February 14 (SeeNews) - The European Systemic Risk Board (ESRB) said it has issued a warning on Croatia's medium-term residential real estate vulnerabilities, as the rapid credit growth and house price overvaluation create a potential risk to the country's financial stability.
“The ESRB has identified medium-term vulnerabilities in the residential real estate sector in Croatia as a source of systemic risk to financial stability, which may have the potential for serious negative consequences for the real economy,” the ESRB said in a press release on Friday.
“From a macroprudential perspective, the ESRB considers the main vulnerabilities to be the rapid growth in household credit and possible signs of house price overvaluation, given the absence of explicit borrower-based measures that could mitigate the build-up of risks related to the residential real estate sector,” it added.
The ESRB was established in 2010 for the macroprudential oversight of the EU financial system and the prevention and mitigation of systemic risk. The president of the European Central Bank, Christine Lagarde, is chair of the general board, the ESRB’s decision-making body.
Real house price growth in Croatia accelerated to 8% year-on-year at the beginning of 2019. Since the outbreak of the COVID-19 pandemic, house price dynamics have remained robust, the ESRB said. According to the estimates by Croatia's central bank, house prices are increasingly diverging from their long-term fundamentals.
One of the factors on the local housing market is that in some regions of the Adriatic country, a significant part of housing demand, estimated at some 10%, has come from foreign buyers, the ESRB said. While overall transaction activity was lower after the outbreak of the COVID19 pandemic, the share of foreign buyers remained at pre-crisis levels.
As another medium-term factor, ESRB pointed out consequences of two earthquakes in 2020, which hit the Zagreb region and damaged dwellings. The earthquakes revealed some deficiencies in the quality standards of the dwellings that were built before the 1960s, before anti-seismic standards were introduced in Croatia. "As a result, the relatively lower level of liquidity of some of these dwellings may reduce the stock of housing to be transacted, potentially leading to a higher general house price level," the ESRB added.
Yet another factor driving the real estate prices is that in 2020, the government extended the housing subsidy scheme, which has been in place since late 2017 and provides higher subsidy rates in less developed regions, to first-time buyers. Even though only a half of housing transactions are financed through bank credit, real mortgage credit growth accelerated in the second half of 2019 and during 2020. It stood on average at some 7.5% between January and August 2021.
"To some extent, this dynamic has been driven by the government housing subsidy scheme, with the share of subsidised loans increasing from 18% in 2019 to 35% in 2020," the ESRB noted.