Rapid household credit growth – can it continue?

The question is related to the previous post. The most striking issue about the composition of household credit in CEECs is that while currently consumer credit is at a comparable level to the Eurozone (5% of GDP on average in “New Europe” i.e. 8 NMS + Bulgaria, Romania, Croatia and Turkey, as compared to 7% of GDP of EMU average in 2004, Coricelli et al.) mortgage lending, despite quadrupling in the last 5 years is far lower (4% of GDP compared to 34% of GDP, same source). It is striking that in countries with relatively high home ownership and substantial financial deepening (and thus credit to GDP growth) this gap remains so wide. The immediate conclusion is that in the future, it is reasonable to expect a surge in mortgage lending. The situation seems in line with anecdotal evidence, which would suggest the effect of transition and financial deepening is causing the consumer, as she/he gets richer, to first take out consumer loans to buy cars and household appliances (in line with new car sales in CEECs e.g. Poland after a hike is now down to early 1990s levels, while Bulgaria, whose transition is arguably at an earlier stage currently experiencing a large increase in new car sales, source:Samar). It is only in the next step that the household can think of buying property - and as it seems most CEECs still are to undergo this phase i.e. a property credit boom. The lag between these steps may depend on many factors such as household indebtedness (previous consumer credit burdens – though hh debt to GDP is on average 4-5 times lower that in EMU, credit to financial assets is in some cases already higher – again source: Coricelli et al.). Concluding, as the countries get richer, there seems a lot of room for mortgage credit to expand. The thing to watch will possibly be house prices, which are still lower than in old Europe, but if they were to, at some point, exhibit a bubble, this could trigger some credit market troubles, mainly through the revaluation of collaterals if such bubble were to burst.