Ukraine's developing mortgage market

Mortgage growth will be a function of new construction. The absence of a centralized system for checking liens and encumbrances on properties hinders the growth of lending to finance the purchases of existing properties. With a focus on new properties, the mortgage market will concentrate on Kiev, where more than a third of new residential construction by value took place in 2000, as mentioned previously.

Besides the volume of new construction, the development of a mortgage market depends on the development of the banking system. Low levels of trust in both banks and the national currency hinder this growth. Memories of the hyperinflation of the early 1990s with the previous currency, the karbovonets, still affect perceptions of the hryvnia, which has been stable except for one period of rapid depreciation during the Russian default crisis of August 1998, when banks had difficulties meeting dollar obligations. Cautious Ukrainians seek alternatives to bank liabilities for their savings instruments, and this must change before the supply side of the mortgage market can grow significantly, and that would include a secondary market for Ukrainian mortgages to further decrease mortgage interest rates. There is no legal barrier to foreign participation in residential mortgages and questionable barriers to this participation in loans on agricultural land, but questions about judicial procedures, especially in the sale of assets to satisfy debts, dampen enthusiasm.7

Banks will benefit from the availability of long-term credit instruments. In 2000, 17.89 percent of bank credit extended in the country was classified as long-term (State Committee of Statistics, 2001: 72), which is not clearly defined but, for comparison, 27.62 percent of SunTrust's loan portfolio was in residential mortgages in December 31, 2000 (SunTrust Banks, 2001: 11). However, given the state of financial markets in the country, development with foreign participation that will drive interest rates down even more is in the future. For a perspective on the financial markets in the country, in 2001 the First securities Trading System, which accounts for 80percent of Ukrainian in-country share trading, had only $200 million in trades for the year, according to the PFTS Public Relations Office. This contrasts with $24.3 billion in equity trades, or more than 100 times the PFTS volume, on the Moscow Interbank Currency Exchange, which is the leading stock exchange in Russia, when Russia's GDP was less than 10 times larger than Ukrainian GDP, according to the World Bank.8

Endnotes

1. The common spelling of Kiev is from the transliteration of the Russian name for the city. The alternative spelling of Kyiv comes from the Ukrainian. Spellings contained in references from sources are in accordance with the language of the source. The default spelling in the paper will be the Russian transliteration. According to the Kyiv Municipal Board of Statistics (p. 214), the amount of privatized residential space in Kiev increased by 1,584,800 square meters from 1999 to 2000 (1 square meter = 10.76 square feet), which represents a 6.44 percent increase in the amount of privatized residential space. The total mount of residential space in Kiev in 2000 was 48,856,900 square meters. For reference, the Kyiv Municipal Board of Statistics estimated the city's population in 2000 at 2,631,900 (p. 158).