Prospective buyers either find it impossible to get mortgage loans or face interest rates of 22-30 percent. With real estate prices still way too high for most people to pay in cash, the future of the housing market looks bleak.
Here is another sign that Kyiv’s housing market is facing long-term ill health: Mortgage lending is practically non-existent and is not expected to revive anytime soon.
Absent widespread availability of credit on attractive terms, many prospective homebuyers of average means are left with the daunting task of coming up with enough money to purchase an apartment outright. That wasn’t so bad when decent two-room apartments sold for $30,000 or less, as they did as recently as seven years ago in Kyiv.
But now, buyers would have to come up with $91,080 for an ordinary two-room apartment (60 square meters) at the current average selling price of $1,518 per square meters in Kyiv. The lack of credit – and, consequently, buyers – is bound to put even more downward pressure on prices.
But only cash-rich buyers will benefit.
“Mortgage loans went into hibernation like polar bears and will wake up only after the crisis is over,” said Greg Krasnov, director of Platinum Bank, a popular choice for homebuyers in recent years. “The process may take up to 10-15 years.”
Like most of the nation’s banks, Platinum Bank stopped mortgage lending this year and has to plans to resume. Currently, experts say that only six of Ukraine’s more than 180 banks offer mortgages.
And even among the handful of banks that are lending, the terms are unattractive. With interest rates ranging from 22 to 30 percent, few are willing to take on the debt burden. While Ukraine’s high inflation offsets the cost of the loan for wage-earners whose salaries keep pace, the interest rates are still high – considering that Ukraine’s inflation might be only 16 percent this year. And many Ukrainian workers are enduring salary freezes or reductions during the recession.
By contrast, in America – with a much more developed mortgage-lending industry – 15-year interest rates are now as low as 5 percent.
“During the last half of the year, almost none of the deals were paid for by mortgages,” said Mykhaylo Polyntsev, analyst at Planeta Obolon real estate agency. “A couple of them that did were the exception rather than the rule.”
Last year, 70 percent of all deals – for both new and used apartments – were paid for by mortgages, according to Serhiy Kostetskiy, analyst with SV Development, a developer and consultant.
More than 30,000 apartments were purchased last year in Kyiv. Oleksandr Moyseenko, an analyst at the Ukrainian National Mortgage Association, said that banks issued 26,000 mortgage loans worth about Hr 23 billion last year. That lending has all but dried up now.
“Currently we see only few in a month or even as few as two,” said Kostetskiy of SV Development, which he said tracks about 90 percent of real estate operations in the real estate sector in Kyiv.
In the last few years, more than half of all mortgage lending was made by Ukraine’s five biggest banks. In the first quarter of this year, however, big private banks offered no mortgages.
Currently, most of the six banks that advertise mortgage lending are smaller banks, except for state-owned Oshchadbank and Ukreximbank, first and third the nation’s largest by assets. And all of them only offer credits denominated in hryvnias.
The dollar-denominated loans of recent years contributed to the current banking crisis. After the hryvnia lost 40 percent of its value in the last year, those debts became vastly more expensive. Many are expected to default on the loans, but the full consequences to the economy may not be known for some time.
So where to go if interested in borrowing money to buy a home?
The list of the rare mortgage lenders is topped by Oshchadbank and Universal Bank, a subsidiary of a Swiss-registered Eurobank EFG. They offer loans for up to 20 years, starting at 22.19 and 24.05 percent annual interest rates, respectively.
Volksbank will offer 15-year mortgages with interest rates starting at 22.25 percent per year. Ukreximbank which came up with an offer this week propose loans up to 10 years with 26.24 – 28.22 interest rates. Credit Europe Bank gives out five-year mortgages and BM Bank only year-long ones, at even higher interest rates.
All of the banks require a 50 percent down payment on the property, except Volksbank and Ukreximbank, which will settle for 40 percent.
One of the few banks advertising credit for newly-built apartments is Kyivska Rus. But borrowers would have to buy apartments in the bank’s own real estate project in Vyshgorod, just north of Kyiv, called Olzhyn Grad. Kyivska Rus offers five to 20-year mortgages at 17.05 – 20.48 interest rates, with 20 to 50 percent down payment.
Because of real-estate scams and uncertainty in the construction market, “nobody dares to invest into unfinished buildings,” said Polyntsev of Planeta Obolon real estate agency.
Kostetskiy of SV Development expects that few customers will be enticed by these offers. “Believe me, considering such interest rates and terms, nobody will be able to take mortgages now, unless there is a very interesting offer and the client is willing to overpay a lot,” he said.
For example, if a person finances half the cost of a $50,000 apartment with a 20-year bank loan of 22 percent interest rate, the $25,000 loan will end up costing the borrower $111,000.
Yevhen Horodetskiy, an employee of a large international company, was ready to take the risk. But despite his Hr 15,000 monthly (almost $2,000) salary – which puts him solidly in Kyiv’s middle class – he was turned down by a bank. He was even willing to make a 60 percent down payment.
“I only needed $10,000 to buy the apartment. It’s equivalent of my salary for half a year,” Horodetskiy said. “I don’t know why they turned me down.”
Officially, banks require that the monthly credit payment is not higher than 30 percent of the borrower’s income. But experts said it’s not always clear what other factors they consider and some mortgage proposals may be advertising gimmicks. SV Development’s Kostetskiy said: “It is very likely that offers by small banks don’t really work. If it was otherwise, we would hear more about them from our realtors and lawyers.”
As an experiment, a Kyiv Post reporter called Universal Bank to inquire about their advertised mortgage offer and completed the required telephone questionnaire. But the bank did not follow up the request.
Real estate prices, in dollars, have already dropped by 34 percent since the start of this year and by 50 percent since last summer when the crisis began. But experts see no further price drops – yet.
“Residential prices have already fallen by half from the last summer but during the last two months they are holding,” said Phil Hudson, head of Jones East 8 real estate company. “It is not possible to know where the bottom of the market is because the situation is quite unusual and unpredictable.
SV Development’s analyst thinks that the main slide has already happened and today’s prices won’t change a lot until the middle of the next year. “Psychologically, sellers are not ready to lower prices further,” Kostetskiy explained. He predicted also that banks won’t be offering 25-year mortgages at more affordable 15-20 percent interest rates for two or three years at least. “This time is needed for the recovery of the banking sector and restoring people’s faith in banks,” Kostetskiy said. “However, it may take much longer to come to [reasonable] interest rates, and the construction industry will take even longer to recover.”
The government has started the process of recapitalizing a few of Ukraine’s most-troubled banks. The latest figures show that the outflow of deposits has halted, which is a sign that faith in Ukrainian banks has, to some extent, been restored.
Vladyslav Krykliy, an analyst with Astrum Investment Management, said the next step will be a renewal of access to long-term cheap financing from abroad. Only then will lending become more prevalent, although Krykliy warned that the days of easy credit are over. Lending requirements, he said, “will be much stricter than before the crisis.”
