Property-market-related loans in the current phase of the business cycle

The property market is very closely related to the evolution of loans for house purchase, loans provided to corporations engaged in real estate activities (developers) and partly also to loans provided to the construction industry. This box analyses the importance of the said segments in total loans. A wider view is especially relevant given the still weak property market, as reflected in a continuing decline in prices of residential and commercial property (see section III.5.7).

In 2004–2009, loans for house purchase accounted for two-thirds of the growth in loans provided to the property market. Loans to developers accounted for one-third, while loans to the construction industry were negligible ¹. As from 2008, all these segments contributed to the slower growth in lending to the property market. This was due to lower demand for loans among households and corporations, but also to tighter credit standards on the part of banks. Annual growth in loans to the property market is currently around 7%. The positive contribution of loans for house purchase is still declining, but is far and away the largest of all the said components. The contribution of loans to developers is increasing slightly, while that of loans to the construction industry is negligible (see Chart 1).

Chart 1 (Box) Structure of loans provided to the realestate market
Growth in property-market-related loans slowed sharply during the crisis
(contributions in percentage points; annual percentage changes)

Loans to the property market contribute significantly to growth in total loans provided to the economy. In 2008, when the credit cycle peaked, such loans contributed 16 percentage points to the almost 30% growth in total loans. Contributions of the other sectors were less significant. A decline in total loans was recorded following the escalation of the global financial and economic crisis. The positive contribution of loans to the property market has been flat in 2010 (only this segment makes a positive contribution). The negative contributions of loans to other sectors are mostly moderating (see Chart 2).

Chart 2 (Box) Importance of loans provided to the property market
Loans provided to the property market make a key contribution to growth in total loans
(contributions in percentage points; annual percentage changes)

The annual rates of growth of loans to corporations for property-market-related activities reveal that the decline in loans to developers halted in 2010, while the decrease in loans to the construction industry is continuing (see Chart 3). Gross value added is flat in the case of developers and the signs of a recovery are very weak, while value added in construction is continuing to fall. The confidence indicator in construction is still declining, but the fall in building production and new orders is moderating. A continuing unfavourable situation in the two segments is also demonstrated by their loan repayment problems, although such problems are considerably more widespread in construction. The share of non-performing loans in total loans increased to 14% in construction and 6% among developers (from 6% and 1% respectively in 2007).

Chart 3 (Box) Loans and gross value added
Loans to developers are flat, in line with their gross value added, while loans to the construction industry
are continuing to fall
(annual percentage changes)

Unlike the outstanding amounts of loans, new loans to households for house purchase are showing a slowing decline in 2010, and are increasing in the segment of large banks. New loans with fixations of over one year and up to five years are increasing amid a persisting decline in new loans with other fixations (see Chart 4). The share of new loans with fixations of over one year and up to five years in total loans for house purchase rose to 51%, and in recent months there has also been a slight increase in the share of loans with fixations of up to one year to 17% (according to Hypoindex the proportion of loans with a variable rate is 4%). By contrast, the share of new loans with longer fixations is decreasing. This is due to the fall in interest rates, which has been most pronounced for loans with fixations of up to five years.

Chart 4 (Box) Housing loans by rate fixation
House purchase loans with fixations of over one year and up to five years are rising
(new business; annual percentage changes)

While interest rates and client risk premia have been declining recently, the loan-to-value ratio has been at 56% since the start of 2009. Banks are therefore generally relaxing their interest terms for house purchase loans, whereas their non-interest terms remain visibly unchanged. The lowest rates on new loans for house purchase are being offered by large banks, but the decline in such rates is currently halting (see Chart 5).

Chart 5 (Box) Interest rates on house purchase loans by bank group
Interest rates fell mainly in the case of large and medium-sized banks
(new business; percentages)

To sum up, loans to the property market were affected very negatively and very quickly by the global financial and economic crisis. Banks started to treat loans to developers very cautiously given the typically low share of own funds invested by developers in their projects. At the same time, small and medium-sized banks faced a temporary lack of funds when the financial turmoil intensified. Lower demand for mortgage loans gradually started to prevail as a result of a more prudent attitude of households to debt as the recession strengthened. However, the slowdown in growth in loans to the property market probably bottomed out in 2010. Loans to developers are currently flat and the decline in new loans for house purchase is moderating. Nevertheless, the housing loan market is still relatively weak, in line with the only gradual recovery of the labour market and the persisting decline in supply and sale prices of dwellings. Only a marked recovery in loans for house purchase together with renewed growth in loans to developers and construction might foster higher growth in total loans. However, given the expected lower economic growth the growth in loans is expected to be more moderate than in the past.

¹ Moreover, only 64% of loans provided to the construction sector are related to the property market; the remainder consists of loans for civil engineering projects and so on.