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Counter-Measures Against the Potential Overheating of the Real Estate Market

Counter-Measures Against the Potential Overheating of the Real Estate Market

Slovakia
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The demand for residential real estate is currently experiencing an unprecedented boom in Slovakia. According to official market surveys, the average price of flats has already exceeded the levels recorded before the outbreak of the world financial crisis, and further price increases are expected due to lagging supply and readily available sources of cheap funding from domestic banks. Not surprisingly, these conditions have resulted in a significant increase in the indebtedness of private households, which are currently the highest in the CEE region.

Both the rising real estate prices and the increase in indebtedness require corrective measures in order to prevent the formation of price bubbles and to ensure that domestic households are able to service their loans even in case of a downturn in economic activity.

Stricter Rules for Disbursement of Mortgages

On May 29, 2018, the Slovak National Bank approved a measure to counter the situation prevailing on the finance side of the real estate market. This measure includes: (i) a change to the allowed peak ratio between the value of pledged real estate and the relevant loan (“loan-to-value,” or LTV), and (ii) the introduction of a loan ceiling of eight times the net yearly income of the loan applicant (“debt-to-income,” or DTI).

Under the new regime lenders will be capped at providing loans for only 90% of the value of the pledged real estate (down from 100%). Furthermore, loans which exceed 80% will be granted only under special conditions and can only make up a specified percentage of the lender´s total volume of loans secured by real estate. That percentage will initially be 35%, but will have to be reduced to 20% by no later than July 1, 2019. This change will force residential borrowers to save some money before applying for a loan.

The debt-to-income ratio is a newly introduced instrument intended to counter the very high mortgage debt ratio and to lower the risk that the borrowers will not be able to service their loans as a result of changing economic conditions. The granting of loans in which the value exceeds the cap of eight times the net yearly income of the loan applicant will also be limited. In this case the percentage will decrease from 20% until it reaches 5 + 5% on July 1, 2019. When assessing the customer’s overall level of indebtedness, all his or her loans (including pending mortgages), as well as credit cards and overdraft facilities on current accounts, are taken into consideration. Exemptions will apply only to borrowers up to 35 years of age with an income not exceeding 1.3 times their average wage; these borrowers can be granted loans which do not exceed the cap of nine times their net yearly income.

The aforementioned changes will apply as of July 1, 2018 to new housing and consumer loans. It is worth emphasizing at this point that the implementation of these measures has already been anticipated by the European Central Bank, the International Monetary Fund, and Standard & Poor’s.

It is expected that the new regulation will have a throttling impact on the rising outstanding loan levels of Slovak households (which exceeded 38% of GDP in 2017, according to information published by the Slovak National Bank). During the commenting proceedings for the new regulation, the Slovak Bank Association expressed its opinion that the approved changes will have a serious impact on the housing and consumer loans sector as well as on the Slovak real estate market.

New Construction Act in the Making

The proposed measure of the Slovak National Bank is only a part of the solution on the financing side. A full solution requires the resolution of the lag in supply as well. Addressing the causes of the sharp decline in completed projects (mainly in Bratislava) and restoring normal supply is also an important factor in reducing the overall risks. Currently, expert groups are preparing a new Construction Act to help speed up the formal process by reducing the average length of the approval procedures, which is currently estimated at 286 days (while the European average is only 165 days).

However, as the new Construction Act is not yet finished, and its approval is uncertain, an increase in construction activity may be the only way to at least partially satisfy demand in heavily urbanized areas. 

By Pavol Rak, Partner, Martin Stelcl, Associate, Noerr Slovakia

This Article was originally published in Issue 5.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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