CBE Reveals Impact of Financial Regulation on Real Estate Prices

The Central Bank of Egypt (CBE) said that macro-prudential policies could mitigate the risks arising from sharp price changes in the commercial real estate sector.

The International Monetary Fund (IMF) Global Financial Stability report stated that in order to absorb shocks in the real estate sector, efforts must be made to reduce budgets' exposure of both lenders and borrowers to sector risks through two basic metrics.

Regarding the first measure, CBE indicated that the following measure targets the sector directly by restricting access to loans related to commercial real estate, such as setting a maximum mortgage value based on its ratio to the property's value (loan-to-value ratio).

The second measure would be setting a ceiling for the debt-to-income ratio, increasing the cost of mortgages, or setting limits for the concentration of commercial real estate loans granted by banks.

As for residential real estate (not commercial), the bank pointed out to setting a ceiling on mortgages, based on the value of the residential property, as well as the debt-to-income ratio.

The bank explained that this is a matter that may affect the prices of some segments of Multi-Family Commercial Real Estate property. To prevent the accumulation of excessive short-term debt, instruments have been proposed, including liquidity coverage ratio, minimum haircut requirements on asset-backed securities.

With regard to the overseas property mortgages, CBE pointed out that Egypt put some restrictions on capital inflows through specific procedures related to financial stability risks, yet, this can be done under specific circumstances, to prevent substantial disruptions.

Regarding emerging markets, many central banks have implemented macro-prudential policies at least since the aftermath of the 1997 Asian financial crisis and the 1998 Russian financial crisis. Most of these central bank authorities consider that such tools have effectively contributed to resilience of their domestic financial systems, keeping the prices of real estate stable, in the wake of the financial crisis of the late 2000s.