The combination of years of low interest rates, a sharp rise in property prices, and increasing living costs has led to explosive growth in credit for households and businesses. This raises the inevitable question: is easy access to financing turning into a risk of credit overheating, and how prepared is the banking system to absorb a potential shock?
Mortgages: record growth amid rising housing costs
Housing lending is one of the clearest markers of risk appetite. In recent years, mortgage loans in our country have been growing at double-digit rates, and their volume has reached historically high levels.
In parallel, housing prices in large cities are rising sharply, and the share of transactions financed with credit is increasing – in Sofia, the predominant portion of home purchases now involve bank participation.
This explosion in mortgage lending is supported by historically low interest rates. Cheap money makes higher property prices "bearable" in the short term, but it increases the sensitivity of households to future interest rate hikes and income shocks.
Consumer loans and the debt burden of households
It is not just mortgages that are growing. Consumer loans – credit cards, commodity and cash loans – are also marking a strong increase and for the first time are reaching a volume of tens of billions of levs.
The total size of household debt now represents a significant share of GDP, and a significant portion of new borrowers have limited reserves and lower financial literacy.
International experience shows that rapid growth in unsecured lending often precedes a deterioration in portfolio quality, especially among low-income households without a "cushion" for unforeseen situations.
Corporate lending: engine of growth or source of overheating?
For businesses, cheap loans are a stimulus for investment, but also a potential source of imbalances. The growth of loans to firms is concentrated in sectors with quick profits and high cyclicality – construction, real estate, trade, and services.
If asset prices suddenly stop rising or demand shrinks, servicing these debts becomes a serious challenge, and risks are transferred to bank balance sheets.
The portfolio of loans to small and medium-sized enterprises (SMEs) is particularly sensitive: SMEs have more limited access to capital markets and smaller reserves, and in times of stress, banks are the first to tighten credit standards for them specifically.
Regulators against overheating: measures to cool the mortgage boom
Realizing the risk of overheating, regulators in Europe and in our country have begun to implement macroprudential measures. The Bulgarian National Bank has introduced stricter requirements for mortgage lending: restrictions on the loan-to-value (LTV) ratio, limits on monthly payments relative to income (DSTI), and a ceiling on the maximum term of the loan.
The goal is to prevent excessive household indebtedness and limit the risk of a credit bubble in the property market. Similar instruments are also used in other EU countries – often combined with capital buffers for banks to absorb potential losses.
At the same time, banks themselves are gradually tightening their internal criteria: stricter income analysis, verification of total indebtedness, higher requirements for self-participation, and more conservative valuation of collateral.
Resilience of the banking sector: the lesson from previous crises
After the crisis of 2008–2009, banks in Bulgaria and the region significantly strengthened their capital positions, and the share of non-performing loans has been in a sustained decline. Stress tests and European regulations create additional safeguards.
Nevertheless, rapid credit growth always carries risk – especially if it is combined with a sharp rise in asset prices and highly optimistic expectations for income and employment.
History shows that credit crises rarely start from the "most obvious" risky loans; often, it is precisely mass mortgage and consumer loans that become a problem when conditions change simultaneously for a large number of households and firms.
Where is the line between a normal credit cycle and overheating?
The key indicators are: the rate of credit growth relative to GDP, the debt burden of households and the corporate sector, the dynamics of property prices, and the quality of credit portfolios.
When loans grow significantly faster than incomes and the real economy, and asset prices detach from fundamentals (rents, profits, productivity), the risk of overheating is present – even if delinquencies temporarily remain low.
In the current situation, the combination of still relatively low interest rates, high inflation in recent years, and people's desire to "save" their money through property and consumption is fueling credit expansion.
The task of regulators and banks is to find a balance between supporting growth and protecting against a new debt bubble – through targeted restrictions, clearer information for customers, and the encouragement of financial literacy, which would limit impulsive borrowing.