Czech banks are not respecting recommended limits to the ratio between mortgage size and the value of a property, which could negatively impact the economy, rating agency Moody’s warned in its latest analysis.

These risky credits could result in huge losses for commercial banks should Czechia experience an economic downturn, or even cause their collapse. Moreover, it has a negative impact on the indebtedness of the Czech population, which is growing and could lead to a decrease in consumption and consequent economic recession.

“As real estate prices have surged, banks have not fully adhered to the Czech National Bank's (CNB) guidelines intended to constrain high-risk mortgages. The share of newly originated mortgages, where the loans represent 80% to 90% of the property value, was 28% in the second quarter of 2017 (the latest data available). This is well above the CNB's recommended level of 15%,” Moody’s stated.

“We are closely monitoring the situation. We keep trying to have a legal authority to set the credit limits and enforce their observance in order to follow our mandate – maintaining of the financial stability of the Czech finance sector,” said CNB spokesman Marek Zeman.

Zeman also argued that Moody’s analysis basically copies the report Risks to Financial Stability and Their Indicators issued by the CNB in January.

“A further tightening of the recommended LTV [loan to value] limits, announced in June 2016, took effect in 2017 Q2. The maximum recommended LTV was newly set at 90% (individual limit) and the recommended amount of new loans with LTVs of 80%–90% was capped at 15% (aggregate limit). The share of loans with LTVs of 80%–90% stood at 28% in 2017 Q2, exceeding the recommended share at the aggregate level by 13 pp,” the report reads.

However, the CNB is positive in its outlook. “Despite institutions’ delayed compliance with the stricter recommended LTV limits, the CNB considers the effect of its measures targeted at the risk of a spiral between housing prices and property purchase loans to have been positive. The stricter LTV limits have led to a halt in year-on-year growth in new mortgage loans and to a rise in the price of loans with high LTVs.”

More concrete details will be available by mid of June when the CNB publishes its report on financial stability.

Another risk is growing property prices. According to the CNB, they are already overpriced by 10%. In Q3 2017 alone, prices increased by 12.3%. 

As for housing costs, prices in Prague recorded a tough increase caused by a slower rate of new construction due to long approval procedures, but also due to low interest rates on housing loans, increasing wages and demand for stable investment, which properties symbolise. Moreover, tourism and services such as Airbnb are also decreasing the volume of available flats.

 

 

In Q4 2017, housing costs increased in year-on-year terms in Prague by 18.8%. The increase is hitting groups of people for whose wage increases have not been significant, who live in rented accommodation and who move quite often, such as students.

“The indebtedness of the Czech households is gradually growing. If this increase isn’t halted, it will have a negative impact on the purchasing power of the population. It can also lead to the lower resilience of banks and the whole economy,” said Moody’s analyst Arif Bekiroglu.

The financial health of Czech households and their ability to repay loans is crucial for the Czech economy.

However, Moody’s expects that gradual increase of the basic interest rate in the next 24 months together with an increase in the corporate surplus should contribute to both limiting the risky behaviour of the banks and to decreasing prices of properties and mortgages.