CNB confirms mortgage limits, increases estimate of housing price overvaluation to up to 20%
- The Bank Board today confirmed the limits on mortgage lending indicators.
- The overvaluation of apartment prices has increased slightly further; according to the CNB’s calculations, it stood at 15%–20% in mid-2019, due mainly to undersupply of apartments in cities.
- The CNB expects growth in residential property prices to tend to slow in the quarters ahead.
- The Bank Board also decided to leave the countercyclical capital buffer (CCyB) rate unchanged at 2% after 1 January 2021. The CCyB rate is expected to stay the same for the near future.
- Banks remain resilient to potential adverse shocks. To maintain this resilience in the event of a cooling of the economy, banks should maintain capital buffers and their current voluntary capital surpluses and pursue reasonable dividend policies.
The CNB Bank Board today discussed the autumn publication Risks to financial stability and their indicators, which assesses the soundness of the Czech financial sector and the risks to its stability according to the 2019 H1 data. To maintain financial stability in the Czech Republic in the future, the CNB uses macroprudential policy instruments, including mortgage lending limits and the countercyclical capital buffer.
Based on the report, the Bank Board decided it does not deem it necessary to change the current recommended LTV, DTI and DSTI limits applicable to mortgage loans. Most banks remained compliant with the Recommendation on the management of risks associated with the provision of retail loans secured by residential property as regards LTV limits in the first half of 2019. However, the proportion of loans with LTVs (loan-to-value ratios) of 80%–90% increased. Loans with LTVs of over 90% were also drawn; according to the Recommendation, such loans should not be provided. Loans with LTVs of over 80% accounted for more than the permitted 15% of the total in June 2019. This means that some lenders were not compliant with this limit. The CNB does not currently deem it necessary to tighten the LTV limits. However, continued growth in housing price overvaluation could necessitate a reassessment of these limits.
By contrast, the DTI (debt-to-income) and DSTI (debt service-to-income) limits, applicable since 1 October 2018, were met in compliance with the CNB Recommendation. The CNB also regards it as positive that the provision of loans with exceeded limits has been reduced for all three loan indicators monitored (LTV, DTI and DSTI).
The share of loans to purchase buy-to-let residential property, for which clients declare rental income as part of their declared income, remains very low (around 5%). However, newly acquired information reveals that almost a third of the volume of new mortgages goes to customers who already have one or more mortgages. It is likely that such loans are mostly of an investment nature. Lenders should therefore also separately monitor loans for the purchase of additional residential property provided to customers who already have one or more mortgages went submitting the application and for which rental income is not included in net income for assessing the DTI and DSTI ratios. They should also use all available information to assess the purpose of such loans and apply a very cautious approach to those which are evidently not being used to finance owner-occupied housing.
The applicable CNB Recommendation states that lenders should apply an LTV limit of 60% to loans to purchase buy-to-let residential property with a higher risk level. The Bank Board today specified the conditions for determining a higher risk level under which the LTV limit of 60% will be applied to loans to purchase buy-to-let residential property. This will be done where loan applicants are not compliant with the recommended limits for one or even both ratios, i.e. where DTI exceeds 9 or DSTI exceeds 45%.
The publication Risks to financial stability and their indicators also assesses property market developments. The affordability of housing has deteriorated further due to growth in residential property prices. Property prices are 35% higher than they were in 2008 before the global financial crisis. According to the CNB’s estimates, the overvaluation of housing prices stood at 15%–20% in mid-2019, i.e. above the level estimated at the end of 2018 (around 15%). This was due mainly to undersupply of apartments and houses in cities. Growth in property prices is also being fostered by low mortgage interest rates, which started to fall sharply again this year after last year’s growth. This was a result of highly accommodative monetary policies of foreign central banks. Given the evolution of asking prices, however, the CNB expects growth in residential property prices to tend to decline in the quarters ahead.
The Bank Board also decided to leave the countercyclical capital buffer rate (CCyB) at 2% after 1 January 2021. The 2% rate will be applicable from 1 July 2020; banks will apply a rate of 1.75% in the first half of 2020. With regard to the assessment of the position of the domestic economy in the financial cycle, the CCyB rate can be expected to stay the same for the near future. In the event of a renewed acceleration in credit growth, for example due to a decrease in mortgage interest rates, a renewed upward shift in the financial cycle or growth in the vulnerability of the banking sector, the CNB stands ready to increase the rate further. The CNB may lower or completely zero the CCyB rate in the event of a sudden turnaround in the financial cycle.
The domestic banking sector continues to develop favourably. Banks remain resilient to potential adverse shocks, and investment and pension funds are continuing to show dynamic growth. The peak of the financial cycle, to which the domestic economy is close, is reflected in a low default rate. Nevertheless, credit risks accumulated in previous years remain in banks’ balance sheets. These risks could have a negative impact in the event of an economic downturn, a rise in unemployment and a decrease in households’ ability to service their debts.
The CNB will publish the full Risks to financial stability and their indicators report and a new Recommendation on the management of risks associated with the provision of retail loans secured by residential property on 13 December 2019. The minutes of today’s CNB Bank Board meeting on financial stability issues will be published the same day.
Petra Vodstrčilová
Deputy Director, CNB Communications Division
Notes for journalists:
Financial stability has been a key objective of the Czech National Bank alongside price stability since 2013.
The CNB Bank Board discusses the Risks to financial stability report in November each year. The report assesses past developments in the individual areas of the Czech financial sector and analyses the risks to the stability of the financial system as a whole.
The CNB will publish the full Risks to financial stability and their indicators report and a new Recommendation on the management of risks associated with the provision of retail loans secured by residential property on 13 December 2019. The minutes of the CNB Bank Board meeting on financial stability issues will be published the same day.
The main macroprudential policy tools applied in the Czech Republic are the countercyclical capital buffer (CCyB) and the Recommendation on the management of risks associated with the provision of retail loans secured by residential property.
Countercyclical capital buffer (CCyB) – the CNB announces the CCyB rate about a year ahead of its application so that banks can adequately prepare for it. The CCyB rate will be increased from the current 1.5% to 1.75% from 1 January 2020 and to 2.0% from 1 July 2020. This instrument is aimed at increasing the resilience of the banking sector to risks associated with fluctuations in lending activity. The CCyB should enable banks to lend to households and firms even at a time of recession or financial instability.
LTV (loan-to-value) – financial institutions should not provide loans where the collateral value exceeds 90% of the mortgage; banks may provide no more than 15% of loans with LTVs of 80%–90%.
DTI (debt-to-income) – financial institutions should not provide loans where the total debt exceeds nine times the applicant’s net annual income.
DSTI (debt-service-to-income) – households with a mortgage should spend no more than 45% of their net monthly income on debt service.
Maintaining financial stability is defined in the Act on the CNB as one of the CNB’s primary objectives. The Act requires the CNB to set macroprudential policy by identifying, monitoring and assessing risks jeopardising the stability of the financial system and, in order to prevent or mitigate these risks, to contribute by means of its powers to the resilience of the financial system and the maintenance of financial stability.
The CNB is seeking the statutory power to set upper limits on the LTV, DTI and DSTI ratios. An amendment to the Act on the CNB has been included on the agenda of the ongoing 39th session of the Chamber of Deputies. A switch to setting these indicators in a legally binding manner will have no major impact on current bank lenders or on consumers. However, the limits must be legally binding in order to ensure a level playing field on the market and to prevent unfair competition between lenders in the future if new (especially non-bank and foreign) players enter this market segment. Enforcement of the rules set out in the Recommendation would not be as effective for them as it is for domestic banks.