On May 20th, President Zelenskii in a press conference promised that the mortgage rate in Ukraine would drop to 10%, from the high teens just several months ago. While 10% is not a low interest rate by Western standards, with rates in the US around 3-4% and effectively negative in some countries in Europe, it is the point at which it starts to make sense for buyers on the Kyiv market to start to think about how to utilize this credit. If the rate does end up dropping to this level, say by the end of 2020, what can we expect from the residential market in the historical center?

Background:

As a rule, the secondary market in Kyiv is extremely under-leveraged. To this day, the overwhelming majority of owners of such properties inherited them basically free of charge from the Soviet Union, in a process called “privatization.” Basically after the collapse everyone who had their officially registered address at a specific property received an equal share (usually) of said property. What this means is that the current owners of properties did not spend capital to acquire these properties, and very few were willing or able to take any kind of home equity loan to extract cash, leaving many of these owners “property rich and cash poor.”

In the hectic 90s, a proper market was just starting to form, and those with hard cash and some foresight were able to pick up great properties for a fraction of what they would be worth just a few years later. An expat who was in Kyiv in the 90s told me how she spent a week drinking and negotiating with a family of 4 until she finally convinced them to sell their 200m2 place for $20,000. Such a property would easily be worth $350,000-400,000 even in today’s slumped market. On the other end of the spectrum, a friend of mine who in the 90s emigrated from Ukraine to the US as a boy with his family told me how his parents sold their apartment just outside of Kyiv in order to be able to pay for 4 plane tickets to the States.

By the early 2000s in Kyiv there was something that resembled a market, with prices comparable to where they are now. Not longer after this, in the mid 2000s, prices started to rise along with many other assets around the globe, pushed sky high by the rocket fuel that is cheap credit from financial institutions. I have heard more than one seller lament that they wish they had sold back in 2006-2007 when they were offered $6000, $8000, or even $10,000 per square meter. With a lack of sophistication or global perspective, they had no way of knowing that they were at the tail end of a massive worldwide asset bubble.

Once this bubble popped in 2008, they saw prices drop by about 50% across the board. A tremendous shift downwards, but not especially cheap given the problems in the country and lack of general development of the market. Credit had not totally disappeared from the market, however. In late 2013 and 2014, Ukraine entered a very tumultuous period that would be even worse than the 2008 crash. The violence of war in the east combined with an almost total economic collapse caused another 40-50% drop in real estate prices across the board. Many banks started to collapse, and many borrowers, who mostly took out loans denominated in USD or EUR, lost their properties as banks foreclosed on them.

From 2014 and even somewhat up until the present day, the banks struggled to clear their books of thousands of properties that they had seized from debtors who failed to pay their loans. Due to a combination of banks being saddled with properties they didn’t want, people very hesitant to take on loans for fear of another crash, and high inflation that kept the key interest rate between 17-22%, the mortgage market has been effectively dead until well into 2020. Enter Zelenskii’s promise that the mortgage rate will soon drop to 10%.

IMMEDIATE EFFECT ON THE MARKET:

Some sellers that are paying attention, and who might have been desperate for liquidity until the president’s comments, might try to hold out a bit longer. Seeing the possible light at the end of the tunnel, these sellers could try to wait and see if prices rise in the coming months before selling.

Alternatively, depending on how banks structure such loans, and if the sellers do not need the whole value of the property in cash right away. They might take out some percentage of the value of the property (up to maybe 40-50%) to cover their cash needs and wait for further increases in property values as credit starts to flow and the economy sees a steady recovery from the Covid-19 induced interruption to economic activity.

MID-TERM EFFECTS:

Assuming the President’s promise starts to be discussed by the ones who actually have to supply this credit – the banks – we might see a rush of buyers trying to pick up places before the credit actually hits the market. Once it does, the purchasing power of all buyers eligible to receive such loans will be greatly increased in a very short period.

Given that prices are down at the early 2000’s level, and significantly cheaper than other Eastern European capitals, the price curve could quite quickly head sharply upwards. As a still developing country, this “low base effect” almost certainly means that modest annual price increases of 3-5% that you might see in a developed country could easily be surpassed for several years to come.

Structure of mortgages:

As important as the interest rate is how exactly the loans will be distributed to homebuyers. More than a year ago I briefly discussed with one Western-associated bank the status of their mortgage program. We didn’t get to the interest rate, but they did mention that they would only be willing to give a loan up to 40% of value of the property, with the value determined by some unknown algorithm from some unit of the bank. Also, it was mandatory that the property already be rented out to a reputable tenant, giving the bank more assurance that the loan could be paid from rental cash flows.

These terms were not appealing to any of our clients at the time, so I didn’t pursue it further, but it will be interesting to see if they will relax the requirements and how much. Obviously, for mortgages to have the maximum impact on the market they need to be available to eligible buyers before they purchase. Otherwise, what we would see is only all-cash buyers being able to acquire the properties and then re-financing at a later date. This would mostly benefit investors, which is surely not the intent of President Zelenskiy’s promise.

Extra content:

Given the collective culture of the Soviet Union, this meant that not only would minor children receive an equal share, but in some “communal” apartments you might have ended up with 6, 8, 10, or even more owners of a single property. While various factors (natural causes, gifting to family members,sales, etc)have often meant that these numbers are more often in the low single digits, there is still a significant amount of properties with several owners.