Česká národní banka

Property prices are overvalued

By Jan Lopatka and Robert Muller (Reuters 22. 5. 2017)

Wait with rate hikes now rather than reverse later

The Czech central bank is in no rush to tighten policy and should only move when it is sure it will not have to undo what will be its first rate hike in almost a decade, board member Vojtech Benda said on Monday.

The Czech National Bank made an initial tightening move on April 6, when it dropped a cap on the crown currency's exchange rate after using the weak crown for 3–1/2 years as a tool to revive inflation.

The next step will be moving the main interest rate, the two-week repo rate, from the 0.05 percent floor it has sat at since 2012. The EU member country saw its last interest rate tightening in 2008, before the global financial crisis and two domestic recessions.

The bank's quarterly staff forecast assumes the first hike in the third quarter, as the economy grows and Europe's tightest labour market pushes up wages and prices.

Benda said the bank would tighten rates in the coming year but he also wanted to wait a few months before he makes up his mind on the timing.

"We need to let the dust settle a little bit," he said.

"I am against us making hasty steps that would lead to interest rates going up and then having to go lower again," Benda said in an interview at the Reuters Central & Eastern Europe Investment Summit.

"Interest rate growth should come at the moment when we know that we will continue in that at some pace in the coming periods."

Benda said rate increases would in part depend on the path of the crown in the coming months. More crown firming would mean fewer hikes but hikes are coming anyway, he said.

The currency had been tipped by many investors to jump after being floated. But long positions built up by investors and exporters, estimated at tens of billions of euros, have helped keep a check on the rate.

The crown has only firmed by 1.7 percent to 26.55 to the euro by Monday.

Benda said he would not raise his hand for a rate increase before the end of the second quarter.

"The third quarter may be key, we will be looking how (the economy) evolves through the summer holidays, then it will show if it is needed to raise (rates) at the end of the year or it can be left for the first quarter (of 2018)," he said.

"I am convinced that within one year, we will be visibly higher with rates. I am not saying by how much, but we will not be at zero lower bound."

Benda said a continued ultra-loose policy of the European Central Bank was not a major brake preventing Czech rates form going up.

The ECB's policy did mean there would be a bigger interest rate differential, but the loose monetary conditions in the euro zone also produced inflationary effects for the Czech economy, he said.

He said the Czech economy has only recently closed its output gap. Growth jumped to 2.9 percent year-on-year in the first quarter.

Inflation has dropped to 2.0 percent in April, the bank's target. The bank's forecast sees it picking up to 2.6 percent in the third quarter before dipping again to 2.1 percent a year ahead.

Higher rates would also come in line with the bank's steps to cool an overpriced housing market, Benda said.

Housing overvalued, bank seeks new tools

The Czech housing market is overvalued and the central bank needs to start slowing a spiral of prices and demand for mortgages, board member Vojtech Benda said in an interview.

Czech housing prices have been driven up by record low interest rates, a growing economy and rising incomes, prompting the bank to introduce regulation and seeking more powers.

"We see that property prices are overvalued ... I think that it is by 10 percent on average, compared to fundamentals," Benda said in an interview at the Reuters Central & Eastern Europe Investment Summit.

"We should see this as a spiral which we need to start curbing somehow, so that we don't get into trouble in five, ten years. Property prices never grow forever," Benda said.

Eurostat data showed that Czech housing prices grew by 11 percent year-on-year in the fourth quarter of 2016, the fastest pace in the European Union.

The Czech economy accelerated to 2.9 percent in the first quarter this year, while apartment prices rose by record 12.1 percent in the same period, according to mortgage lender Hypotecni Banka.

The central bank recommended banks not to provide, as of April, mortgages worth more than 90 percent of property values (loan-to-value, LTV) and not provide financing for over 80 percent LTV to more than 15 percent of customers. (Full Story)

The regulation led to a scramble for mortgages in the months ahead. In March, mortgage lending grew 16.4 percent year-on-year.

The central bank is also seeking a legal change to be able to set binding limits on mortgages through LTV, loan-to-income (LTI) and debt-servicing-to-income (DSTI) ratios. A bill giving the banks those powers has been slowly making its way through parliament.

"It is not tools that we want to start using immediately once the law is effective, but tools we want to have potentially at our disposal, should there be a need to use them in future," said Benda.

"We have been using the LTV already. From the other two, the first - I don't say immediately - would be DSTI, because it is a key indicator of a household's ability to maintain its financial stability," he said.

Benda said he believed the bill would be approved despite lengthy proceedings. A failure to adopt the bill before an election in October would mean the entire legislative process must start from scratch.

If the change is not adopted, the central bank could be forced to reach for alternative ways to cool the market, such as individual bank-by-bank capital requirements or a countercyclical capital buffer set for all banks, currently at 0.5 percent.

But that was not the preferred option, Benda said.

"So far, I feel that the situation is such that it is more appropriate to use finer instruments in the form of the targeted indicators instead of the hammer of the countercyclical capital buffer," Benda said.