There was information flowing through the media that the state was preparing to provide housing loans to young people under 36 years of age. Either spouses, regardless of whether they have children or unmarried couples with at least one child up to 6 years of age, will be able to apply for these loans. The main argument for this generous step is that housing is currently unavailable to young people, for two basic reasons: property prices are high and the CNB has tightened the conditions for obtaining credit. The intention is nice, but there are a few ALEs that we should keep in mind.
BUT 1: Approval is only up to the government in resignation
Although the total volume of possible loans is just a drop in the sea (650 million USD this year, about a billion USD in the following years) in terms of both the state budget and the housing loan market, this is a step that will have its economic consequences. At the same time, we are not talking about anything that is absolutely necessary for the operation of the state, so the government in resignation is not in any way to act in this respect, and not at all when it decides on its own without Parliament’s consent. This is a decision that will have to be paid for because 2% interest is below the inflation rate. The government will lend a handful of people to our money without Parliament’s approval, and the rest of us will lean on it.
BUT 2: The loan is only 80% of the value of the property
The reasoning why the government wants to allow cheap housing loans is partly based on the fact that real estate is expensive and therefore unavailable. It’s okay that if someone wants to live in their own, they should be spared. At the same time, it should be noted that 20% of the value of the property is not quite small money. If we are talking about the maximum limit that the state will lend, ie 2,000,000 USD , the client can take a loan for a house worth 2.5 million, and must have saved 500,000 USD . If these young people are not able to save themselves to meet the same requirement to obtain a mortgage (usually 20% of their own is also required), then how can they meet this condition for a loan from the state?
BUT 3: Tightening credit conditions was a good step
In December 2016, an amendment to the Consumer Credit Act came into force, which tightened the rules on lending. Among other things, it emphasizes a more rigorous assessment of clients’ creditworthiness. This is only good, because this ideally ensures that people do not have unhealthy debt. However, it is not yet clear how the state will assess the creditworthiness of its citizens applying for a government housing loan. If such a client fails to reach its creditworthiness for a loan provided by the bank, it is not right for the state to be in debt. And the government argues that it wants to make expensive housing accessible to young people. It sounds dangerous in this context.
BUT No. 4: Is it really worth it?
If I borrow 2,000,000 USD for a family house at the interest rate of 2% and I decide to pay back 20 years, the monthly payment will be 10,118 USD . At the bank I can currently get interest at 2.59% without considering various discounts (so the interest may actually be lower). In this case, the monthly payment will be USD 10,686. Is the $ 568 a month so big a difference that it allows young people to afford housing that they would not have been able to reach in other circumstances? It seems to me more like a populist step, which is nicely fluffy to impress, but it really doesn’t help.