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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-governor Vladimir Tomsik have reiterated the point. “There is warn- ing information considering the ability 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 mort- gages,” Rusnok said.
Often-cited Cyrrus chief analyst Lukas Kovanda criticized CNB policy in a piece for Czech business daily E15. He argues that the central bank, obsessed with financial stability, is creating bigger problems by only tackling the superficial ones, which the free hand of the market would solve on its own.
Czech banks were in good financial standing during the 2008 crisis, and there was no need for public money to come to their rescue, Kovanda said, yet their reward is greater CNB regulation, which will hurt business.
Rusnok anticipated such criticism in an interview for Radio Plus on June 11. “It is our policy, and we have to do it. I know that financial institutions won’t be happy.”
The CNB measures will have a social impact. Tightened mortgage policy will affect one-third of applicants, analysts said. But the impact won’t be distributed evenly. “Singles or young families will have to live longer, maybe their whole lives, in rental housing,” Raiffeisen- bank analyst Helena Horska said. “The
rents will be increasing at higher pace especially in bigger cities and their sur- roundings.”
The unemployment rate in Czechia dropped to 3% in May, the lowest
level in the EU and OECD, but living expenses are outpacing wage increases, particularly outside of Prague. Along with the Czech capital, the second- largest city, Brno, will be hit hardest
by the CNB measures. Young couples and students say that without personal connections, finding affordable hous- ing is becoming next to impossible. “People, especially in Prague, are paying more on rent than they would on a mortgage,” said Central Group director Michaela Tomaskova.
While steep rents don’t directly
or primarily endanger financial institutions, they can dampen domestic demand and thus curb economic growth. Analyst Lukas Kovanda warns the CNB policy could lead to a black market in residential real estate and usurious practices.
CNB governor Jiri Rusnok said that there has been a “fetishization” of home ownership. “It is a bit off the wall. And
years, the prices of flats have increased overall by almost 30pp.
It is hard to say if and when the CNB policy will halt or even reverse the trend. According to property develop- ers, it serves to strengthen the position of buyers and speculators investing into properties. “There is not a price bubble, but the CNB can create one,” Ekospol general director Evzen Korec said.
M&M finance director Michal Pitucha said that the prices are not so high when compared to more developed European countries. “If we don’t count Prague, prices are in fact relatively low when compared to wages. I think this measure is too cautious.”
Already a year ago, the CNB said that DTI (debt-to-income) exceeding eight- fold the total yearly income and DSTI (debt service-to-income) exceeding 40% monthly net income is very risky, the vice-governor Tomsik said.
The CNB has left LTV (loan-to-value) limits at 90% (individual limit) and the recommended amount of new loans with LTVs of 80%–90% is still capped at 15% (aggregate limit). Banks are overall
“The second-largest city, Brno, will be hit hardest by the CNB measures”
I understand it is reminiscent of the previous [communist] regime. But in Germany maybe 50%, even less, of the people own their homes. In Czechia, it is 70%-80% and there are notions it is almost a human right to have your own home and quite early on. It is not like that”, he told Radio Plus.
The third impact is on the property market itself. The average prices of flats increased in Czechia by 12 percentage points (pp) in the first quarter to 129.6 points. On a quarter-on-quarter basis, prices increased by 3.1pp, according
to the Hypotecni Banka (HB) Index published on June 10. The basic value of the HB Index – 100 points – is calculated to January 1, 2010. Over the past eight
respecting the 15% limit, but they still provide some loans in excess of 90%, as the CNB recommendations are only that – recommendations and not mandatory. Moreover, some properties are valued “too optimistically,” which undermines the point of the recommended limit.
As for the counter-cyclical buffer rate,
it will be one of the highest in the EU. The CNB raised the rate for domestic banks to 1.25% of domestic lending, from 1% from January 2019, because of rising household indebtedness, on December 18. And speculation is rife that the central bank will raise rates again before the end of this year, putting more pressure on would-be home buyers.
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