Page 30 - bne_Magazine_July_2018

30 I Central Europe bne July 2018
Old town of Brno as seen from the town hall tower. Milan Gonda / Shutterstock.com
Czech central bank tightens mortgages rules to pop the nascent housing bubble
Jaroslav Hroch in Prague
The Czech National Bank (CNB) took aggressive actions to burst a potential real estate bubble before it gets too big on June 12 by increasing the banks' capital buffer rate to 1.5% effective from July 1, 2019 and tighten- ing lending policies on mortgages effec- tive from October 2018.
The CNB introduced a raft of tough pru- dential rules to ensure that consumers don't overload themselves with debt. The regulator recommended that banks set an overall recommended limit on indebt- edness 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-bind- ing, but banks usually follow the central bank’s recommendations. CNB warned earlier that loans exceeding eight-fold and 40%, respectively are risky. Current
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measures are a bit more relaxed, but still tough, critics say.
It has sparked heated discussion about CNB policy in three main categories: impacts on the financial sector, society and the property market.
“The Czech financial sector has devel- oped highly favourably since spring 2017. According to the CNB’s aggregate assess- ment 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 Report 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 tan- gible 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 mortgage loans in proportion to wag- es. Czech housing prices expanded faster that 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,” CNB said.
Analysts have said a nascent real estate bubble is already receding and could soon burst. But the growth in prices
is still a worry, especially in Prague,