BoA, IMF, Association of Banks: Be careful with construction!

2025-01-20 08:06:00, Ekonomi CNA

Since 2018, an average of 1.2 million square meters of building permits have been granted per year for housing in Tirana, with the record being reached in 2022, with around 1.6 million square meters, according to INSTAT data.

For comparison, for the period 2012-2017, the monthly average of housing area according to building permits was 340 thousand m2.

The growth is expected to continue at a rapid pace. The latest INSTAT data revealed that for the first 9 months of 2024, the total area granted for building permits in the capital reached a new record of 1.6 million square meters, with an increase of 60% compared to the same period a year ago (about 80% of permits are granted for housing).

The IMF, the Bank of Albania, and the Association of Banks have expressed concern in recent months about the banking system's increased exposure to the real estate sector.

Bank of Albania statistics show that credit for real estate and housing purchases reached 50% of the total loan stock in October 2024, up from 35% a decade ago, where the jump began in the second half of 2023.

“While systemic risks in Albania’s financial system remain largely contained, the significant increase in mortgage lending and the continued rise in prices in the real estate sector require careful surveillance,” says Anke Weber, the IMF’s country manager for Albania.

"The rapid growth of lending, especially in the real estate sector, constitutes a potential source of risk for the banking industry and the concern expressed by the Bank of Albania stems from its supervisory, controlling and financial stability objective position," the Bank of Albania said in a statement to "Monitor".

"Exposure to real estate can create excessive dependence in a sector that is sensitive to economic fluctuations. In the event of a decline in real estate prices, banks may face an increase in non-performing loans," asserts Prof. Spiro Brumbulli, president of the Albanian Association of Banks.

Below, read the full responses that the Bank of Albania, the International Monetary Fund and the Association of Banks have given to "Monitor" regarding the rapid growth of the sector and its lending by banks. MN: Steps that ensure that the construction sector continues to grow sustainably

You recently warned about the risks that the construction sector poses for the Albanian banking sector, due to the rapid growth of mortgage loans. Do you see any risk of a bursting of the “bubble” in the construction sector in Albania?

Anke Weber, IMF mission chief for Albania:

The banking sector is generally well-capitalized and liquid, with prudential ratios well above regulatory requirements. While systemic risks in Albania's financial system remain largely contained, the significant growth in mortgage lending and the continued price increase in the real estate sector require careful supervision.

Encouragingly, the Bank of Albania (BoA) has made progress in strengthening its macroprudential framework, including improved data collection on real estate. The BoA has also appropriately increased the cyclically-adjusted capital buffer (CCyB) from zero to 0.25% in June 2024 (expected to take effect in June 2025).

Given these efforts, the introduction of loan-to-value (LTV) and debt-to-income (DTI) requirements could be considered to help curb the rapid expansion of lending to the real estate sector. Given the high proportion of unsecured foreign currency loans, such requirements could be differentiated between Lek and foreign currency loans.

Financial stability could be further strengthened by moving towards a positive neutral rate for the countercyclical capital buffer (CCyB) (i.e., setting a positive CCyB level even when systemic risks are neutral), together with the finalisation of the framework for systemic risk buffers (SyRB), in order to address risks not covered by other capital buffers.

Strengthening macroprudential tools would allow monetary policy to focus on price stability without interfering with financial stability issues.

These steps will also be essential to ensure that the construction sector continues to grow sustainably while mitigating risks to financial stability.

Bank of Albania: The increase in housing prices, in parallel with the increase in real estate loans, risks transforming into a self-fulfilling phenomenon.

During 2024, the Bank of Albania applied the countercyclical capital addition for commercial banks for the first time. Why do you think the pace of credit growth should slow down and what are the main risks associated with rapid credit growth in the current situation?

Countercyclical capital allowance, as its name suggests, is an instrument that has countercyclical qualities, meaning its purpose is to moderate the performance of the financial cycle – where the main contribution is made by credit growth – when it shows a significant increase.

In this way, this instrument acts in two directions: it mitigates or prevents exposure to risks and increases the resilience of the banking sector – that is, its ability to absorb potential losses, through higher levels of capital – if these risks materialize.

The risks associated with the rapid growth of total credit are mainly related to the increase in the debt burden of households and businesses. They materialize at times when, due to various shocks that the economy may suffer, incomes fall, leading to a decrease in the solvency of borrowers and an increase in non-performing loans.

In our case, during 2023 and 2024, credit growth accelerated, with the main contribution from loans to individuals in Lek, mainly for the purchase of residential real estate.

This increase has coincided with the increase in house prices, according to the index that we monitor and publish. The increase in house prices in parallel with the increase in real estate credit risks transforming into a self-fulfilling phenomenon (where each indicator supports the growth of the other), moving away from the levels that suggest fundamental economic and financial developments.

Under these conditions, based also on the performance of other warning indicators that we monitor regularly, it was deemed necessary to increase the countercyclical capital allowance rate (CUAC).

Therefore, in accordance with the regulation, the Bank of Albania decided to increase the macroprudential capital surcharge from 0% to 0.25% in June 2024. Banks must meet this capital increase requirement no later than one year from the date of the decision. Depending on the performance of the monitored indicators, the further performance of the KUNC rate will also be decided.

Association of Banks: Rapid lending growth, especially in the real estate sector, constitutes a potential source of risk for the banking industry

The Bank of Albania, during 2024, expressed concern about the rapid growth of lending, especially in the real estate segment, even applying a special capital surcharge to slow down lending. Do you believe that there are increased risks associated with the rapid growth of lending and the high exposure of the sector to the real estate market? Spiro Brumbulli, Secretary General of the Albanian Association of Banks.

The rapid growth of lending, especially in the real estate sector, constitutes a potential source of risk for the banking industry and the concern expressed by the Bank of Albania stems from its supervisory, controlling and financial stability objective position.

Exposure to real estate can create excessive dependence on a sector that is sensitive to economic fluctuations.

In the event of a decline in real estate prices, banks may face an increase in non-performing loans.

Increasing lending by, for example, 25% for one year, although it sounds positive, may be associated with increased risks if borrowers cannot meet their obligations in the event of an economic downturn.

And the International Monetary Fund has asked the Bank of Albania to take measures to rapidly increase lending to the real estate sector and to conduct borrower-based analysis to help mitigate risks from the rapid growth of lending to the real estate sector.

The Bank of Albania's regulatory measures, including the capital increase, are important steps to balance lending growth with the long-term sustainability of the sector. However, it is essential that banks continue to strengthen their risk analysis and diversify their portfolios./ Monitor Magazine