(7)

As regards Bulgaria, this recent assessment has revealed that: a. Real house prices have grown moderately over the last two years in Bulgaria, increasing on average by about 3,5 % year-on-year until mid-2020. Since then, real house price growth has accelerated to around 7 % as of mid-2021, also reflecting base effects from lower house price growth in the first half of 2020. Estimates produced by Bulgarian National Bank show that house prices were slightly overvalued at the end of 2020. b. At the same time, annual growth in household loans for house purchase has accelerated significantly over the last years in Bulgaria, reaching 13 % in August 2021 in real terms. c. According to the European Banking Authority, the level of non-performing loans in the RRE sector in Bulgaria stood at 5,3 % in the second quarter of 2021 (3). At the same time, the high coverage ratio of these loans (48,1 % compared to 25,7 % for the Union as a whole) is an important mitigating factor. d. Against this background, household indebtedness in Bulgaria has been relatively low but has increased somewhat during the COVID-19 pandemic. Moreover, the share of homeowners with a mortgage is very low. As a result, the stock of mortgage loans is at a relatively low level in Bulgaria, representing 27 % of GDP in total (i.e. including corporate loans collateralised by commercial immovable property) compared to 52 % for the Union as a whole in 2020. However, a large majority of loans are at variable rates, making households vulnerable to significant interest rate changes. e. At the same time, banks operating in Bulgaria have a relatively high level of own funds, with the Tier 1 capital ratio reaching 24 % in December 2020. Thus, if the vulnerabilities related to the RRE market continue to grow, the banking sector’s high absorption capacity would be a mitigating factor to the financial stability risks that could be accumulating. Another specificity of the banking sector is the predominant use of the Standardised Approach for credit risk exposures, which mitigates potential risks related to RRE. The share of risk-weighted assets as a proportion of total assets remains above 50 %. Accordingly, the effective risk weight of banks using the Standardised Approach for RRE loans to households is 48 %, while the effective risk weight of banks using internal ratings is 25 %. f. In comparison with the Union countries overall, although the share of mortgage loans in banks’ portfolios is limited and the level of household indebtedness is currently low, the favourable conditions for mortgage financing could pose a risk, on the medium-term horizon, of a spiral developing between house prices and mortgage credit. On the one hand, rising house prices means that the value of the collateral for real estate loans increases, thereby allowing for higher leverage on the part of borrowers. On the other hand, house price growth is usually accompanied by positive macroeconomic developments, which may lead to loosening of the lending standards adhered to by credit providers. At the same time, an increasing supply of real estate loans may represent additional upward pressure on house prices. Over a medium-term horizon, such a spiral could lead to a credit-driven house price bubble and excessively indebted households. g. The ESRB acknowledges several measures that are in place in Bulgaria that mitigate the current RRE vulnerabilities. In particular, the positive countercyclical capital buffer (CCyB) rate is an appropriate tool by which to address vulnerabilities related to the rapid credit growth, which has been widespread across sectors, and increase the resilience of the banking sector. It was decided in September 2021 that the CCyB would be increased from 0,5 % to 1 % with effect from 1 October 2022. The ESRB also notes that a legal framework for borrower-based measures was established in Bulgaria in 2019, and that, in accordance with Article 124 of Regulation (EU) No 575/2013 of the European Parliament and of the Council (4), a risk weight floor is applied to mortgage loans with relatively higher loan-to-value ratios for banks that follow the Standardised Approach. A weight of 35 % is assigned to a part of exposure secured by mortgages on residential property that does not exceed 70 % of the collateral value. h. From a forward-looking perspective and taking into account the medium-term risk outlook, the current macroprudential policy mix is considered to be partially appropriate and partially sufficient. In addition to the currently applied capital-based measures, the introduction of borrower-based measures would be appropriate in order to act pre-emptively against the potential build-up of a spiral between house prices and mortgage credit.