- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
- Privatisation
- Macroeconomic developments
Housing in Bulgaria - asset or liability
submited on 15.12.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 15.12.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
The main participants in the housing market in the recent months have reported decline in the number of the closed deals and drop in asking prices. The official statistics still shows the state of the housing market with a little lag. The data on Q4 2008 will probably register more serious decline of the housing growth. The slower pace of housing price growth will result in holding the expansion of housing wealth, which has recently expanded 3.4 times for the last 6 years. What the effect on consumption, savings, the banking system and the broad economy will be depends on a few factors.
First, it is important to see what the significance of the housing credit to the economy is. As of end September 2008 the mortgage credit represents some 5% of housing assets – a relatively small share compared to other European countries.
An alternative measure for the significance of the housing credit to the economy is the so called penetration rate. Despite the credit expansion in recent years the penetration of housing loans in the economy is above three times lower in Bulgaria compared to the Euro area. This is why even under potential deepening of the global crisis and additional contraction of housing markets the negative effects on consumption and savings will be stronger in the Euro area and other mature economies than Bulgaria.
Secondly, it is important to determine what is the average percentage of bank financing for housing, whose purchase is financed via credit. The high ratio of the housing loan to the value of the property could turn out to be problematic, because it changes the stimuli for the buyer’s behavior, which could further decelerate housing price growth.
The risk is not equally distributed, and is concentrated in a particular group of borrowers – those buying at the peak – when housing prices have reached their higher value.
This framework partially explains the change in banks’ credit policy in recent months and particularly in October. Considering the insecurity regarding income, employment and the housing price trend banks partially restrain the credit expansion in the consumer and housing segment. The more conservative behavior of banks reduces the risk of potential problems not only of the financial system and the borrowers, but the broad economy as well.
In this course of thoughts, the effect of reducing the minimal required reserves, which BNB undertook in the beginning of December, will be rather limited in the short term, because the slowing down of the credit expansion recently is due not only to the more costly financial resource. It is clear however that under traditional banking there is no way for banks to retain credit growth for a longer period of time, provided the financial system is stable. Hence, in the medium term the BNB decision to stimulate credit growth will reflect more tangibly on housing loans extension, and therefore on the housing market in Bulgaria.
First, it is important to see what the significance of the housing credit to the economy is. As of end September 2008 the mortgage credit represents some 5% of housing assets – a relatively small share compared to other European countries.
An alternative measure for the significance of the housing credit to the economy is the so called penetration rate. Despite the credit expansion in recent years the penetration of housing loans in the economy is above three times lower in Bulgaria compared to the Euro area. This is why even under potential deepening of the global crisis and additional contraction of housing markets the negative effects on consumption and savings will be stronger in the Euro area and other mature economies than Bulgaria.
Secondly, it is important to determine what is the average percentage of bank financing for housing, whose purchase is financed via credit. The high ratio of the housing loan to the value of the property could turn out to be problematic, because it changes the stimuli for the buyer’s behavior, which could further decelerate housing price growth.
The risk is not equally distributed, and is concentrated in a particular group of borrowers – those buying at the peak – when housing prices have reached their higher value.
This framework partially explains the change in banks’ credit policy in recent months and particularly in October. Considering the insecurity regarding income, employment and the housing price trend banks partially restrain the credit expansion in the consumer and housing segment. The more conservative behavior of banks reduces the risk of potential problems not only of the financial system and the borrowers, but the broad economy as well.
In this course of thoughts, the effect of reducing the minimal required reserves, which BNB undertook in the beginning of December, will be rather limited in the short term, because the slowing down of the credit expansion recently is due not only to the more costly financial resource. It is clear however that under traditional banking there is no way for banks to retain credit growth for a longer period of time, provided the financial system is stable. Hence, in the medium term the BNB decision to stimulate credit growth will reflect more tangibly on housing loans extension, and therefore on the housing market in Bulgaria.
What is your opinion about this article?
0 agreed
0 disagreed