For the last five years, creditors and loan takers have been subject to responsible lending requirements imposed by the Bank of Lithuania to ensure that the country’s financial system remains stable and no bubbles form in the real estate (RE) market. However, country-specific experience shows that property taxation should also be taken into account as certain RE-related taxes or subsidies may threaten the stability of the financial system. Potential links between RE taxation and macroprudential policy are the focus of the international Macroprudential Policy Conference hosted by the Bank of Lithuania in Vilnius.
“Seeking to prevent RE bubbles, the Bank of Lithuania takes a holistic approach in terms of the housing market and instruments influencing its development. We believe that it is important to monitor housing policy as a whole, not merely its individual segments, and to assess how different RE-related decisions could affect the entire domestic housing sector. In this regard, certain choices on RE taxation may have a significant impact on RE price dynamics and financial stability within the country,” said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.
During his keynote speech, Klaas Knot, President of De Nederlandsche Bank, shared some insights from an international perspective: “The taxation of residential RE is in many countries in fact amplifying housing and macroeconomic cycles, and therefore partly offsets the stabilising function of macroprudential policy. Hence, policymakers and politicians face the challenge to make the tax system and macroprudential policy work more in tandem to reduce macroeconomic and financial risk.”
Under its macroprudential policy mandate, the Bank of Lithuania applies a number of different tools to promote responsible lending and borrowing practices: households whose debt service‑to-income ratio exceeds the required threshold have to meet the minimum down payment and maximum loan maturity requirements, while banks are obliged to perform interest rate stress tests. Creditors must accumulate buffers to cover potential losses in periods of financial stress.
Lithuania’s RE market is currently booming. The annual growth rate of house prices in the first quarter of 2019 reached 6.8%, exceeding the EU average (4.2% at the end of 2018). Over the last several years house prices in Lithuania have been rising in line with the country’s GDP and household income, thus continuing on a sustainable path. However, the situation may change at any time due to, for example, overoptimistic market expectations, therefore the Bank of Lithuania constantly monitors and evaluates the situation in both the property and credit market.
Some EU countries, where house prices have risen significantly over the past few years, have witnessed a gradual build-up of imbalances, i.e. high levels of public debt and potentially overvalued housing, which may entail risks to the financial stability of the countries concerned. Traditional macroprudential policy measures may not suffice to effectively mitigate these imbalances, thus RE-related tax measures could be added to the arsenal of existing macroprudential policy instruments.