Ukraine Captive to Soviet Era After Lending Collapse: Mortgages
Olesya Myhal, a 28-year-old public- relations executive who lives in a cramped Kiev apartment with her husband, is also being squeezed in other ways.
Ukraine’s weakening currency inflated the principal of the couple’s 20-year dollar mortgage, while high prices and loan rates are preventing them from moving up the property ladder. Higher mortgage payments mean they can’t afford to modernize their 58 square-meter (624 square-foot) Soviet-era home.
For most of Kiev’s 3 million residents, including the nascent middle class, buying a home isn’t an option. Eight years after the Orange Revolution propelled the country toward closer European integration and kick started a real-estate boom, the cost of a house as a proportion of the average income is among the highest in Eastern Europe even as prices lag behind.
“For many people, it’s almost impossible to have their own apartment,” Myhal said in an interview at the Landysh, named after the lily of the valley flower, in downtown Kiev.
The average price of a non-luxury apartment in Kiev is about $1,500 a square meter, Knight Frank LLP estimates. That’s about half as much as a home in Prague and two-thirds of one in Warsaw. When average incomes are taken into account, Kiev residents are far less able to afford a property, earning $560 a month compared with $1,400 in Warsaw and $1,500 in Prague.
Ukraine, with a population almost five times that of Portugal and an economy half the size, is hosting this month’s European soccer championship with Poland. The construction of airports and hotels may help the former Soviet republic achieve its goal of as much as 1.5 billion euros ($1.9 billion) in tourist revenue from the three-week tournament, according to government forecasts. Erste Group Bank AG estimates the revenue will be 400 million euros.
That may not be enough to help the housing industry, which has stagnated since the 2008 credit crisis that started with rising losses on U.S. home loans and spread globally. Ukraine signed a $16.4 billion bailout from the International Monetary Fund as its economy plunged almost 15 percent in 2009. Banks have since raised borrowing rates and granted fewer loans.
The hryvnia has declined 41 percent against the U.S. dollar since the middle of 2008, hurting Ukrainians that took out dollar-denominated mortgages to benefit from relatively low borrowing costs versus rising property prices. The currency may lose another 10 percent of its value after parliamentary elections in October, according to Vladimir Tsibanov, an economist for Societe Generale’s OAO Rosbank unit in Moscow.
Natalia Orlovskaya, a 40-year-old video-producer, took out a 15-year dollar loan in 2006 to buy a Kiev apartment. At the time, the monthly payments of $450 were equivalent to 2,250 hryvnia.
“Now we’re paying more than 3,600 hryvnia, which is a quarter of the family’s income,” she said.
Hungarians, whose country borders Ukraine to the west, suffered a similar fate, when their currency’s collapse against the Swiss franc caused hundreds of millions of forint in bank losses, saddled homeowners with ballooning repayments and stalled the mortgage market. Swiss-franc loans had been marketed in Hungary as a device to protect homeowners. Instead, they have become a burden for borrowers because of the franc’s strength.
The share of home purchases in Ukraine financed by mortgages fell to about 7 percent last year from 30 percent in 2007, at the end of the country’s four-year property boom, according to Dragon Capital, a Kiev-based investment bank. In neighboring Poland, it’s about 70 percent.
“The mortgage market’s had a massive decline,” said Volodymyr Tymochko, the managing director in charge of the company’s real-estate division. “Everything just stopped.”
Kiev’s real-estate market began growing when Ukraine’s 2004 Orange Revolution catapulted Viktor Yushchenko into power. As president, the former central bank chief and advocate for European Union membership encouraged closer ties to the West and a stricter rule of law to protect ownership rights, encouraging an investor boom.
Ukraine’s economy expanded by an average of 7.5 percent a year from 2004 through 2007, creating a middle class of mostly young professionals and married couples that snapped up new residential properties, according to Tymochko.
Like the rest of Europe, Kiev’s housing market ground to a halt in 2007 as losses on U.S. housing debt spread to infect bank balance sheets globally and economic growth slowed. The middle class, the biggest source of demand, was punished the most, said Mykola Tolmachov, the general director of TMM Real Estate Development Plc.
“So many people closed their business,” Tolmachov said in an interview at TMM’s Kiev headquarters. “Ukraine’s investment image is a problem.”
Rising borrowing costs also deterred buyers, causing the number of home sales to drop to 10,024 in the first five months from a year earlier, real-estate brokerage SV Development estimates. At the market’s peak in 2008, 29,915 transactions were completed.
At the same time, mortgage rates jumped to almost 30 percent in 2010 from about 10 percent in 2007, and now stand at around 18 percent, according to Dragon Capital.
Ukraine’s “weak economic performance will continue to weigh on banks’ credit growth and financial positions over the next 12 to 18 months,” Moody’s Investors Service said in a June 1 report. The rating company has a “negative” rating on the country’s banking system and grades Ukraine B2, the fifth- highest junk ranking.
Bad loans will account for about 35 percent of the total by the end of 2012 as real GDP growth decelerates to between 2.5 percent and 3 percent from 5.2 percent in 2011, Moody’s said.
Ukrainian mortgages outstanding fell 14 percent in 2011 from the previous year, totaling 70.5 billion hryvnia ($8.7 billion), according to the central bank. Mortgage loans shrank in the first four months of the year to about 66 billion hryvnia.
In March, the government announced a plan to make home loans cheaper for some families by contributing to the repayments. The 1 billion-hryvnia program for new mortgages would boost the country’s construction industry, Prime Minister Mykola Azarov said at a meeting in Kiev today.
Developers are trying to create special financing arrangements with banks to find affordable ways to get people into homes, even while mortgage rates remain in double-digits.
“Mortgages are still very expensive,” said TMM’s Tolmachov. About 15 percent of the developer’s sales rely on mortgage financing. TMM is working with state-run Oshchadbank.
“They should be in the 5 to 7 percent range,” Tolmachov said. “Unfortunately, banks don’t have the type of resources to provide loans for 20 years at such rates.”
For now, there is no reason for Kiev’s mortgage market to improve, said Ivan Ulitko, an analyst at Erste Bank in Kiev.
“Mortgages are risky because of the very high interest rates imposed on loans and the expected decline in property prices,” Ulitko said. “It’s very hard to find a client with the right risk profile to carry such an expensive loan.”
Myhal considers herself lucky to have been able to buy an apartment four years ago at an affordable mortgage rate of 11 percent. Still, the prospect of finding a new home with enough space to start a family means she would have to take on a higher rate or sell her current apartment for less than the mortgage value. She may have a more radical solution.
“It would be cheaper for us to rent a house in Bulgaria and find a tenant for our flat in Kiev,” she said. “We could live by the sea and have some fun.”