Page 11 - bne_newspaper_June_15_2018

Central Europe
June 15, 2018 www.intellinews.com I Page 11
Czech central bank tightens mortgage rules to pop nascent housing bubble
Jaroslav Hroch in Prague
The Czech National Bank (CNB) took aggressive actions to burst a potential real estate bubble be- fore it gets too big on June 12 by increasing banks’ capital buffer rate to 1.5% effective from July 1, 2019 and tightening lending policies on mortgag- es effective from October 2018.
The CNB introduced a raft of tougher prudential rules to ensure that consumers don't overload themselves with debt. The regulator recommend- ed that banks set an overall recommended limit on indebtedness to nine-times the total yearly income of the mortgage applicant, and limit the debt repayment load to 45% of the applicant's monthly net income. These recommendations are non-binding, but banks usually follow the central bank’s recommendations.
These two new measures have sparked heated discussion about CNB policy in three main cat- egories: impacts on the financial sector, society and the property market.
“The Czech financial sector has developed highly favourably since spring 2017. According to the CNB’s aggregate assessment presented in the macro-prudential dashboard, it has maintained
a high level of resilience to possible adverse shocks,” the CNB said in its Financial Stability Re- port 2017-2018, also published on June 12. “This is being fostered mainly by the maintenance of sufficient capitalisation, stable funding sources and an extensive buffer in the form of quickly available liquidity.”
The CNB has chosen to act as it sees tangible risks in excessive optimism that has driven house prices up on the back of the buoyant economy. The financial sector has peaked and created
obvious cyclical risks, mainly related to a boom
in property prices and the growing size of mort- gage loans in proportion to wages. Czech housing prices expanded faster than anywhere else in the EU throughout most of 2017.
“The average year-on-year growth rate of apartment prices was almost 16% in the individual quarters
of 2017. The year-on-year growth started to slow slightly in the fourth quarter of 2017 but remained relatively high. At the same time, apartment prices considerably outpaced wages, so the affordability of apartments deteriorated,” the CNB said.
Analysts have said a nascent real estate bub-
ble is already receding and could soon burst. But the growth in prices is still a worry, especially in Prague, where AirBnB is driving out regular ten- ants and the rate of issuing construction permits for new apartments has long outstripped demand. In response, the CNB has slammed on the brakes and issued very conservative recommendations, in effect saying, “We won’t let the 2008 crisis happen again.”
Both the CNB governor Jiri Rusnok and vice-gov- ernor Vladimir Tomsik have reiterated the point. “There is warning information considering the abil- ity of an applicant to pay back loans from ordinary income. Almost one-tenth of provided loans were what we consider risky,” Tomsik wrote in a commen- tary for the Czech business daily Hospodarske noviny.
“Debtors are getting more vulnerable. If the economy worsened, households would get into trouble with repayments. And there is a greater probability that riskier applicants will apply for mortgages,” Rusnok said.