Over a year after it began, the economic crisis is still being blamed for a slew of problems. A strong crown combined with other countries’ financial troubles has hit the national industrial and export markets hard. Companies are being cautious, and this leads to worried employees – meaning concerned consumers. The mortgage market is one sector hit hard by this uncertainty.
Jan Urban, the managing director of the mortgage broker Simply, says that the biggest issue on the Czech market in his industry is that economic insecurity has made people less willing to make long-term financial decisions such as purchasing properties. He estimates that, by the end of 2009, demand for mortgages will have dropped 30% to 40% from last year. This correlates with Regional Development Ministry statistics that found that mortgages for individuals dropped by about 30% year-on-year in the first half of 2009.
Ondřej Roček, sales and marketing manager at Hyposervis, another mortgage broker, seconds the “fear factor” idea. He says that recent studies by his company have found that people concerned about losing their jobs hold back on buying property. “It’s not the prices,” he said. “Prices are actually low: It’s more about panic than the crisis.”
Kristýna Havligerová, a press officer for Česká spořitelna, points out that consumers need to live within their means, especially young people. Perhaps many already are: “Prices go down slightly, but people put aside big decisions such as getting a loan for 15 to 20 years as they are uncertain about their future,” she said. She also pointed out that the mortgage market could actually be a lot worse. “We can’t forget that the market started from zero in 2001,” Havligerová said. “It was not difficult to have double-digit growth every year.”
Urban says that a lack of property choice has been caused by the combination of banks putting the brakes on developers’ financing and people not attempting to sell off their flats in the down market. This decreased selection means that potential buyers who do seek mortgages might not find a property that they would want to finance. Roček says that Hyposervis previously focused on mortgages for new homes; as recently as two years ago, 85% of the company’s business went to finance new residential deals. In the last quarter of 2008, though, Hyposervis began a new strategy focused on refinancing and reconstruction mortgages.
It’s not just clients who are struggling over mortgages; banks have had to make some decisions, too. Urban explained that liquidity was a big issue last year and pointed out that banks didn’t have enough money to lend. Another issue was delinquency. “Banks began to hear about delinquent mortgages in places like the US and started to think about their own policies,” he said. “’Are we stringent enough? Will our clients be able to repay their loans?’” He says that this led to tighter lending criteria and less flexibility in granting loans. Urban estimates that, once, the rules were tweaked for about 10% to 20% of loans: for example, approving a less-qualified applicant if he agreed to accept a higher interest rate. Urban said that in 2007 the standard rate was 2% lower than it is today. Due to higher interest rates, fewer people apply for mortgages, and toughened rules mean that fewer qualify.
Roček has seen this as well and estimates that about 30% of the clients he sees every month have some sort of credit problem. “Even a small one like not paying a phone bill is a big problem,” he said. “Banks are very strict and not willing to give mortgages to people with a black mark.”
Česká spořitelna has tried to stimulate the mortgage market by introducing a service at the end of September to offer its clients a 1% interest rate discount on one-half of their mortgages, up to 3 billion CZK. “It is designed in such a way to allow clients to count beforehand and to rely on the guarantee of low instalments,” Havligerová said. Following Česká spořitelna’s announcement, Raiffeisenbank and Komerční banka were quick to introduce similar schemes for their clients. But Urban says that – while he feels that the program is an interesting experiment to see if people really will buy if rates get lower – he doesn’t believe that it will have a significant effect on the market as a whole.
Due to the volatile economic conditions, a short-term prognosis is out of the question. “I think autumn is going to be very difficult: political instability, insecurity about future tax rates, multinationals closing divisions, a wave of bankruptcies,” Urban said, but he managed to note that there are also reasons to be optimistic because the fundamentals of the Czech property and mortgage markets are strong and there’s still a need for properties or home improvements.
It is not a question of whether the mortgage market will pick up, then, but when. “It’s not so much about rates, products, liquidity, but about the fundamentals of economics,” Urban said. “How fast will people gain confidence that their income will be high enough and stable enough to take on a mortgage?”