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Mortgage dead end for real estate prices

In early January, CreditMarket Index experts reconsidered the mortgage index calculation list. The explanation is quite simple: within last months of the last year a number of banks stopped issuing real estate loans. And the ones still issuing loans consequently increase the rate – since October the effective rate has increased from 20.37% to 25.14%.

Why is the amount of issued mortgage loans decreasing, and why are these loans becoming more expensive? There are at least two factors that resulted in this state of affairs. Banks are not confident of the paying capacity of their potential customers, which is the first factor. The second reason is that, in fact, they have neither long-term (7-10 years), nor middle-term resources (from 3 years) in UAH.

Therefore, a share of mortgage loans in the amount of credits totally issued to individuals covers a bit more than one-third. And there is no guarantee that long-term resources will emerge in the nearest future.

However, there is another factor which is as important as two other mentioned above. These are price expectations.

Banks have serious concerns about further mortgage depreciation. Further decrease of real estate prices is quite possible, especially in the regions and cities with the population below a million.

“Mortgage decrease –demand slowdown– price decrease – mortgage offer narrowing – more intense mortgage decrease – new spin of demand slowdown– new spin of price decrease...” – it’s a vicious circle that can only be broken by the input of mass mortgage loans at 12-15% annual rate in UAH. However, the state mortgage programs are likely to finance purchase of apartments in newly constructed mass scale buildings. Only upon this condition state support to mortgage with the highest efficiency will give an impulse to economic development on the whole.

Thus, it’s early to believe that the state mortgage crediting program will “recover” the whole market. Actual price prospects of the real estate market will be clear after the issuance of the first cheap mortgage loans for at least UAH 0.5 bn. in total. This amount is comparable to a semi-annual volume of the mortgage market in 2011.