Loose norms boost lagging mortgage volumes

In March this year, the central bank decided to loosen crediting conditions and cut the standard down payment rate for housing and mortgage loans from the initial 25 percent to zero, depending on the value of the transaction and collateral. The regulations also added to the general indebtedness degree, which from thereon stands at 65 percent for all types of loans, up from the former maximum of 40 percent.

Since then, the norms have had differing effects on banks' businesses, depending on the type of housing loans they offer: traditional mortgages or bauspar loans.
Alpha Bank, leader on the local housing loans market, was the first lender to adapt its loan conditions to customers' individual profiles. In March, the bank came up with mortgage loans that required no down payment and had boosted indebtedness levels. The new level of indebtedness was acceptable only for Alpha Bank clients with incomes above EUR 1,500 per family, all other clients having to keep their loans under the 55 percent rate of indebtedness.
Since then, the changes for the better have been apparent, said Sergiu Oprescu, Alpha Bank executive president.
“Mortgage loans have gone up by about 3 percent each month in the first three quarter of the year. In the June-September period, when the new norms were in place, the monthly growth rate for mortgage loans went up to about six percent. Adding up, it is just like a car that used to go with 3 miles per hour now goes 6 miles per hour,” said Oprescu.
Even if one excludes the growth coming from seasonal changes – for instance, more houses are built, bought and sold in summer – the influence of norms has still been significant.
“In Alpha Bank's particular case, the growth rates have been the same as the market's,” said Oprescu.
“Starting with the second half of this year, the dynamics of housing loans were greater and much of it can be explained by the looser crediting conditions adopted by most of the banks on the market,” said Petre Tulin, head of HVB Banca pentru Locuinte (HVB BpL), a lender specializing in granting bauspar housing loans.
The Bauspar system is a collective self-help system consisting of a savings phase of at least 18 months prior to the investment and a loan phase after the actual investment. In Romania, clients also receive a state premium of 15 percent of their savings annually, without exceeding EUR 150.
On this particular segment of the market, namely the bauspar loans portion, the effects of the change in regulations have been limited, said Adrian Resmerita, spokesperson with HVB BpL.
“Discussing solely HVB BpL's case, which was only launched in 2005 and is now grating its first loans, the new regulations did not encourage our clients to take a loan at the end of the 18 months of saving. Considering the profile of our customers – low and medium income individuals – we will see that the effect of the norms is to prevent the immediate allocation of the loan and increase the saving period,” said Resmerita.
“Besides, our clients choose our products firstly because of the returns they get in the savings period. They are less interested in getting a loan immediately,” he added.
“We are still at the beginning of our activity, therefore we do not expect a significant increase in bauspar loans in the next two years. We expect the rise to appear afterwards, when many of the clients that closed saving-crediting contracts in 2005 and 2006 will apply for bauspar loans,” said Tulin.
Regarding the negative effects of looser crediting terms on the volume of non-performing loans in the system, both Oprescu and Tulin said they were not a cause for concern.
“As long as the real-estate market grows it is unlikely that clients will no longer be able to repay their loans, as they would have more and more to lose. We could expect a rise in the number of non-performing loans if there was a shock on the real-estate market, but not when prices continue to go up,” said Oprescu.
“I expect that in the coming period the volume of non-performing loans in the housing segment will go up, especially due to increases in interest rates and the depreciation of the national currency. However, I do not think this increase in non-performing loans will affect the financial stability of the system considering the low levels of financial intermediation in Romania and the solidity of the banking system, which is dominated by strong European financial groups,” said Tulin.
Whatever negative effects might appear on the housing loans market, they will not necessarily be linked to the norms introduced in March.
“They will rather come from the way in which banks are able to manage the specific risks attached to grating such loans. In this context, I think that some banks' habit of grating loans on very long durations (more than 35 years), with variable interest rates and sometimes denominated in Swiss Francs (CHF) or Japanese Yen (JPY) is very risky,” said Tulin.
Indeed, an important characteristic of housing loans in Romania is that almost 90 percent of them are denominated in foreign currency, which means that the exchange risk must be properly assessed and administered. So must each client's profile.
“The degree of innovation on the local housing loans market is closely dependent on the education of borrowers. One cannot sell spaceships to clients who have not yet traveled by plane. One example are the loans in CHF and JPY, which have a supplementary exchange risk attached to them. Are the clients capable of understanding the triple risk attached to such loans, coming from the yen to dollar rate, then from the dollar to euro rate and then from the euro to RON rate?” Oprescu wondered rhetorically.
He said Alpha Bank had not introduced CHF or JPY denominated loans, although it had thought this option through for a long time.
“If we want to have a long-term partnership with the clients, I cannot expose them to immediate risks and then apologize. I cannot tell I was not aware that they might not be good at assessing the risks. Because I should have been,” said Oprescu.
As regards the evolution of housing loans in general, both experts expect them to go up at a steady pace and exceed the growth rates of consumer loans and personal needs loans in a short while.
Analyst Ionut Dumitru of Raiffeisen Bank said mortgages will grow to the detriment of consumer loans.
“Mortgages are minuscule at this point, but have the biggest development potential. In Romania, 80 percent of retail loans are consumer loans, and merely 20 percent are mortgages. In the Euro zone, it is the reverse: the ratio is 30 to 70 percent in favor of mortgages,” said Dumitru.
However, the distance to Western European mortgage volumes will take more time to cover.
“It is hard to tell when mortgages in Romania will get to European Union levels, due to the big differences in the mortgage volumes and their weight in the Gross Domestic Product (GDP). For instance, mortgages in those countries represent about 50 percent of the GDP, while in Romania their weight is under four percent. Under these circumstances, I believe we will be able to talk about values comparable to levels in Western European countries after at least ten years,” said Tulin of HVB BpL.
Oprescu said the catching-up process might take even more time.
“At the end of 2006, mortgages per capita at individual level represented about 1.8 percent of the European level. At the end of 2007, they are estimated to reach approximately six percent of the European average. Even if we start from the idea that the other European countries will have marginal growth rates in the coming years, it will be more than 15 years until Romania reaches the same relative level seen there, even if the segment experiences a very strong growth,” said Oprescu.
If one considers what share of non-governmental loans is represented by mortgages, the European level is about 70 percent, while in Romania it is roughly 15 percent, he added.
“To grow to 70 percent, we would need about eight to ten years, even if growth rates continue to remain at high levels,” said Oprescu.
The two bankers said products on the local housing loans market are competitive with products available elsewhere in the European Union.
“Prices in Romania are at the same level as elsewhere, with the sole difference coming from the cost of mandatory reserves. The margins that can be decided by the bank are even lower than in other countries,” said Oprescu of Alpha Bank, who added that increased competition on the market has further pushed banks' loan margins down.
Tulin also brought up the problem of the high minimum mandatory reserves.
“The price of financing products on the Romanian market is higher than the price of similar products in other European countries, but this price must be analyzed from the perspective of specific conditions in our country. A big part of the high price of loans comes from the minimum mandatory reserves and the bigger risk premium. Also, in the case of banks which are not subsidiaries of foreign banks, there is also the question of the high price of financing,” said Tulin.
Adding to the cost of housing loans in Romania is also the US subprime mortgage crisis, according to Antonela Marchievici, head of real estate department with UniCredit Tiriac Bank.
“Romania is generally protected by the crisis on international markets, as the fundamentals for economic growth are healthy. Only banks will be affected by this crisis, as the price of refinancing from external markets has gone up. Most banks in Romania get financing from Europe at higher costs, which will eventually surface in the prices paid by developers and individuals,” said Marchievici.
She said the effects of the international crisis will appear in the price of houses in the next three to five years.
Related to the booming prices of real-estate properties in Romania, Oprescu ruled out the event of a bubble on the local market followed by a steep correction in the prices.
“I do not think there is a bubble, but there are certain local segments of the mortgage loan market where prices have already reached a plateau that would be very difficult to surpass. We are talking about certain segments, not the entire real-estate market,” said Oprescu.
For example, if one area of Bucharest has developed too much and the price of houses in that area have gone up really fast, although there is little or no infrastructure in that area, there might be some corrections in prices of houses located there, the Alpha Bank head said.
“Similarly, there might be corrections in Bucharest, where the market is much more intensely tapped by banks and developers, and prices are much higher than in any other parts of the country. However, the market in its entirety does not seem to have a bubble, as there are still many projects that can be developed outside Bucharest where prices continue to be attractive,” said Oprescu.

Ana-Maria David