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Sustainable real estate financing

Addressed risks

Macroprudential instruments in the real estate sector address financial stability risks related to mortgages. Unsustainable real estate financing combined with increasing real estate prices can lead to high systemic risk, thus, jeopardizing financial stability. In particular, during a crisis, an ex-ante unsustainable real estate financing can increase the vulnerability of both borrowers and lenders towards systemic risk. Hence, the objective of such real estate instruments is to mitigate and prevent excessive credit growth and leverage as well as increasing the resilience of financial institutions.

The financial stability analyses of the FMA and the European Systemic Risk Board (ESRB) show that the high level of household indebtedness in Liechtenstein is associated with systemic risks, while the risks related to the collateral and funding stretch are identified to be low or moderate, respectively. The high level of household debt, which has risen continuously over the past 20 years, makes this sector vulnerable to unexpected macroeconomic shocks. At the same time, negative feedback effects on the collateral cannot be ruled out in the event of a materialization of risks in the household sector.

Due to the high level of household debt and the simultaneous lack of income-related, borrower-based measures (BBMs) to curb the further accumulation of risks in the residential real estate sector, the ESRB issued a risk warning for Liechtenstein at the beginning of 2022. The ESRB's risk assessment also confirms earlier risk analyses by the FMA, which is why in 2023, the Financial Stability Council (FSC) and the FMA recommended a tightening of the existing BBMs, while activating new income-related measures to decrease household indebtedness and adjusting banks' reporting obligations, accordingly.

Various BBMs can be used to address unsustainable lending practices. These macroprudential instruments enable, for example, the implementation of maximum limits for loan-to-value (LTV) ratios, debt-to-income (DTI) ratios and debt-service-to-income (DSTI) ratios, as well as maturity limits for newly granted real estate loans. In addition, requirements can be set for the amortization of newly granted real estate financing. These real estate measures are often used as complements to each other and can be used both as a fixed boundary and as a time-variable limit. The measures are mostly applied during upswings or booms, when a deterioration in lending standards - often in connection with a property price boom - emerge.

Measures

In February 2015, a policy mix consisting of BBMs and lender-based instruments was introduced in Liechtenstein, which has led to a decline in mortgage loan growth in Liechtenstein over the following years. However, the indebtedness of private households has continued to rise in recent years, which may entail risks - both for private households as well as for the banking sector. Therefore, the FSC recommended a mix of policy measures in November 2023 based on the results of a working group with representatives of the FMA, the Liechtenstein Bankers Association and the three national (other) systemically important banks (O-SIIs) in order to limit the further build-up of private household debt and ensure the effectiveness of the instruments in the longer term. These measures are in line with the recommended policies outlined in the ESRB warning issued to Liechtenstein. In addition, risk awareness was increased on both the lender and borrower side, while data availability in the real estate and mortgage market was improved as part of the new reporting standards.

The following borrower-based measures (so-called minimum standards) apply in Liechtenstein:

Measures related to the LTV ratio:

  • A loan-to-value (LTV) limit of 80% at loan origination or if the mortgage is expanded for owner-occupied and income-producing real estate loans. An LTV ratio greater than 80% is possible in exceptional cases, whereby these loans then qualify as "exceptions to policy" (Appendix 4.5 of the Banking Ordinance).
  • Amortisation period for loans with high LTV ratios: In the case of owner-occupied and income-producing real estate loans, the mortgage loan must be amortized to a maximum LTV ratio of 66,6% within 15 years. The amortization should be linear (Appendix 4.5 of the Banking Ordinance).

Affordability:

  • The affordability of a loan secured by a mortgage on residential property is deemed sustainable, if the maximum LSTI ratio is 33% of household disposable income when assuming an interest rate of at least 4.5%. Loans exceeding an affordability threshold of 37% are classified as "exceptions to policy" (ETP). In addition, increased reporting requirements apply for exceptions from the LTV limit and whenever an interest rate increase to at least 4.5% would entail a debt service burden of more than 37% of the annual household disposable income (“exception to policy”).
  • Amortization requirements based on the affordability: If sustainable affordability is not given for loans granted after 1 July 2024, i.e. if the affordability is above 33%, a minimum amortization amount of 1% of the total loan volume per year is applied until the sustainable affordability of a maximum of 33% is reached. For existing loans granted before 1 July 2024, this minimum amortization amount applies if the loan is classified as an ETP, i.e. if the affordability exceeds 37%.

The decision on which loans are granted lies with the individual bank. There are no upper limits on how many loans a bank may grant as an “exception to policy”. If a loan does not meet the minimum standards, the bank must report the number and volume of these loans to the FMA. This information is crucial for the FMA in order to monitor the risks of the banking sector. It also forms an integral part of the FMA's comprehensive risk assessment of banks. The greater transparency created by the harmonized reporting obligations also means that risks can be better addressed on a bank-specific basis.

The following lender-based, macroprudential measures apply in the real estate sector in Liechtenstein:

  • Article 124 CRR measure: Setting standardised approach (StA) risk weights for mortgages with an LTV ratio between 66% and 80% at 50%, rather than 35% stipulated in the standard Capital Requirements Regulation (CRR) framework.
  • Sectoral systemic risk buffer: The sectoral systemic risk buffer amounts to 1% for RRE and CRE loans in Liechtenstein for all domestic banks.

The development of risks will be closely monitored, and appropriate measures will be adjusted as needed.

Further information (in German):

More detailed information on the individual measures can be found in “FMA Communication 2023/1”, in the “FAQs” and under the heading "Financial Stability Committee".