Eesti Pank has set three requirements for issuing housing loans

Three requirements for commercial banks issuing housing loans start to apply from this week. They are a precautionary measure by Eesti Pank to reduce the risks of a lending bubble inflating in the future.

Governor of Eesti Pank Ardo Hansson explained that the move by the central bank will help contain the risk of a housing bubble in the future. “These requirements will not have any noticeable effect on the loan market at the moment as we have introduced them at a level that is close to where the banks are currently lending. The requirements will start to have an effect when competing banks look to take on excessive risks when lending is growing fast”.

Mr Hansson noted that the requirements will also protect borrowers by helping them avoid making commitments in an overheated market that they could struggle to meet if the economy later turned downwards.

The first limit is that the amount lent can only be up to 85% of the collateral, which is the housing property being purchased. If the loan is guaranteed by KredEx then it can be for up to 90% of the value of the collateral.

The second limit is that all the monthly loan and lease payments of the borrower taken together may amount to only 50% of the borrower’s net income. Net income is regular income that reaches the bank account after taxes have been deducted.

The third limit is that the maximum length of housing loans is 30 years.

The requirements for housing loans have been set close to the current lending standards of the banks, meaning they will not have any significant impact on the conditions currently available in the Estonian housing loan market. The banks are permitted an exemption from the limits for up to 15% of the amount of housing loans issued in a quarter, which will allow them flexibility in making decisions about loans. The exemption is intended for borrowers who have very good ability to repay the loans or very good collateral for example.

Eesti Pank is applying the limits for all the banks operating in Estonia, including branches of foreign banks operating in Estonia. The limits will apply to loans to private people in Estonia for buying, renovating or building housing. The Financial Supervision Authority will supervise how the limits are met.

Eesti Pank got advice on its plan for the requirements for housing loans from the Ministry of Finance, the Financial Supervision Authority and the commercial banks.

Eesti Pank has published background analysis on its website explaining the aims of the requirements and describing them in more detail.

 

Source: Eesti Pank

Deflation slowed in February

Data from Statistics Estonia show that the consumer price index was 0.8% lower in February than a year earlier, meaning the fall in prices was smaller than that in the preceding month. The harmonised index of consumer prices for the euro area also fell by less as deflation slowed from -0.6% to -0.3%.

The global oil price ended its rapid slide of more than half a year in February, leading the price of motor fuels in Estonia to rise by 6.6% during the month and the consumer price level as a whole to rise by 0.6% from January. Motor fuels were still 16% cheaper than a year earlier, and the fall in the oil price on world markets started to have an indirect effect on other components in the consumer basket. Gas prices had already fallen for residential consumers in January by 5% from December’s levels and the consequences of the fall in the oil price were felt strongly by the price of heating, as it fell by 1% over the month in February. Although prices of imported energy have fallen substantially over the year, the fall has been restrained somewhat by the exchange rate of the euro hitting its lowest level for over ten years. The fall in the oil price to date has benefited the Estonian economy by boosting consumption and through that, economic growth.

Food prices were down in February, mainly because of price movements in global markets and the European Union’s internal market, as the food price index of the FAO (Food and Agriculture Organization) stood 14% lower in February than a year earlier. The disappearance of the Russian market as a destination market for food exporters has started to show up more and more in the food producers price index, though the impact on the consumer price index for food products has so far been limited. This can be seen in the farm gate price for milk at which dairy farms sell their output, which was 38% lower in January than it was a year earlier, while the latest data show the consumer price of dairy products falling by only 3.2%. Similarly, the farm price of beef has fallen by 10% over the year and that of pork by 15%, while consumer prices are down only 2.7%. An exception among food products was alcohol, which saw prices rise as higher excise taxes accelerated the inflation in the price of strong alcoholic drinks to 7.4%.

The largest fall in consumer prices has probably now ended, because the world oil price has started to rise. Consumer prices will continue to fall in the months ahead, but in the second half of the year growth will return to consumer prices and inflation for 2015 as a whole will be in positive territory, though close to zero.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank