The systemic importance of the real estate market stems from its strong interconnectedness with the key sectors of the real economy. First, construction activity and related investments, services and employment constitute an important part of the economy. Second, real estate- secured exposures account for a significant share in the banks’ balance sheet because a large part of investments in real estate is financed by bank loans. Finally, residential real estate also account for the major part of assets of households and housing loans are usually the largest part of their debt. The real estate market is susceptible to strong cyclical fluctuations. Due to its strong links with the real economy, the high share of debt financing and the consequential sensitivity to the changes in interest rates and prices of real estate, these fluctuations increase the vulnerability of debtors and credit institutions, thereby posing systemic risks to financial stability. Economic activity declines much more sharply during recessions when it is associated with a real estate market crisis so that, historically, financial crises and deep recessions have often been preceded by periods of great upswings in the real estate markets. Regulators, governments and the general public have been paying particular attention to the trends in the real estate market since the global financial crisis, whose origins can largely be associated with the accumulation of imbalances and vulnerabilities associated with the real estate market.

In order to assess real estate market-related risks and calibrate the measures for their mitigation, the CNB regularly monitors and analyses data on household lending conditions and, in addition to residential real estate lending conditions, the CNB has also begun to closely monitor commercial real estate lending conditions. With the aim to increase credit institutions’ resilience to systemic risks associated with the real estate market, since 2016, the CNB has applied measures related to risk weights for banks’ exposures to residential real estate (stricter definition of residential real estate for the application of the preferential risk weight of 35%, instead of the standard weight of 75% applied to exposures to natural persons) and commercial real estate (higher risk weight for exposures secured by commercial real estate – 100%, instead of 50%), thus indirectly strengthening the capital position of credit institutions with regard to risks associated with these exposures. The appropriateness of the applicable risk weights is reviewed annually in light of the incurred and expected losses on these exposures, also by taking into account the real estate market trends and other financial and economic developments. In addition, from 2019, the CNB prescribes the implicit debt service to income (DSTI) ratio for housing loans to consumers, which results from the supervisory Decision on the additional criteria for the assessment of consumer creditworthiness and the Foreclosure Act. Finally, real estate market-related risks are also taken into account in the calibration of the countercyclical capital buffer rate, which may additionally strengthen banks’ resilience to real estate market-related risks.