Stricter mortgage rules are reshaping the property market and reducing demand
The property market has seen a year of records, which until now have not affected the appetite for properties or the unmet demand caused by limited supply. Now the tide is beginning to turn, and there are fewer people interested in buying property. Tightening mortgage limits, which are coming into force now, are also contributing to this. However, according to David Novotný, an expert at the real estate company Bohemian Estates, the cooling in demand will not ultimately lead to a fall in property sale prices.
After a turbulent 2021, we are witnessing a change that is gradually beginning to show in the overheated property market. Sellers and developers are starting to report declining interest in buying flats and houses, although experts believe this change is unlikely to affect market prices. “The changes started to emerge gradually in the first months of this year. The main drivers were, and continue to be, dramatically rising energy prices, high inflation and increasing interest rates on mortgage loans. Higher energy prices are also feeding into the cost of construction work and materials, resulting in lower demand,” explains David Novotný, owner and managing director of the real estate company Bohemian Estates. After last year’s record-breaking performance, this is certainly a turning point.
Stricter mortgages are curbing demand
Since the beginning of April, banks have been required to closely monitor mortgage parameters and provide loans only to people who meet the conditions set by the Czech National Bank. “The limits for granting mortgage loans are becoming stricter. Applicants will now need to invest one fifth of the property’s purchase price from their own funds, whereas one tenth was sufficient until now. This is a huge difference that will affect demand. The central bank adopted these measures last autumn, but they are only coming into effect now,” explains David Novotný of Bohemian Estates. Following a relatively sharp rise in rates, demand is cooling noticeably – compared with renting, buying one’s own home will become financially disadvantageous.
The key factor is the so-called LTV ratio, which expresses the ratio of the mortgage to the value of the property. For new loans, it is being reduced to 80% from the previous 90%. In practical terms, this means that a mortgage will generally now only be available to those who have saved at least 20% of the property’s price. Two other indicators are also being reintroduced.
The DSTI ratio indicates what proportion of an applicant’s net monthly income is spent on repayments. It is now set at 45%. This means that only those who spend no more than 45% of their income on mortgage repayments each month will qualify for a loan. The second limit, the DTI ratio, reflects the number of years of the applicant’s net income needed to repay all their debts. It is now set at 8.5. This means that banks should only grant a mortgage to applicants whose total debts do not exceed 8.5 times their net annual income.
Banks will have some scope to exceed the new limits if they are convinced that the applicant will be able to repay the loan without difficulty. However, the volume of such mortgages must not exceed 5% of all loans granted in a calendar quarter.