The average interest rate on mortgage loans inched up to 2.03% in May from 2.01% in April and 1.89% a year ago, according to the Hypoindex data calculated by the firm Fincentrum and released on Wednesday. It has been on declining path since mid-2015 until end-2016, and crossed the 2%-level for first time in fourteen months in April. The banks granted 10,344 new mortgages in the total value of CZK 21.2bn in May, up by 20.8% m/m and 20.4% m/m in number and value terms, respectively. Thus, in Jan-May local banks granted 47,355 new mortgages in total value of CZK 96.3bn, which represented 10.3% y/y and 16.2% y/y expansion in number and value terms, correspondingly, which may be indicative, if the developments are preserved in the next months, that the mortgage lending in 2017 may remain quite robust. We believe that the monthly increase reflects mainly low base effects since the mortgage lending in April was the lowest this year to reflect that the more stringent CNB’s macroprudential regulations aimed at reducing further the share of new mortgage loans with LTV ratios exceeding 80% to 15% became effective as of April. Fincentrum analyst Josef Rajdl commented that for the time being average interest rates on mortgage loans are unlikely to climb too much with some banks even correcting previous rate hikes. We believe that this is because the CNB is unlikely to precipitate with policy interest rate hikes soon – note that the first hikes are deemed by the central bank possible in Q3, but may be postponed to Q4 if crown’s appreciation trend continues. The monthly increase also possibly reflects the fact that people are concerned that interest rates on mortgages may increase with the CNB’s hiking interest rates in the future, Rajdl noted.
We believe that the fact that the CNB ended its fx commitment in early-April resulted into gradual increase in yields on government bonds and higher financing costs of local banks, which has found expression into higher interest rates on mortgage loans as well. The higher monthly demand for mortgage loans in May in our view reflects the fact that despite the announced tightening of conditions for housing loans on part of local banks, the future when the CNB is to raise interest rates and the drawing of mortgage loans will be much more difficult – if the amendment to the law on the CNB is passed by the parliament’s lower house, does not seem quite rosy in this regard. Therefore, the yet to raise interest rates on mortgage loans, especially when the central bank starts raising the policy interest rates (sometime in Q3 or maybe later), will be the decisive factor influencing the demand for mortgage loans going forward, irrespectively of real estate price and labor markets developments, and the wage growth, in our view. That said, the CNB’s decision to double the countercyclical buffer (CCB) rate to 1.0%, effective as of July 2018, seems more than appropriate given the robust mortgage lending expansion and the risks of a spiral between mortgage lending growth and real estate prices growth emerging. Still, the central bank is confident that the higher countercyclical buffer rate would not limit lending by banks as they have sufficient capital and if they adjust their dividend policy accordingly. At the same time, some rate-setters have refuted the possibility of using policy interest rates to regulate mortgages saying that if the CNB law amendment, which gives it powers to set legally binding limits for LTV, LTI and DSTI ratios, fails to pass the lower house as it seems now, it may raise the CCB rate further or the individual bank-by-bank capital requirements instead of using policy rates.