your original investment. So the next time you earn returns, you're not just earning on what you originally put in, but also on the returns of what you already made. The earlier you start investing, the more compounding opportunity that you have. And it takes time. This is just one of the many ways people can build financial security over time. Safety and security are wrapped up emotionally and financially with the idea of owning a home for many people. Most people understand the safety that comes in having a home, the emotional stability and security and this notion of wealth. And a lot of people without much education aim and strive for that. And buy today mortgage products across the world. So how does that change? And what do you look ahead and hope for? As an entrepreneur, you have to be covered in hope to have been in this industry for these many years. - Oh, I think for me, what you just described, that's what I'm really hopeful about is that, that for me is something that is here to stay. I think the urge of anybody globally that wants to have a home, own home, that wants to basically be able to own a property, I feel it's a basic need that everybody pursues. And I feel that technology can help us to make it easier, to make it more accessible, to make sure people take the right decisions. I know that five years ago when we started, there were a lot of back in the days, venture capitalists looking at our company and saying, the next generation is they don't want to own anymore. Nobody wants to own properties, they don't want to own cars, they just want to rent, they want to lease. And to be honest, five years later, that assumption, that hypothesis that they formulated, I think is still false everywhere around the globe, every country that starts developing a meaningful middle class wants to have mortgages. It's a need we have and I don't think that will die down so easily. (gentle music) - This was a really unique episode of INDEC Files, so much to unpack when it comes to mortgages. Bianca, what's your personal experience with buying your first home? - I think I was 24 and I was working at a bank and at RBC at the time working in commercial reeds, senior debt financing, so super technical things and had a lovely RBC mortgage rate as an employee, so it felt like the right thing to do to follow the route of the traditional time when I was having this banking job, I thought I was gonna buy this place. But I remember just not understanding and realizing, even working at the bank, how credit scoring already worked, I knew with the formulas and the ratios that they were looking for. But that was a unique vantage point, so I think my anxiety was a little less than normal first home buyer because I had my mentors at RBC that were just saying, hey, we can help you figure this out. But when I think of just now even having moved, like I live in Denmark and even buying property in another country, I find it a really different and scary sort of anxious experience because the rules are different. And even understanding how my affordability rates are gonna be calculated, even the way mortgages work in Brazil compared to Canada compared to Denmark is completely different and even how they market in terms of transparency. So I think it's the one that causes you anxiety no matter where you go and maybe some people in real estate are better than me on this one. - I think from your starting position it really makes sense because for me, honestly, I've always been a bit too afraid because of moving countries so often, I just don't see the need. And I'm really afraid of the administrative overhead. For instance, if I would now buy a house back in my home country, Germany, where I for sure will live in maybe 10, maybe 20, maybe 30 years from here again, I don't want to manage it right now from the Middle East. - That's super fair. I've thought about that long, hard, and I think a lot of digital nomads or expats can relate to that. I know that my next sort of dream thing is to maybe buy a place in Lemmy Beach, which is where I'm from in Rio de Janeiro, but living the crazy airport life that we often also talk about here in the podcast, this renting and buying debate. And you see this in the numbers, right? You see in the numbers, not only based on, we are in a fortunate place to be able to choose. Some people in our generation are not. And some of these calculations are something that they, one, don't understand. And two, are not even aware how they can make it any different. When we look at North America as an example, the credit spread and debt in younger generations is terrifying. So it's not a renting versus buying debate, is a, can I even afford rent debate? So how do you see that and how is that in the Middle East on and how, like, what do you see as opportunity? What are the, because I've also seen a really incredible cool market of fintech opportunities with the renting market. - I think this can be like your next startup, Bianca, because especially in the Middle East, you don't pay on a monthly basis. You pay on an annual basis. So basically the month or the day you move in, you need to pay your rent for one year in advance. It's usually a one-time payment. Otherwise it's gonna get more expensive, which is totally different to Germany. And I can imagine, especially for starters in the job, when you just start your first job or when you just move jobs, it's super expensive. - And we see things like the potential impact of the EU green deal. But when I looked at that and listening to him share, it just kept diving this gap even bigger and bigger between what people can afford and what we hypothetically would like to have as a world. - I fully agree. And I think here, the gap between what we want and what is reality is quite big. So just from my example, I'm the daughter of a civil engineer. So of course our walls at home, back at my parents, they are very well isolated. But they're also good to know for your first property. Well, he's now a physics and math teacher. But anyways, I think for me as a child of a civil engineer, I know like how walls should look like. And also what good windows are, because my dad paid a certain emphasis on it. But I also know 1000 ways of how houses can also be built. So for instance, when you have not so well isolated walls because you can save space and so on, it's a completely different thing. And I can fully imagine when thinking about the EU green deal, that it's also neat to drive it from a regulatory perspective more, to really have the incentives for everyone to take care that this is not only when you're civil engineer's child, but also for the general population. - Yeah, and how do you drive that consciousness, right? Like how do you, is it at the time of purchase and for what premium are you willing to be green? So I think when we look at how that's gonna impact their decision making, like I think they're gonna have to do a lot more than green bonds to truly see and harness the impact of all those legislation coming. - This has been "Fintech Files", a podcast from BCG Platinian. This season, we're digging deep into the groundbreaking ideas that are reshaping the future of "Fintech". And we want to hear from you, our listeners. What topics do you want to come up with? And who are your dream guests? Feel free to reach out at any time at [email protected]. We can't wait to hear from you. - Thank you so much for tuning in. - Bye. (laughs) (gentle music)