2016-09-29
Bank of Lithuania: Housing market recovery requires taking grounded borrowing decisions
The recovery in the housing market has been prompted by residents’ growing income and historically low interest rates. Nevertheless, the Bank of Lithuania warns that residents should consider very responsibly the statements of property vendors that flat prices will be on the rise and not hurry to purchase them if there is no need to do so, because borrowing entails a huge and long-term debt burden.
‘With interest rates at record lows, some residents consider housing a good investment and rent it after acquisition. Others, where housing prices rise and loan tranches decline, decide not to lease housing but purchase it. In every such case, however, it is necessary to responsibly consider one’s financial position, not to forget about potential turns in the housing market, which can significantly complicate the repayment of the loan or not live up to one’s expectations. This particularly applies to those residents who purchase housing for rent, using not their own but borrowed funds,’ said Tomas Garbaravičius, Member of the Board of the Bank of Lithuania.
He noted that, while the economic outlook for the country is currently good, growth in wages and salaries has for the last few years outpaced growth in housing prices, business cycles, characteristic of the economy, and residents’ income may nonetheless fall substantially, while their wages and real estate (RE) prices could be hit by a significant external geopolitical or economic shock such as RE price adjustments in Scandinavia.
‘Yes, the market is in full throttle, but there are no grounds to speak about an already big RE bubble for several reasons. Firstly, the housing demand is sufficient. Secondly, housing construction currently can react much quicker to an increase in demand; hence, there are no fears that the desired housing will be quickly bought by someone else. Fewer documents are required for construction to start, building permits are issued sooner. All this restricts stronger price increases,’ said Simonas Krėpšta, Director of the Financial Stability Department at the Bank of Lithuania.
The survey of market participants conducted by the Bank of Lithuania shows that the expectations regarding price growth have been modest. RE market participants expect that housing prices in Vilnius will rise by up 5 per cent over the next year. On the other hand, it should be noted that the latest survey of RE market participants showed that there are more of those who believe that the number of people willing to purchase a house, e.g. in Vilnius, will even go down — of these there were almost 10 percentage points more than of who reported that the demand would increase.
The capital city’s market is an important and the largest share of the country’s RE market, with the trends within it being more pronounced. A generation of young people who were raised in Vilnius and who have arrived in the capital from other cities has been contributing to this market’s activity.
‘The housing needs of people aged 25–30 are higher: many of them have established themselves in the labour market under the conditions of economic growth and strong income rise. Although the demographic situation in Vilnius is currently favourable for the RE market, in the medium-term it may raise increasingly more challenges because the share of 30-year-old people will decrease,’ claims Simonas Krėpšta.
The Bank of Lithuania has been closely monitoring the housing market and would take additional action to ensure financial stability where necessary.
‘We can change the down-payment requirement, the debt-to-income ratio set in the Responsible Lending Regulations. We can apply a counter-cyclical capital buffer, i.e. require more own funds from banks if lending becomes excessive. These, as well as other measures available to us would help stop housing market overheating,’ commented Tomas Garbaravičius.
As the credit market currently posts no imbalances, also, despite certain signs of ‘hotness’ in Vilnius, there are no sufficient grounds for concerns over the RE price level, today the Board of the Bank of Lithuania took a decision concerning the setting of a 0 per cent counter-cyclical capital buffer rate.
The counter-cyclical capital buffer is a macro-prudential policy measure first applied by the Bank of Lithuania in mid-2015. The 0 per cent rate then set has not been changed to date, but the situation is assessed on a quarterly basis and, if signs of unsustainable development of the credit or RE market were identified, the countercyclical buffer rate would be raised.