31.1.2017   

EN

Official Journal of the European Union

C 31/1

(1)

The real estate sector plays an important role in the economy and its developments can have a material influence on the financial system. Past financial crises demonstrated that unsustainable developments in real estate markets may have severe repercussions on the stability of the financial system and of the economy as a whole. Adverse real estate market developments in some Member States, both in residential real estate (RRE) and commercial real estate (CRE), resulted in large losses in the past and negatively impacted the real economy. This reflects the close interplay between the real estate sector, funding providers and other economic sectors, and the strong feedback loops between the financial system and the real economy, reinforcing any negative developments.

(2)

These linkages are important because they indicate that risks originating in the real estate sector can have a systemic impact that is procyclical in nature. Financial system vulnerabilities tend to accumulate during the upswing phase of the real estate cycle. The perceived lower risks and easier access to funding may contribute to rapid credit and investment expansion, along with an increased demand for real estate, putting upward pressure on property prices. Since the resulting higher collateral values further favour the demand for and supply of credit, these self-reinforcing dynamics can result in speculative bubbles. Conversely, during the downturn phase of the real estate cycle, tighter credit conditions, higher risk aversion and downward pressure on real estate prices may adversely affect the resilience of borrowers and lenders, thereby weakening economic conditions.

(3)

Establishing a more harmonised framework for monitoring developments in the RRE and CRE markets, the segments of the real estate sector most relevant for financial stability purposes, is therefore crucial to ensure early identification of vulnerabilities that could lead to future financial crises. Policymakers need to have a certain set of relevant information available, including a reliable set of key indicators, to help identify the build-up of systemic risks and assess the potential need for macroprudential intervention. In addition, these indicators can play an important role in determining whether and when to tighten or release the harmonised macroprudential instruments targeting lenders that are available under Union law. Furthermore, the indicators can also be used to guide national authorities in the use of national macroprudential instruments that target borrowers.

(4)

The lack of commonly agreed working definitions across Member States on the RRE and CRE sectors, along with operational constraints on data availability for a number of relevant indicators, hampers the reliability of financial stability analyses, making it difficult to accurately assess and compare risks across national markets. On the RRE side, earlier work by the European Systemic Risk Board (ESRB) (3) has highlighted that comparable high-quality data on some key metrics needed for financial stability surveillance and policy-making are still not available. In addition, the assessment of the ability of these indicators to provide early warnings against the build-up of systemic risks has been hampered by the absence of reliable and harmonised time series. On the CRE side, similar ESRB work (4) concluded that the absence of a harmonised working definition of commercial property and the lack of a granular and consistent data framework to capture broader market developments made the analyses of systemic risks problematic.

(5)

Measures have been designed and implemented across Member States to dampen the procyclical effects of real estate markets and to strengthen the resilience of credit institutions against negative spillovers arising from real estate market dynamics. In addition, the prudential rules for the Union’s banking sector, as laid down in Regulation (EU) No 575/2013 of the European Parliament and of the Council (5) and Directive 2013/36/EU of the European Parliament and of the Council (6), introduced a set of instruments, such as sectoral capital requirements, aimed at mitigating risks emerging in specific sectors, including real estate. The Union’s prudential framework focusses mainly on capital-based measures targeting the capital structure of credit institutions. Instruments targeting borrowers, such as limits on the loan-to-value ratio, the loan-to-income ratio, the debt-to-income ratio, the interest coverage ratio and the debt-service-to-income ratio or the debt service coverage ratio, fall outside the scope of Regulation (EU) No 575/2013 and Directive 2013/36/EU and their implementation is governed by national law. Some of these instruments have already been activated by several Member States, although the definitions of the instruments and indicators vary.

(6)

In carrying out its task, the ESRB should contribute to ensuring financial stability and mitigating the negative impacts on the internal market and the real economy. For these purposes, the availability of harmonised working definitions and a core set of comparable and timely available real estate indicators are of key importance. A better understanding of the structural and cyclical characteristics of RRE and CRE markets in the Union will be helpful in allowing national macroprudential authorities to better track the dynamics of the real estate sector, to identify the threats it may pose to financial stability and to guide appropriate action.

(7)

Existing gaps in the availability and comparability of data on RRE and CRE markets in the Union relevant for macroprudential purposes should therefore be addressed. Accordingly, target working definitions of RRE and CRE should be provided for this purpose. In addition, a common set of indicators that national macroprudential authorities are recommended to monitor in order to assess risks resulting from the RRE and CRE sectors should be identified, along with target definitions of these indicators. The guidance should further specify the dimensions and degree of granularity for each indicator, the scope of the envisaged information and the measurement of the indicators.

(8)

The adoption of harmonised definitions and methods for measuring indicators used for monitoring RRE and CRE markets does not prevent national macroprudential authorities from relying, for their internal risk and policy assessment, on real estate indicators based on their own definitions and metrics, which may be better suited to accommodate national requirements.

(9)

Considering the strong procyclical nature of developments in CRE markets, risk monitoring in these markets should be performed more frequently than the monitoring of the RRE markets. Therefore, for the physical market as well as investment and credit flows and corresponding lending standards, monitoring should take place at least quarterly. Monitoring of the stocks of investments and lending and the corresponding lending standards in the CRE sector, as well as the development of lending standards in the RRE sector, should take place at least once a year.

(10)

As CRE markets are heterogeneous, national macroprudential authorities should be encouraged to break down the common set of indicators according to relevant dimensions, such as the property type, the location of the property, and the type and nationality of the market participants. Moreover, the ESRB encourages national macroprudential authorities to consider information on the distribution of key indicators such as the loan-to-value at origination ratio, the current loan-to-value ratio, the interest coverage ratio and the debt service coverage ratio according to relevant risk buckets. Since, at this juncture, information on such distributions is not available at Union level, no specific guidance can be given as regards to relevant risk buckets for these CRE indicators. In the absence of more specific information, a monitoring on the basis of distribution characteristics of the indicators (e.g. quantiles) can be an alternative, with a need to focus on tail risks (i.e. the upper or lower quantiles depending on the indicator at hand).

(11)

CRE markets are typically characterised by a wide range of market participants, often foreign-based and sometimes not subject to any microprudential or macroprudential supervision. The European Supervisory Authorities (ESAs) should therefore be encouraged to publish, on an annual basis, relevant aggregated data at country level on the activity in CRE markets of the entities under the scope of their supervision, drawing on data collected through existing regulatory reporting templates. Such public disclosure will enhance the knowledge of national macroprudential authorities on the activity of entities from other Member States on their domestic CRE market.

(12)

In addition to using quantitative indicators, the ESRB encourages national macroprudential authorities to monitor developments in real estate markets through regular contacts with relevant market participants, in particular for the CRE sector.

(13)

This Recommendation has been prepared taking into account other ongoing international and European initiatives in the area of data harmonisation and collection, the most relevant in the context of closing real estate data gaps being Regulation (EU) 2016/867 of the European Central Bank (7), which introduced the AnaCredit project. However, AnaCredit cannot be relied on alone for meeting the information needs identified in this Recommendation due to some of its features. First, the definitions of RRE and CRE provided in the Recommendation are more detailed and better suited for financial stability purposes than those laid down in the Regulation (EU) 2016/867, which only refers to the definitions in the Regulation (EU) No 575/2013. Second, information on some key indicators and market segments identified as important for financial stability in this Recommendation (such as the buy-to-let segment) is not provided for in Regulation (EU) 2016/867. Third, only euro area Member States are within the scope of AnaCredit. Non-euro area Member States have the option to participate on a voluntary basis, but at this stage it is still unclear which Member States will opt for this. Fourth, AnaCredit is currently restricted to legal persons and other institutional units, including non-financial corporations. Information on credit to natural persons is not yet within its scope and the timing of such extension is not yet defined. Fifth, AnaCredit collects loans held or serviced by credit institutions. This approach implies that loans held by other market participants are registered in AnaCredit only when a credit institution is servicing the loan. The importance of other market participants in real estate financing, in particular CRE property, requires a large collection of loans granted by these institutions. As set out in Recitals (10) and (12) of the Regulation ECB/2016/13, when preparing future stages of AnaCredit, the scope of loans in this market segment will be assessed as part of the merits and costs procedure, prior to possible extensions of the reporting population and of the reporting requirements to better cover RRE and CRE loans. Sixth, in application of the proportionality principle small banks may be excluded from the scope of AnaCredit (8) although a macroprudential authority might consider that also their activity in the real estate sector needs to be monitored for reasons of financial stability.

(14)

In order to achieve a coherent implementation of the real estate indicators and to build upon existing decisions, structures, projects and methodological work, it is advised to liaise with the AnaCredit project for the implementation of this Recommendation.

(15)

The purpose of the Recommendation is that national macroprudential authorities implement a framework for monitoring developments in the real estate sector relevant for financial stability and based on the recommended commonly agreed target definitions and indicators. The ESRB is also of the view that it would be beneficial for financial stability and macroprudential policymaking to regularly collect and distribute at Union level comparable country data on these indicators. This would not only allow a more accurate assessment of real estate-related risks across Member States, but also a comparison of the use of macroprudential policy instruments activated by the Member States to address real estate-related vulnerabilities. Under Article 2 of Council Regulation (EU) No 1096/2010 of 17 November 2010 conferring specific tasks upon the European Central Bank (ECB) concerning the functioning of the ESRB, the ECB is required to provide analytical, statistical, logistical and administrative support to the ESRB. The ECB is therefore well-placed to coordinate such a data collection and distribution at Union level. Work on this should be initiated immediately after the adoption of the Recommendation, in consultation with Eurostat and the national statistical agencies as appropriate. As macroprudential authorities start implementing the Recommendation and the actual data collection at Union level proceeds, further technical guidance and work on the target definitions and indicators will be needed to accommodate for the specificities of markets or market segments and to ensure the statistical quality of the data; however, any such more detailed implementation guidance should not change the basic features and purpose of the target definitions and indicators as laid down in this Recommendation.

(16)

In the implementation of this Recommendation and the further technical work mentioned in Recital (15), due regard should be paid to the principle of proportionality. When proceeding with the implementation of the relevant indicators and methods for their calculation, the size and development of the national RRE and CRE markets should be taken into account. Any assessment as regards the implementation of the Recommendation should consider the progress and constraints faced in the data collection at Union level mentioned in Recital (15). In particular, the final reports due by end 2020 for Recommendations A to D may not necessarily include all key indicators if justified by such constraints.

(17)

This Recommendation is without prejudice to the monetary policy mandates of the central banks in the Union.

(18)

The observations of the relevant private sector stakeholders have been taken into account in preparing this Recommendation.

(19)

ESRB recommendations are published after the General Board has informed the Council of its intention to do so and provided the Council with an opportunity to react,

1.

National macroprudential authorities are recommended to implement a risk monitoring framework for their domestic RRE sector, including information on current lending standards for domestic RRE loans. For this purpose, the following set of lending standards indicators is recommended for effective monitoring of risks arising from the RRE market:

The information on these indicators should relate to domestic credit providers on a solo basis and should be sufficiently representative of the domestic RRE loan market.

2.

Where buy-to-let housing represents a significant source of risks stemming from the domestic real estate sector, possibly but not only because it constitutes a significant share of the stock or flows of total RRE lending, national macroprudential authorities are recommended to implement a risk monitoring framework based on a number of additional indicators for this market segment. Where no or limited quantitative information is available to assess the significance of buy-to-let housing, this assessment may initially have to be made on the basis of more qualitative information. The additional indicators for this market segment should include:

3.

For the calculation of the indicators listed in paragraphs 1 and 2, national macroprudential authorities are recommended to follow the guidance specified in Annex IV to this Recommendation.

4.

On the basis of the indicators laid down in paragraphs 1 and 2, national macroprudential authorities are recommended to monitor developments in the domestic RRE sector at least annually.

1.

National macroprudential authorities are recommended to monitor the univariate distribution and the selected joint distributions of the relevant indicators as specified in Template A of Annex II to this Recommendation. This template provides guidance on the granularity of the information relevant for the monitoring of risks arising from the domestic RRE sector.

2.

National macroprudential authorities are recommended to monitor risks in relation to the different indicators on the basis of the following information as specified in Template A of Annex II to this Recommendation.

3.

Where buy-to-let housing represents a significant source of risks stemming from the domestic RRE sector, possibly but not only because it constitutes a significant share of the stock or flows of total RRE lending, national macroprudential authorities are recommended to monitor risks in relation to the relevant indicators separately for buy-to-let housing and owner-occupied properties. In this case, national macroprudential authorities should consider also the breakdowns specified in Template B of Annex II to this Recommendation.

1.

National macroprudential authorities are recommended to implement a risk monitoring framework for their domestic CRE sector. For this purpose, the following set of indicators is recommended for effective monitoring of risks arising from the CRE market:

Indicators on the physical CRE market:

Indicators on the financial system’s CRE credit exposures:

Indicators on CRE lending standards:

The information on these indicators should relate to credit providers on a solo basis and should be sufficiently representative of the domestic CRE market.

2.

Where investments are deemed to represent a significant share of CRE financing, national macroprudential authorities are recommended to include in the risks monitoring framework for their domestic CRE sector also the following set of additional indicators on CRE investment exposures:

The information on these indicators should relate to investors on a solo basis and should be sufficiently representative of the domestic CRE market.

3.

For the calculation of the indicators listed in paragraphs 1 and 2, national macroprudential authorities are recommended to follow the guidance specified in Annex V and, where appropriate for CRE, in Annex IV to this Recommendation.

4.

On the basis of the indicators laid down in paragraphs 1 and 2, national macroprudential authorities are recommended to monitor developments in the domestic CRE sector at least quarterly for the physical market, lending and investment flows (including flows of non-performing loans, loan loss provisions and valuation adjustments on investments) and the corresponding lending standards. Such monitoring should take place at least annually for the stock of loans and investments (including stocks of non-performing loans, loan loss provisions and valuation adjustments on investments) and the corresponding lending standards.

1.

National macroprudential authorities are recommended to monitor the relevant indicators as specified in Templates A, B and C of Annex III to this Recommendation. These templates provide guidance on the granularity of the information necessary to monitor risks arising from the domestic CRE sector.

2.

National macroprudential authorities are recommended to monitor risks in relation to the different indicators on the basis of the following information as specified in Templates A, B and C of Annex III to this Recommendation:

3.

Where investments are deemed to represent a significant share of CRE financing, national macroprudential authorities are recommended to include in the risks monitoring framework for their domestic CRE sector also the following set of additional information on CRE investment exposures as specified in Template B of Annex III to this Recommendation:

1.

The European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) are recommended to publish, at least annually, aggregated data on the exposures of the entities subject to their respective supervision to each national CRE market in the Union in accordance with the guidance provided in Annex V.9 to this Recommendation. These aggregated data should be based on information available to the ESAs under existing reporting requirements.

1.

For the purposes of this Recommendation, and taking into account the further technical specifications in Annex IV and Annex V to this Recommendation, the following definitions apply:

1.

The following criteria apply to the implementation of the Recommendation:

2.

Addressees are requested to report to the ESRB and the Council on the actions undertaken in response to this Recommendation, or adequately justify any inaction. The reports should at minimum contain:

1.

Recommendation A

2.

Recommendation B

3.

Recommendation C

4.

Recommendation D

5.

Recommendation E

1.

The ESRB Secretariat will:

2.

The General Board will assess the actions and justifications reported by the addressees and, where appropriate, may decide that this Recommendation has not been followed and that an addressee has failed to provide adequate justification for its inaction.