The Sectoral Systemic Risk Buffer for Commercial Real Estate Finance

The Austrian National Bank and the Financial Market Authority will gradually raise the sectoral systemic risk buffer for commercial property finance (CRE) to 3.5 percent by 2027. This study assesses the macroeconomic consequences of this measure. The planned increase will lead to a decline in construction investment of around 1 percent for every 7 basis points of interest rate hike. This is significantly more than indicated in the authorities' impact assessment. The analysis of credit-to-real activity gaps highlights the uncertainty involved in identifying financial cycles. At present, e.g., there are no signs of cyclical overheating that would justify a further tightening. Alternative macroprudential measures already implemented by the authorities tightened the regulatory requirements for the granting of CRE-credit significantly. Currently, microprudential requirements appear to be more targeted and proportionate than the sectoral systemic risk buffer, which has a blanket effect. CRE-credit also include exposures to commercial housing developers. Given the fragile state of the construction sector, the rent-lowering effect of new buildings, and the European Central Bank's interest rate policy switching into a tightening mode, the sectoral systemic risk buffer is no longer appropriate given the current economic situation.