Central bank moves to tighten mortgage loans as real estate boom sends up housing prices

Record low interest rates have led to a mortgage boom in the Czech Republic that is driving up housing prices. According to the central bank housing prices in Prague and other big cities are now five to ten percent inflated and the rush to invest in property is leading people to borrow more than they can afford.

Photo: Filip Jandourek

Favourable mortgage interest rates have resulted in the biggest mortgage boom in years. Mortgages were up by 29 percent year-on-year in 2015 and this year is expected to bring further growth, according to the Ministry for Regional Development. In August of this year the average interest rate on mortgages was 1.84 percent, down from 2.11 a year ago.

The scramble for real estate is worrying the central bank which is asking for more powers in regulating mortgages, the news site novinky.cz reports. According to the head of the bank’s financial stability department Jan Frait, people are borrowing above their means, with some households spending more than a third of their monthly income on mortgage payments. Many people are investing in flats in view of renting them out as an additional means of income, others are buying larger flats than they could normally afford, due to the low interest rates.

The central bank has now moved to tighten its recommendations to banks to lend no more than 95 percent of a property's purchase price. As of April 2017 it should be no more than 90 percent of the purchase price.

For the present time it is only able to issue a recommendation, and although most banks have signalled they will tighten lending standards for mortgages as recommended, the bank is now cooperating with the Finance Ministry on a bill that would give it the power to set the parameters for mortgages. Housing prices have been shooting up across central Europe, with central banks in Slovakia and Hungary also moving to regulate mortgage loans.