Households prices hitting the ceiling

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Households prices hitting the ceiling

The increase in housing prices has accelerated over the past year and is above the long-term average and the long-term trend, according to the Financial Stability Report for 2021, adopted by the National Bank.

Housing price growth in part reflects supply-side factors, such as rising costs of building materials and the effects of the pandemic on housing supply in the previous year. The growth of housing lending, for the second year in a row, contributes to almost half of the growth of the total debt of households, which also increased in 2021 with an accelerated growth rate, which was still lower than the growth of the nominal GDP, says the report of the National Bank .

The stability of the financial system was successfully maintained in 2021 as well, with almost all segments of the financial sector achieving accelerated growth. The banking system, as the main part of the financial system, has maintained its reliability, and by bringing macroprudential measures into the domain of the anti-cyclical protective layer of capital, its resistance to shocks is further strengthened.

The stability of the exchange rate, as a key prerequisite for financial stability, was successfully maintained, which once again confirmed the firm determination of the National Bank to consistently implement the strategy of a fixed exchange rate, which is guaranteed by the appropriate level of foreign exchange reserves.

The Report states that after the gradual economic recovery from the pandemic last year, which positively contributed to the operation of the domestic financial sector and financial stability, the outbreak of the war in Ukraine brought new challenges. Although the crisis in Ukraine has no direct impact on the domestic financial sector, its consequences spilled over into the domestic economy through the movements of the global market of energy and basic products, which created pressure on domestic inflation. From March 2022, the National Bank started with a gradual increase in the basic interest rate, thus contributing to calming inflationary expectations and maintaining medium-term price stability.

During 2021, the domestic corporate sector normalized operations and began to recover from the consequences of the pandemic, ending the year overall with improved profitability, a moderate level of indebtedness and a relatively stable, albeit traditionally low, liquidity position.

In these conditions, the activities of almost all entities from the corporate sector recovered, although with different intensity, depending on the volume of pandemic losses suffered, the specifics of the operation and the coverage with protective measures, as well as the possibility of adapting the activities to the conditions of the pandemic.

The risks related to the “households” sector are still within controlled limits, they even noticed a certain decrease. This was supported by the post-pandemic recovery of the economy, which contributed to the stabilization of the labor market and the growth of disposable income. The indicators for the solvency and liquidity position of households point to a relatively limited systemic vulnerability of this sector.

But taking into account the unpredictability of the overall environment caused by the prolonged duration of the pandemic and the geopolitical tensions and developments between Russia and Ukraine, especially the ever-higher product prices and the normalization of monetary policies, the risks to the indebtedness of companies and households and their ability to for repayment of debts. This increases the risks for a potential future higher realization of the credit risk and the growth of the non-performing loans of the banks.

The banking sector has coped well with the risks of the pandemic and is ready to respond to the challenges that could arise from the Russian-Ukrainian conflict. This is largely due to the traditionally high liquidity and adequate capitalization of the domestic banking sector, an important part of which are the protective layers of capital, which, with the strengthening of domestic regulation, the banks built in the previous period.

The loan portfolio is healthy and the rate of non-performing loans has improved compared to the pre-pandemic period. Credit growth accelerated, supported by deposit growth, and was almost equally directed at households and the corporate sector. The resilience of the banking sector is also confirmed by regular stress tests that show that banks are resistant to possible shocks.

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