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Subprime crisis boosts crown

Modest local mortgage market has little risk of default, analysts say

By Michael Heitmann
Staff Writer, The Prague Post
August 22nd, 2007 issue

While financial instability continues on the global markets and the Prague Stock Exchange following concerns of U.S. banks holding risky subprime mortages, the domestic mortgage market holds little similar risk, according to analysts.
Indeed, the country’s mortage market remains solid and the crown has experienced some positive side effects from the worldwide slump.
“The nervousness of the financial markets is helping the crown,” said Michal Brožka, an analyst at Raiffeisenbank. “It’s being used as a currency for cross-country carry trading. You borrow in crowns and then buy assets denominated, for example, in Swiss francs.”
Because Czech interest rates are relatively low, investors make their profit when they reverse the trade and pay back the loan.
“This is very risky,” Brožka warned. But this risk has not detered investors who are scrambling to pull their money out of the U.S. mortage market, he added.
As soon as the global market turmoil subsides, investors will regain confidence and divert investment back to the more volatile stock markets. Brožka already sees this happening, as the crown depreciated slightly early this week.
Unlike its U.S. counterpart, the domestic mortage market holds little risk. Mortgages given to households on shaky financial footing — known as subprime mortgages — don’t exist here, said Tibor Bokor, analyst at Wood & Company.
“Roughly 10 percent of households pay some kind of mortgage, with an average value of 1 million Kč [$49,000],”  he said. “In the United States, this number is closer to 50 percent.”
Even if interest rates are raised further — the Czech National Bank has raised its key rate twice this year, though it still sits at 3 percent, lowest in the European Union — homeowners should not be at risk, he said.
So mortage lenders might feel the pinch, but they won’t go bust. What’s more, analysts say, wages are rising at unprecedented rates.
“We expect growth of 7 percent to 8 percent year on year,” said Jan Čermák, ČSOB analyst. “Even if your mortage becomes more expensive, you’ll have higher income.”
The current turmoil might help to keep rates low, Čermák said.
“Interest rates are going down globally, and the Czech Republic partly follows core markets,” he said.
Mortgages and housing construction will continue to rise, analysts say. In the second quarter of this year, 6,758 residences were built, the Czech Statistical Office reported, a 30.3 percent surge over last year.
But this rise doesn’t mean developments being built in less desirable areas are sure bets.
“There will always be a huge demand in Prague and its metropolitan area,” Čermák said. “But if you look at the periphery, there is a risk that these new flats will either be sold at a discount or not at all.”

Michael Heitmann can be reached at mheitmann@praguepost.com


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