MONDAY, 15/07/2024 - Scope Ratings GmbH

New property value definitions in CRR3 to have notable impact on some mortgage covered bonds

There is less than six months to go until the property value in the updated Capital Requirements Regulation takes effect. This could have a notable impact on covered bonds as market values are directly linked to the amount of bonds that can be issued.

Updated article 229 of the CRR matters because it will determine the valuation standards to be used for covered bonds backed by mortgages from 1 January 2025. Covered bonds will not be allowed to use the current market value of a property. The value must be one that “excludes expectations on price increases” and must be “sustainable over the life of the loan”. As such the property value cannot exceed either the current market value or the average market value over the last six years for residential and eight years for commercial property.

To gauge the effects of the updated property value definitions, Scope calculated the haircut on residential property values assuming the directive had been transposed and that no country exceptions or transitions were granted. We then factored in European house-price indices since 2005 and calculated the floating average over six years to compare it to the respective index value.

“Our analysis demonstrates that the Commission’s proposal to reduce the impact of cyclical effects on the valuation of property securing loans and to keep capital requirements for mortgages more stable works relatively well.,” said Mathias Pleissner, deputy head of covered bonds.

Haircut to market value (residential)

Source: Eurostat, Scope Ratings

“It comes as no surprise that the discount negatively correlates to property-price increases over the same period,” said Pleissner. “Neither is it a surprise that the discount peaked in 2022 following a period of double-digit growth for residential property. The discounts have obviously decreased since then, reflecting the price corrections observed in many European countries.”

On a country level, the haircut reveals how diverse Europe is. For most central European countries, no haircut would have to be applied to current market values as of Q1 2024. But Southwestern and Eastern European countries show a haircut of up to 12%.

For more information, download the full report here.

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