Recommendations of the Czech National Bank
The continuing increase in the number of bank loans provided in the Czech Republic has drawn the attention of the Czech National Bank (CNB), the regulatory body obliged to maintain and support financial stability. The CNB has therefore published a number of recommended industry guidelines regarding mortgage lending conditions.
In particular, lending limits have been suggested relating to loan-to-value ratios (LTV); debt-to-income ratios (DTI); and debt service-to-income ratios (DSTI). In the opinion of the CNB, these limits need to be observed in order to minimise risks connected with the growing economic market.
In 2015, CNB issued its first recommendation on managing the risks associated with providing retail secured residential property loans. This was aimed at preventing risks associated with the residential property market by setting LTV limits. In 2016 and 2017, the CNB continued to tighten LTV limits; DTI and DSTI levels were also introduced.
This initiative was driven by the CNB's worries that lending conditions might be too liberal, as well as by the development of property prices, which rose steeply at 16% on average in 2017. This represented the fastest increase in the entire European Union. In addition, overvaluation of apartment prices reached 14% in the same year. Combined with the rising number of property purchase loans, the CNB felt that the situation might create conditions for loans and property prices to negatively impact each other, presenting the greatest domestic risk to financial stability.
On 1 October 2018, CNB tightened the DTI and DSTI limits: successful mortgage applicants should not be spending more than 45% of their net monthly income on debt service (ie DSTI ratio); and at the same time, their overall debt should not exceed nine times their net annual income (ie DTI ratio). The recommended LTV ratio remained at 80%.
Planned legislative changes
These CNB recommendations were not binding on mortgage lenders; they were only "best practice" guidelines. For this reason, legislation has been proposed to provide the CNB with the statutory power to set binding upper LTV, DTI and DSTI thresholds to restrict lender activity. Such limits would apply to all market participants, including non-banking institutions and foreign lenders.
The draft law has already been prepared by the Czech Ministry of Finance in cooperation with CNB. Nevertheless, given the long legislative process, it is unclear what amendments will be proposed and accepted along the way, and whether the draft Act will be approved at all.
Market developments
According to the most recent press release of the CNB on 31 January 2019, the loan market grew in 2018, reaching an all-time high. The volume of new mortgages rose in 2018 by 15 billion CZK to 187 billion CZK in total.
In the two months following the release of the October 2018 recommendations, the amount of new mortgages entered into was actually higher on a year-on-year basis. This news partially lifted worries that the CNB recommendations would affect the mortgage market negatively. Having said that, the amount of new mortgages did decrease in December 2018.
According to CNB, banks are mostly compliant with the recommended LTV limits. On the other hand, DTI and DSTI limits will be assessed for the first time in May 2019.
CNB itself considers the current limits as sufficient, without the need to tighten them further in the coming months.
