Housing Standards 2004/2005
Financing Housing and Refurbishing Housing Estates
Lux M., P. Sunega, T. Kostelecký, D. Čermák, J. Montag
Prague: The Institute of Sociology, Academy of Sciences of the Czech Republic
4. The Effectiveness of the System of Financing Owner-Occupied Housing in the Czech Republic
4.1 Mortgage Loans in the Czech Republic - Quantitative Analysis
- There is a relatively high degree of mortgage market concentration in the Czech Republic [1], in comparison with other transition economies however it is one of the lowest. With a dose caution it can be claimed that the mortgage loan market in the Czech Republic is not, given its size, in any way seriously negatively affected by monopolistic or oligopolistic behavioural features on the part of mortgage providers.
- In recent years there has been continuous and relatively constant (without any major deviations) growth in the volume of home mortgage loans granted amidst an increasing average interest rates and a rising maximum and average LTV rate.
Figure 3: Average LTV for residential mortgage loans granted to physical persons in 2000 - 2005
Note: The weights were the banks' shares in the total amount of residential loans granted to citizens up to 31 December 2004.
Source: survey "Mortgage loans in the Czech Republic"
- The margin between average costs associated with the resources banks use to finance mortgage loans and the average cost of mortgage loans granted in 2004 (i.e. the interest rate) is roughly between 1.07 and 1.35 percentage points, according to our calculations. The average level of gross margin, which was calculated as the difference between the average weighted interest rate from mortgage loans granted by banks in 2000-2004 and the average annual gross yield of state five-year bonds during the same period was 1.44 percentage points, with the margin falling over time to a value below one percentage point in 2004. From a comparison of this value with values of gross margins in countries with advanced mortgage markets it can be claimed somewhat cautiously that the Czech mortgage loan market is relatively efficient and that its efficiency in the monitored period increased.
Figure 4: Gross margin as the difference between the interest rate from mortgage loans granted and gross yield on five-year state bonds
Note: The so-called gross margin was calculated in the Czech case as the difference between average weighted interest rate from mortgage loans granted by banks in the individual years between 2000 and 2004 and average annual gross yield of state five-year bonds during the same period.
Source: survey "Mortgage loans in the Czech Republic", Czech National Bank, own computations.
- In 2004 an improvement occurred in comparison with 2003 in the sector of mortgage loan providers in terms of cost indicators (the ratio of operational costs to net profit) and in profitability ratios. The average values of the profitability ratios in both years evaluated attained satisfactory levels.
- The rate of delinquency (the share of problem loans in bank portfolios) is low and in the period between 1995 and 2005 was around 1%. In recent years a slight rise has been evident.
- The average age of mortgage loan applicants is around 36, and it does not appear to have gone down significantly in recent years. The question arises as to how effective are the tools that banks use to increase mortgage loan access to a wider circle of clients (especially younger ones).
- Taking into account the additional fees connected with setting up and administering a loan in the form of an efficient interest rate the nominal rate offered increase by up to 0.4 of a percentage point. A portion of the costs connected with the loan therefore remain, from the client's perspective, "hidden", which decreases market transparency and reduces the quality of the services offered.
Figure 5: The effective interest rate on mortgage loans in relation to payment term and the value of principal
Note: the graph was constructed with the assumption of a nominal annual interest rate of 4.09% (corresponding to the average interest rate offered by banks in a 5-year fix and the 70% LTV in May 2005), a one-time fee for setting up the loan set at 0.8% of the loan's nominal value, and a monthly fee of 150 Czk for operating the bank account. The tax break (the possibility of deducting unpaid interest on the loan from the taxation base in personal income tax returns) was not taken into consideration in the calculations.
Source: survey "Mortgage loans in the Czech Republic", own computations.
[1] The five largest providers of residential mortgage loans for citizens in the Czech Republic (measured from the total volume of contractual securities of loans granted to citizens for housing up to 31 December 2004) control 96.3% of the market, and the value of the Herfindahl index is also relatively high in comparison with Western countries.
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