(7)

As regards Slovakia, this recent assessment has revealed that: a. House prices have continuously increased in real terms in Slovakia during the last five years. Despite the tightening of the legally binding loan-to-value limit, the house price growth rate has accelerated since the beginning of 2019. During the COVID-19 pandemic, price rises have further accelerated and the annual real increase in house prices reached almost 16 % in the second quarter of 2021, the second highest level in the Union. Moreover, the affordability of housing has reduced over time as a result of house prices growing faster than household income. According to overvaluation metrics, there is an increasing risk of house price overvaluation. Price dynamics have been sustained by an economy in an expansionary phase, low interest rates, increased household saving and strong household demand for new housing against a shortage of supply. b. Mortgage credit growth in Slovakia has been among the highest in the Union over the last three years, despite policy measures, and also withstood the COVID-19 shock. The Slovakian mortgage market is characterised by low interest rates, strong demand for mortgages, amplified by rising house price levels, as well as intense competition among lenders. Moreover, the Slovak banking sector is one of the most exposed to real estate activities across the EEA countries. c. Household indebtedness in Slovakia has risen over the last years due to intense lending activity. After years of double digit increases in the stock of real household debt, the pace of growth of household indebtedness has decelerated, stabilising at around 4 % in 2020. Despite this deceleration, which also occurred thanks to macroprudential policy measures (the introduction of the debt-to-income limit and a tightening of the debt service-to-income limit), the growth in household indebtedness is still among the highest in the Union and has translated into a rising debt-to-GDP ratio. While households reduced their consumption throughout the COVID-19 pandemic, their demand for housing loans remained strong. In fact, refinancing of mortgage loans has increased recently and is often associated with the topping-up of the original notional loan amount. Another vulnerability arises from the fact that the maturity of a significant proportion of loans exceeds borrower retirement age. Both these developments and pockets of vulnerabilities need to be closely monitored going forward. d. The build-up of the abovementioned vulnerabilities may also be attributed to a number of structural factors such as the favourable tax regime in respect of the property market as well as limitations in the functioning of the rental market. e. The ESRB acknowledges that several measures aimed at the mitigation of current RRE vulnerabilities are in place in Slovakia, including, in particular, a comprehensive set of borrower-based measures to appropriately address the underlying risks related to mortgage lending and borrower vulnerabilities. Moreover, the positive countercyclical capital buffer (CCyB) rate is an appropriate tool to address vulnerabilities related to the high rapid credit growth, which has been widespread across sectors, and increase the resilience of the banking sector. f. From a forward-looking perspective and taking into account the medium-term risk outlook, the current macroprudential policy mix is considered to be appropriate and partially sufficient. Given the continuing build-up of pockets of vulnerabilities, fine-tuning of the existing borrower-based measures would be appropriate. If the cumulation of cyclical risks continues or structural vulnerabilities intensify, the Slovakian authorities might consider rebuilding the CCyB or introducing a sectoral systemic risk buffer to further increase resilience against the risks that exist in the RRE sector. In addition, the activation of the risk weight floor for the internal ratings based RRE exposures through Article 458 of Regulation (EU) No 575/2013 of the European Parliament and of the Council (3) also constitutes an option that would increase the resilience of the banking sector. Beyond macroprudential measures, considering adjustments to the favourable tax regime related to RRE, as well as measures improving the functioning of the rental market could mitigate the sources of systemic risks related to the Slovakian RRE sector.