Author: Khazar AKHUNDOV
Stabilisation of oil prices and the growth of production in the non-oil sector have a very beneficial effect on the indicators of mortgage lending in Azerbaijan. After the tangible recession caused by the pandemic in 2020, the Azerbaijan Mortgage and Loan Guarantee Fund (AMLGF) has increased funding for housing programs this year, successfully placing bonds and refinancing loan capital. Comparing the experience of mortgage lending in Azerbaijan with similar programs in post-Soviet countries, we can note a number of advantages of the existing mechanisms in Azerbaijan. Nevertheless, in order to make mortgages truly massive and affordable in Azerbaijan, it is necessary to expand the construction of budget housing, introduce leasing schemes and form an accumulative model of housing loans.
Pros and cons
According to the Central Bank of Azerbaijan (CBA), in January-July 2021, the agents banks of AMLGF issued housing loans for ₼230.4m, which is 74.8% higher than in 2020. For comparison, during 2020, the volume of issued loans was ₼257.5m. The relatively high demand for mortgage products this year is due to the favourable market conditions, primarily in the real estate market of Baku, where prices and demand increased. This happens due to the flow of foreign currency into the country, as well as the strengthening of the national currency amid the persisting rise of oil prices in the last six months. Finally, the factor of deferred consumer demand plays a significant role in the increased interest in mortgages.
It is appropriate to note that since the beginning of the year, similar processes have been observed in a number of post-Soviet countries. Thus, in Russia, the growth rate of mortgage lending in the first half of the year was 74%, in Kazakhstan - 116%, in Uzbekistan - 25.2%. On the contrary, in Ukraine and Belarus, the rates of housing lending have shown a slight decline in the recent period.
Obviously, a direct comparison of real estate markets and mortgage programs in the countries of the region is not entirely appropriate, since the market size, average housing prices, annual turnover and the scale of capitalisation vary greatly in these countries, including the terms of lending, as well as forms of access to budget housing.
Nevertheless, according to a number of parameters, the availability of mortgages in Azerbaijan and in its neighbours in the region can be compared. If we consider the conditions for issuing loans and interest rates on mortgages, Azerbaijan's positions look more than preferable. AMLGF issues commercial mortgage for a period of 3-25 years at a rate of no more than 8%. Conditions for social mortgages are even better – the deadline for loan repayment reaches 30 years, and the interest rate does not exceed 4%. In most mortgage programs in Russia, Kazakhstan, Uzbekistan, Ukraine, Belarus and a number of other states in the region, the maximum maturity of a housing loan is limited to 20 years, which is less than in Azerbaijan, but the level of the interest rate is slightly higher. In particular, according to forecasts for 2021, in Russia the average interest rate on mortgages is estimated at 7.7%, and excluding subsidized programs, it rises to 9%. In Kazakhstan, annual interest rates start at 13% on average, in Uzbekistan they reach 22%, in Ukraine - 13.2%, in Belarus - 21%, in Armenia - 12.8%.
In January-July in Azerbaijan, the average annual interest rate of commercial and social mortgage loans was 6.3%, which can be considered the best indicator among the CIS countries.
According to some other parameters, the loan conditions of AMLGF are comparable with the requirements in neighbouring countries, and in some cases are inferior to them. For example, the initial payment on a commercial mortgage in Azerbaijan is 15-25%. Approximately the same level can be observed in other post-Soviet countries, but in the segment of social mortgage with its 10% down payment, Azerbaijan is clearly the leader. At the same time, AMLGF limits its clients to the maximum cost of the purchase of housing, which is ₼150,000 for commercial loans, and ₼100,000 for the social ones. In the large cities of Russia, the maximum cost for housing on mortgage is ₽12m (over ₼273,500), in Kazakhstan this indicator is also comparatively higher.
In terms of the affordability of mortgage programs, there are a number of other factors to consider. In particular, the average level of income in the country, indicators of transparency in salary payments, cost of housing in large cities, stability of the national currency, legislative framework and a number of other parameters. All this together determines the level of the population's ability to pay, as well as the availability and prevalence of mortgages. programs.
From this perspective, the position of Azerbaijan could be better. This was confirmed by the research published in May 2021 by Numbeo, the world's largest database on the cost and quality of life. Azerbaijan dropped 2 point marks and is now ranked the 82nd among 109 countries in the world in terms of mortgage affordability. According to the global rating table, Azerbaijan lost to Russia (65th), Moldova (73rd), Kazakhstan (74th), but is ahead of Georgia, Ukraine, Armenia, Belarus, Kyrgyzstan, and Uzbekistan. In top 5 of the Numbeo rating in terms of mortgage affordability come Saudi Arabia, Puerto Rico, the US, UAE and Denmark.
There is one more objective point that affects the availability of mortgages in Azerbaijan. After two devaluations and another negative period of the energy crisis of 2014-2016, real estate prices in Baku have increased significantly. Today the average price of 1 sq. m of budget housing in new buildings is about ₼1,700-1,800. At the same time, according to the data of Baku Department of Statistics, in the first half of the year, the average monthly nominal salary in Baku reached ₼942.3, that is, almost two times less than the cost of 1 sq. m. In the pre-crisis 2014, both indicators were approximately comparable.
Back in the day, negative devaluation almost completely cancelled our own bank mortgage products, and reduced the practice of loan-free sale of apartments in new buildings. And this situation has hardly changed.
Much or less?
The most popular loan product for the population is a preferential social mortgage through the AMLGF. Moreover, social mortgages are especially beneficial when combined with the purchase of housing in low-cost multi-apartment residential complexes built by MIDA LLC. However, limited categories of citizens still have access to social mortgages and buying apartments in new budget buildings. In addition, all these projects are limited by the financial capabilities of the state budget. In January-July 2021, the fund received only ₼35.5m from the state budget to finance social mortgage.
One should not expect a sharp increase in lending through commercial mortgages either. First, such an increase is limited by the current market conditions, which are mainly determined by the effective demand of the population. Secondly, the extremely prudent lending policy of the AMLGF does not provide for any risky steps to attract unsecured funds or create financial bubbles. By the way, the fund's conservative approach can be considered a good sign that helped ensure the long-term stability of its activities.
Evaluating the work of AMLGF, we should mention that this structure effectively attracts funds from the market by placing its own bonds. So, during the seven months of 2021, the fund attracted ₼105m (31% increase). In general, the fund's securities pack (₼999.6m) are traded at the Baku Stock Exchange. Moreover, the share of mortgage bonds in the corporate securities market is about 96%.
An equally important source of replenishment of the fund's working capital is a successful loan refinancing program. For seven months, thanks to the return of loans and interest, the fund accumulated ₼182.4m, which is an increase of 4.4 times compared to the corresponding period of last year. A competent financial policy of the fund contributes to the growth of its capital, which increased by 5.4% over the reporting period, including the authorised capital (by 19.7%) and reserves (by 8.4%).
During 15 years of the implementation of state mortgage programs in Azerbaijan, they covered 35,100 borrowers, who were provided housing loans for almost ₼2b (about $1.2b). Is it much or less? Probably not so much, given that over the same period, the overall amount of housing sales on the real estate market without the use of loan schemes (due to population and investor savings, as well as preferential instalments of developers) was twenty billion manats.
Nevertheless, in the future, there are opportunities in Azerbaijan for the introduction of new mortgage instruments and the expansion of housing lending. Particularly, the development of the housing leasing system, which provides for the lease of real estate with its subsequent buy-back and registration of ownership. By mid-2021, over 900 apartments were leased out under a leasing scheme with an option to purchase. In the future, a savings-construction bank and an accumulative model of mortgages, both of which have been proposed by the Central Bank for several years, can give extra burst of power to mass housing programs.