Bank of Lithuania’s measures will cool down the high-risk real estate segment but attention from other institutions is required
A tightened down payment requirement for the second and subsequent housing loans will cool down the high-risk real estate segment and will reduce the risk of over-indebtedness. In many cases, buyers, prompted by unreasonable expectations and agiotage in the market, increase their indebtedness by purchasing an additional housing for rent or resale, although they have not repaid a major part of their first loan. Nevertheless, in order to prevent the overheating of the whole housing market, it is necessary to broaden the range of instruments. Measures to boost the sustainability of the real estate market are being discussed at today’s Real Estate Conference of the Bank of Lithuania.
“Although there are no major disbalances in the real estate market yet, the annual growth rate of the housing prices of up to 20% signal the heating of the market. The Bank of Lithuania has already taken action to cool down the high-risk real estate segment, but other institutions have to pay attention to the heating of the real estate market as well, in order to prevent the overheating,” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
The Board of the Bank of Lithuania approved the amended Responsible Lending Regulations introducing a bigger down payment requirement for the second and subsequent loans and intends to take a decision on the systemic risk buffer (SRB) of 2% for the housing loan portfolio of credit issuers. According to the Bank of Lithuania, the overall flow of new loans could shrink by up to 10% due to the tightened down payment requirement and the intended SRB for the housing loan portfolio of credit issuers, and the growth of housing prices could decrease by up to 3 percentage points. A doubled minimum down payment requirement for second and subsequent housing loans of 30% should affect around 40% of individuals taking their subsequent loans. This share of individuals should be required to pay a bigger down payment. Housing loan interest rates should not be affected by the said measure; they could increase by as little as 0.05 percentage point due to additional capital requirements. Currently, new housing loans are being granted with an interest rate of 2.12% on average. Since the beginning of the previous year, it has decreased by 0.25 percentage point.
According to Gediminas Šimkus, a general and socially oriented non-commercial real estate tax would boost the sustainability of the housing market and limit the ungrounded incentives to invest in real estate. The Bank of Lithuania has submitted proposals to the Ministry of Finance to apply the real estate tax to all real estate without any exceptions by setting a minimal non-taxable real estate value limit to protect the most vulnerable residents. The tax should be progressive, i.e. the initial tariff should be very low, e.g. 0.1%, and increase in case of very high-value and luxury real estate. This would mean that for the majority of residents the tax would equal tens of euros annually and in regions, where the value of housing is lower, it would be rather symbolic or the housing would be non-taxable. On the other hand, real estate that costs hundreds of thousands of euros or luxury real estate that costs millions of euros would be subject to significantly higher taxes, amounting to hundreds or even thousands of euros. Such a tax would allow for significant contribution to municipal budgets, while the funds received would be allocated to the management of cities and towns, as well as the maintenance and development of their infrastructure.
Another measure is the mandatory registration of preliminary purchase-sale agreements for unbuilt housing. Such a legislative amendment would contribute to the transparency of the primary market, allowing the Bank of Lithuania and other institutions to monitor in real time the transaction and price trends in the primary housing market, the extent of speculative transactions, to identify more accurately the risks of overheating of the housing market and to take action to mitigate these risks. The current environment of increased expectations with regards to the increase in real estate prices creates a platform for speculation on reservations, and assessing and limiting this phenomenon could reduce tensions in the market. The Bank of Lithuania has submitted proposals for mandatory registration of agreements to the Ministries of Justice and the Environment and awaits their conclusions.
Finally, the sustainable development of the market would be facilitated by reduced shadow activities in the real estate sector, e.g. by legitimising the requirement to make the down payment or even the entire purchase of housing transparent and by limiting the payment for real estate in cash.
Measures to increase the sustainability of the real estate market, the current market situation and risks in the residential and commercial real estate sectors are discussed at today’s Real Estate Conference of the Bank of Lithuania.