CNB keeps mortgage limits unchanged
- The CNB Bank Board today discussed Financial Stability Report 2018/2019, according to which the domestic financial sector remains stable and highly resilient to potential adverse shocks.
- The Bank Board decided to leave the upper limits on mortgage lending indicators unchanged.
- The overvaluation of apartment prices increased slightly further; according to the CNB’s calculations, it stood at around 15% at the end of 2018, as compared to around 10% a year earlier. Current property prices may not be sustainable in the long run.
- The CNB is continuing to seek the statutory power to set upper limits on the LTV, DTI and DSTI ratios.
- At the same time, the CNB is increasing the countercyclical capital buffer rate to 2% from 1 July 2020. This is due to a rise in risks associated with the upward phase of the financial cycle of the Czech economy and to a slight increase in signals of vulnerability of the Czech banking sector to a potential adverse change in the conditions in the economy.
The CNB Bank Board today discussed Financial Stability Report 2018/2019, which assessed the soundness of the domestic financial sector and the risks to its stability. 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.
The Bank Board decided today to maintain the current limits on mortgage lending indicators. The maximum LTV (loan-to-value) ratio thus remains at 90% and banks may provide a maximum of 15% of loans with LTVs of 80%–90%.
The DTI and DSTI limits introduced in October 2018 also remain in force. Banks should continue to not provide loans where the total debt exceeds nine times applicants’ net annual income (the DTI – debt-to-income – ratio) At the same time, households with mortgages should spend no more than 45% of their net monthly income on debt service (the DSTI – debt-service-to-income – ratio).
“The Bank Board discussed whether, given the recent rise in interest rates on mortgage loans to 3%, it was desirable to change the recommended upper limit on the DSTI ratio from the current 45% to 50%. However, it decided to leave it at the current level with reference to the CNB’s analyses and household stress tests, which indicate that loans with a DSTI ratio of over 40% can be regarded as highly risky,” said CNB Governor Jiří Rusnok.
Although banks were mostly compliant with the current recommendations as regards LTV limits, the CNB observes their natural tendency in the current “good times” to value collateral on the basis of current market prices regardless of the fact that prices may be overvalued in an upward phase of the cycle. The CNB estimates this overvaluation of house prices at 15% at the end of 2018, i.e. around 5 percentage points higher than a year earlier.
The CNB is continuing to seek the statutory power to set upper limits on the LTV, DTI and DSTI ratios. A switch to setting these ratios 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 current CNB Recommendation would not be as effective for them as it is for banks.
The Bank Board decided today to increase the countercyclical capital buffer rate to 2% with effect from 1 July 2020. This is the sixth increase since the rate was introduced in 2015. Today’s Bank Board decision to increase this rate responds to a rise in risks associated with economic developments in the upward phase of the financial cycle, when the volume of loans in the economy and their riskiness increases, and to a slight increase in signals of vulnerability of the Czech banking sector to a potential adverse change in conditions.
The domestic banking sector continues to have sufficient space for credit growth even after the capital buffer increases, assuming reasonable dividend policies. Given that the domestic economy is probably close to the peak of the financial cycle, the likelihood of a further increase in the countercyclical buffer rate has decreased significantly. The CNB stands ready to lower or completely zero the rate in the event of a sudden turnaround in the financial cycle.
Banks strengthened their capital adequacy in the previous period and have high liquidity. Insurance companies maintained their capitalisation and profitability despite financial market developments that unfavourably affected the value of their assets and liabilities. Pension management companies and investment funds were adversely affected by changes in asset prices at the end of 2018, but this did not result in an outflow of clients or in systemically important losses.
Alongside price stability, financial stability has been another key objective of the Czech National Bank since 2013. The CNB will publish the full Financial Stability Report 2018/2019 and a new Recommendation on the management of risks associated with the provision of retail loans secured by residential property on 11 June 2019. Together with these documents, minutes of the Bank Board meeting on financial stability will be published for the first time, bringing the communication of financial stability policy closer to that of monetary policy.
The CNB will publish additional detailed analyses of risks to financial stability and information about the macroprudential policy settings in December in its regular document Risks to financial stability and their indicators – December 2019, which will be the underlying document for the autumn Bank Board meeting on financial stability issues.
Director of the Communications Division and CNB Spokesperson