28th meeting of the Financial Market Stability Board

In its 28th meeting on June 18, 2021, Austria’s Financial Market Stability Board (FMSB) focused on the development of systemic risks arising from the financing of residential real estate. In addition, the FMSB reiterated its recommendation to leave the countercyclical capital buffer (CCyB) rate unchanged at 0%.

FMSB closely monitors systemic risks from residential real estate financing

Having extensively discussed the systemic risks associated with households’ financing of residential real estate in its 28th meeting, the FMSB concluded that these risks have been on the rise, with annual growth of both real estate lending to households (+6.6% in April 2021) and residential real estate prices (+12.3% in the first quarter of 2021) having gained considerable momentum. These rates are rather high also when compared with developments in other European countries. This gives rise to increasing concern about an overheating of Austria’s residential real estate market and about potentially high welfare losses as frequently seen in many countries in the past in the event of house price corrections. Developments in Austria have been driven by very low lending rates and strong competition among lenders. As a result, lenders have seen their margins drop significantly and have been increasingly willing to tolerate risk in real estate lending. The data on residential housing loans that banks have been required to report since 2020 enabled the FMSB to evaluate compliance with the quantitative guidance it had issued in its 17th meeting on September 21, 2018. In its guidance, the FMSB advocates a down payment of at least 20% of total financing needs, a maximum loan maturity of 35 years and debt service-to-income ratios of no more than 30% to 40% of household net income (17th meeting of the FMSB). Having continued to rise against the five-year average, the share of lending with elevated debt service-to-income and loan-to-value ratios was found to be substantial. In the FMSB’s view, lending standards – and debt service-to-income and loan-to-value ratios in particular – will have to be improved to safeguard financial stability and address systemic risks arising from a credit-driven real estate price bubble. Hence, the FMSB once again urged banks to comply with its substantive guidance.

FMSB affirms its recommendation on the CCyB

The FMSB recommended that the Financial Market Authority (FMA) maintain the CCyB rate at its current level of 0% of risk-weighted assets also from October 1, 2021 (Recommendation FMSB/2/2021). The gap between the credit-to-GDP ratio and its trend has remained positive since the second quarter of 2020, still reflecting the sharp contraction of Austria’s GDP caused by the COVID-19 pandemic. Broad credit growth, which is relevant for calculating the CCyB, continues to be not excessive. While growth of credit to businesses had again slowed down by April 2021, growth of real estate lending to households increased markedly in the first few months of 2021. Likewise, among the indicators monitored by the FMSB for the purpose of assessing the risks resulting from the credit cycle, those related to real estate still call for close scrutiny. The average risk weights applied to mortgages are currently standing at historically low levels, the OeNB’s fundamentals indicator for residential property prices points to a considerable overvaluation, and households’ debt-to-income ratio has been going up.

Information on the FMSB

The FMSB, which became operational in 2014, works toward strengthening financial stability. Its members are representatives of the Austrian Federal Ministry of Finance, the Fiscal Advisory Council, the Financial Market Authority and the Oesterreichische Nationalbank. In particular, the FMSB may issue recommendations to the Financial Market Authority and provide risk warnings.