In Bulgaria there are signs of overestimation of housing prices.
The European Systemic Risk Board (ESRB), set up in 2010 to warn of the EU’s financial system and to prevent and reduce systemic risks, warns against this. In addition to Bulgaria, warnings have been issued to Croatia, Hungary, Liechtenstein and Slovakia, investor.bg reported.
The Council warned that the main vulnerabilities in the residential real estate sector in our country in the medium term are the high growth of mortgage loans, signs of price overpricing and the lack of measures aimed at borrowers to mitigate the accumulated risks in the housing sector.
The Council notes that housing prices in Bulgaria have risen moderately over the last two years to mid-2020 by an average of around 3.5%. After that, however, the growth of house prices accelerated to about 7% by mid-2021.
At the same time, the annual growth of loans to households for the purchase of housing has accelerated significantly in recent years in Bulgaria, reaching 13% in real terms in August 2021, the ESRB notes. According to the European Banking Authority, the level of bad loans in the housing sector in Bulgaria is 5.3% as of the second quarter of 2021. At the same time, the coverage ratio of these loans (48.1% compared to 25.7% in the EU as a whole) ) is an important mitigating factor, the Council added.
According to the ESRB, although the share of mortgage loans in the portfolios of banks in Bulgaria is limited compared to EU member states as a whole, and the level of household indebtedness is currently low, favorable conditions for mortgage financing may pose a risk in the medium term from a spiraling development between house prices and mortgages.
On the one hand, rising house prices mean that the value of mortgage collateral is rising, and therefore leads to increased indebtedness of borrowers. On the other hand, rising house prices are usually accompanied by positive macroeconomic developments, which may lead to a loosening of bank lending standards. At the same time, the growing supply of mortgages may put house prices under additional upward pressure. In the medium term, such a spiral could lead to a credit bubble caused by housing prices and excessive household indebtedness, warns the ESRB.
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