Warning of the ESRB on vulnerabilities in the residential real estate sector in Iceland
The European Systemic Risk Board (ESRB) sent warnings to five European countries and recommendations to six European countries in connection with its assessment of medium-term residential real estate (RRE) sector vulnerabilities. Iceland is one of the countries receiving such a warning, along with France, Norway, the Czech Republic and Germany.
The ESRB warning is based on a detailed report on RRE vulnerabilities in Europe. The ESRB notes that in Iceland, numerous measures have already been taken to mitigate the impact of housing market vulnerabilities on financial stability, for example through a regulation on maximum loan-to-value (LTV) ratios, a regulation on creditworthiness assessments and the implementation of a systemic risk buffer and a countercyclical capital buffer. However, from a financial stability perspective, the ESRB considers the main domestic vulnerability to be the high level of household indebtedness associated with the rapid rise in house prices in the medium term. It is proposed that Iceland respond to this by examining whether a maximum debt-to-income (DTI) ratio of households would be appropriate. However, the ESRB points out that the activation of such macroprudential tools should take into account the position of Iceland in the economic and financial cycles at any time, having regard to the costs and potential benefits.
The Icelandic Government was given the opportunity to respond to the ESRB warning, as were the governments of other countries that received a similar warning. The response was published at the same time as the warning in the Official Journal of the European Union. In the response, the Minister of Finance and Economic Affairs agrees that macroprudential tools that limit household indebtedness could be considered to target household indebtedness. In recent years, experience has been gained in implementing macroprudential tools and data gathering and monitoring has improved. The macroprudential authorities will continue to monitor and assess vulnerabilities in the RRE sector and their impact on financial stability and take appropriate actions when necessary considering the position of the economy, the financial system and the effect of policy measures underway.
The warning of the ESRB has been discussed at the level of the Systemic Risk Committee and the Financial Stability Council. The FSA is preparing a consultation process with the relevant parties regarding appropriate responses.
The response of the Minister of Finance and Economic Affairs