PRAGUE The Czech housing market is overvalued and the central bank needs to start slowing a spiral of prices and demand for mortgages, board member Vojtech Benda said in an interview.
Czech housing prices have been driven up by record low interest rates, a growing economy and rising incomes, prompting the bank to introduce regulation and seeking more powers.
"We see that property prices are overvalued ... I think that it is by 10 percent on average, compared to fundamentals," Benda said in an interview at the Reuters Central & Eastern Europe Investment Summit.
"We should see this as a spiral which we need to start curbing somehow, so that we don't get into trouble in five, ten years. Property prices never grow forever," Benda said.
Eurostat data showed that Czech housing prices grew by 11 percent year-on-year in the fourth quarter of 2016, the fastest pace in the European Union.
The Czech economy accelerated to 2.9 percent in the first quarter this year, while apartment prices rose by record 12.1 percent in the same period, according to mortgage lender Hypotecni Banka.
The central bank recommended banks not to provide, as of April, mortgages worth more than 90 percent of property values (loan-to-value, LTV) and not provide financing for over 80 percent LTV to more than 15 percent of customers.
The regulation led to a scramble for mortgages in the months ahead. In March, mortgage lending grew 16.4 percent year-on-year.
The central bank is also seeking a legal change to be able to set binding limits on mortgages through LTV, loan-to-income (LTI) and debt-servicing-to-income (DSTI) ratios. A bill giving the banks those powers has been slowly making its way through parliament.
"It is not tools that we want to start using immediately once the law is effective, but tools we want to have potentially at our disposal, should there be a need to use them in future," said Benda.
"We have been using the LTV already. From the other two, the first - I don't say immediately - would be DSTI, because it is a key indicator of a household's ability to maintain its financial stability," he said.
Benda said he believed the bill would be approved despite lengthy proceedings. A failure to adopt the bill before an election in October would mean the entire legislative process must start from scratch.
If the change is not adopted, the central bank could be forced to reach for alternative ways to cool the market, such as individual bank-by-bank capital requirements or a countercyclical capital buffer set for all banks, currently at 0.5 percent.
But that was not the preferred option, Benda said.
"So far, I feel that the situation is such that it is more appropriate to use finer instruments in the form of the targeted indicators instead of the hammer of the countercyclical capital buffer," Benda said.
(Reporting by Jan Lopatka and Robert Muller; Editing by Tom Heneghan)