Czech central bank to set stricter conditions for extending mortgages

The Czech National Bank is due on Tuesday to recommend stricter lending conditions over rising concerns that a potential shock to the economy could lead to widespread defaults on mortgages, despite rising incomes and low unemployment.

Photo: Kai Stachowiak, Pixabay / CC0Photo: Kai Stachowiak, Pixabay / CC0 Czech real estate prices have been increasing at a heady pace in recent months boosted by increased demand coupled with rising wages, greater confidence in the economy over the long term, and low unemployment.

But with Czech households also increasingly borrowing at high multiples of their incomes, the central bank is looking to further rein in lending.

Since January, the Czech National Bank has considered a housing loan to be high-risk if monthly instalments exceed 40% of a borrower’s monthly income, or if the total amount of the loan is more than eight times the borrower’s annual income.

But commercial lenders are not obliged to respect the central bank's guidelines on maximum Loan-to-Value ratios, and so the multiples of loans to incomes remain high.

In 2016–2017, the average new housing loan was about 50% higher than in the preceding two years, and its ratio to salaries was around 35% higher than before the global financial crisis.

Simply put, the number of Czechs borrowing beyond their means, and therefore are at risk of missing payments, has become a concern.

According to a report in April by the international rating agency Moody’s, the growing number of high Loan-to-Value mortgages risks eroding the resilience of the Czech financial sector, as lenders have not been respecting the existing caps set by the central bank.

In May, the International Monetary Fund, after wrapping up its Article IV Mission to the Czech Republic, also noted concern in this regard, and offered a recommendation of its own: the central bank should be given binding powers over Loan-to-Value ratios – as well as Debt-to-Income and Debt-Servicing-to-Income levels.

Such tools are in use by other central banks in Europe – in fact, they are becoming increasingly standard worldwide – and the Czech National Bank has been lobbying for real power in this regard.

For their part, commercial lenders would rather the central bank use the key demand-side tool at its disposal, namely raising interest rates, than have greater regulation of the sector.

Meanwhile, the Czech Banking Association expects a slight cooling in household lending growth, which is dominated by mortgages, both this year and in 2019.