Slovak households are increasing their debts at the quickest pace in the whole European Union, and the second quickest among the central and eastern European countries.
This is partly due to strong demographic and macro economic factors, such as the increase in the population of 30-year-olds and the dynamics of income that surpasses GDP growth, as stems from the analysis issued by the Institute for Finance Policy (IFP), running under the auspices of the Finance Ministry.
However, part of the debt growth remains unexplained. If this trend continues, it may start accumulating risks which the National Bank of Slovakia (NBS), the country’s central bank, is already trying to reduce through regulation.
“From the point of public policy, the more developed market with subsidised rental housing might also contribute to mitigating any potential imbalances,” the analysis reads. “Shorter processes in building proceedings would also help reduce the price shocks generated by the late response of new construction to the demand for flats.”
The reasons for increase in debts
Back in 2016, the total debt of Slovak households amounted to 40 percent of GDP, which is the second highest share in the CEE countries, after Estonia. Ten years ago, the share was one half lower and was the lowest in the EU.Slovakia still among countries with fastest growing loans Read more
“This is why several national and foreign institutions have started to describe the indebtedness of Slovak households as a potential risk if the current trend doesn’t slow down,” the IFP analysis reads.
Although the international comparisons suggest that the change has been caused mostly by the burst of a pre-crisis bubble in some countries of the region and the increase in debt is driven by home loans with relatively low risk of the lack of ability to repay them, the concerns might by justified. The expected increase in non-repaid loans during the crises has a higher impact on economies with high indebtedness and can deepen its negative effects, IFP analysts said.
Young people have impact too
Meanwhile, the steep increase in debt is partly driven by the younger generation seeking their own housing, as well as positive macroeconomic development, particularly the difference between the increase in salaries and GDP growth.
Slovakia currently has the highest share of young people of an age when they seek their own housing in the EU. It also belongs among the countries where young people still live with their parents, which often results in overcrowded households where one person has only 1.1 rooms.
Although the share of 30-year-olds has been decreasing in past years, the strong demand for properties is probably still driven by 40-year-olds. However, this still does not explain the unbalanced increase in debts, the analysis reads.
NBS regulations have a reason
The most important factor impacting the dynamics of the increase in debt is the excess of compensations over GDP. Compared with the unemployment rate, it better mirrors the purchasing power of people. Households still make decisions based on the expectations from their incomes that might grow quicker than GDP.
“As a result, even the balanced debt of households might surpass the GDP dynamics,” the IFP analysis reads.Slovaks’ debts increase the most in the EU Read more
At the moment, the unbalanced increase in household debt is only slightly reflected in property process, mostly due to the NBS regulations and the stagnating prices of family houses. The increase in property prices culminated in the first quarter of 2017, when it amounted to 7.6 percent, mostly due to the late response to the demand for flats.
Since the beginning of this year, the dynamics of price increase has been slowing down as a response to the equalisation of supply and demand, partly in connection to NBS measures that came into force on January 1, 2017.
“Also the fact that we aren't witnessing strong speculation of investment demand for flats, as before the crisis, helps the situation,” the analysis reads.