Hurry up: Czech mortgages are about to become far less accessible…

The Central Czech Bank is about to tighten its regulatory policy in the field of mortgages. According to the Ihned.cz news site, a number of banks in the Czech Republic have confirmed that they are expecting new regulations from the Czech Central Bank. These regulations are about to be published in the middle of the Month of June 2018, and it is projected that they will reduce the mortgage ceiling in accordance to the income levels of the mortgage applicants.

Validation of this claim has been received by the Governor of the Central Czech Bank, Jiří Rusnok. He claims that mortgages make up around 60% of the total loans for Czech households (a rise of around 50% compared to the past two years), so that this has only one meaning – Czech citizens taking mortgages are undertaking financial commitments which are beyond their economic earnings. 

In the event that this is indeed the case, this means that buying a house or an apartment in the Czech Republic is about to become a bit more difficult for Czech citizens than in the past. When you add to this the high real estate prices, the task becomes nearly impossible. The new ordinance is supposed to negatively impact about a third of the mortgage seekers for one main reason – the monthly repayment of the mortgages will not be able to be higher than the threshold of 40% of the monthly income. 

For example, a Czech individual currently earning 23,000 Czech Korunas a month had so far been able to receive a mortgage as high as 3,000,000 Czech Korunas whose repayment was spread over 25 years. According to the new regulations, this same individual will now be able to receive a mortgage no higher than 2,000,000 Czech Korunas. 

In addition, the Central Czech Bank is projected to limit loans to a sum no higher than eight times the annual income of the mortgage applicants. The purpose of these regulations is to reign in the loans taken at sums higher than the monthly income, so that they are meant to primarily harm the areas where the average wage are lower than the cities of Prague or Brno.

These ordinances are the realization of the recommendations given to the Czech Republic by the International Monetary Fund in May. Nor is the Czech Republic alone in this regard. Ordinances of this type have become standard in other central banks in Europe and the entire world. It is true that the banks of the Czech Republic prefer for the Central Bank raise the interest rates rather than embrace such ordinances, but this is not the first time that the Czech Central Bank intervenes in the field of mortgages.

The first time the Czech Central Bank intervened in this manner occurred in the Autumn of 2016, when the number of mortgages provided by the Banks reached a record high. On April 2018 the Central Czech Bank released two new ordinances : the level of the Mortgage would not exceed 90% of the value of the real estate asset and these mortgages would only be provided to 15% of the mortgage applicants.

These ordinances had one primary result so far – the number of Czech mortgage applicants has declined over the past few months. However, this number did not decline drastically and there is significant concern that an economic recession may occur due to difficulties in paying back the mortgages, primarily among lower income Czech citizens. It is therefore expected that these ordinances and regulations will have an impact, leading to the number of mortgages and loans per households to decline in 2018 and in 2019.

Nonetheless, claims about a potential destabilization of the entire Czech market seem excessive and the economy of the Czech Republic continues to be strong. Salaries are rising regularly (they are now higher by nearly 35% in comparison with the salaries prior to the 2007 - 2008 economic crisis), unemployment is low, and the economic policy of the Czech Republic has been praised for many years. Moreover, the expectation is that these ordinances will prove to be of considerable benefit to the economy of the Czech Republic and will restrain the current risks. These ordinances do not contradict the current economic situation in the Czech Republic but project the situation in the future. According to the Governor of the Central Czech Bank "The Economic situation in the Czech Republic is not projected to change anytime soon, but in the event that the interest rates or unemployment rates rise, we want to make sure that Czech households do not run into problems that might have a negative impact on the entire market."

Are you thinking of making a solid long-term investment in the Czech Republic? We will be happy to be of assistance.