MORTGAGE RISKS

The demand for mortgages in Azerbaijan remains high, but the prospects for 2015 tend to indicate that care needs to be taken. At least, until the hullabaloo about another devaluation has died down, the situation both on the banking market and the real estate market will not become stable. 

Risks and problems

The problems on Azerbaijan's mortgage market are caused by the uncertainty about property prices, which is linked with fluctuations in the dollar exchange rate. The fact is that for this reason the value of property is increasingly indicated in dollars of late, while buying and selling is conducted in manats just as before.

Taking into consideration that the process of acquiring housing on a mortgage takes around 30 days (the client has to submit all the necessary documentation in order to conclude the agreement, select the flat that he wants to acquire, get the loan and so forth), in that time the dollar exchange rate may change which will make the deal disadvantageous either for the seller or the purchaser. As a result, one of the sides is forced to pull out of the agreement. Here we are talking about the initial agreement between the buyer and the seller, in which the bank is not involved. These contracts are concluded at best in the form of an agreement on obtaining an advance, but more often than not this happens on the basis of a spoken agreement between the parties.

The figures relating to this over the last few months are not comforting: in February alone every second mortgage agreement relating to the real estate market was cancelled. The director general of the "MBA Group" consulting company, Nusrat Ibrahimov, explained that the situation obtaining is due to a leap in the manat exchange rate that occurred in the third 10 days of that month. It is understandable that this was the first reaction, since the rates of cancellation in March were considerably lower and their share in the overall number of agreements concluded was 6-7 per cent.

Moreover, the banks note that there is still a big demand for mortgages, but the real estate market is continues to be in a state of uncertainty.

Today the banks are continuing to issue mortgages mainly via Azerbaijan's Mortgage Fund, i.e. at the expense of the state. They have suspended the financing of housing purchases within the framework of their own programmes, which may be linked to the common credit policy. You see, after the manat exchange rate was corrected, the banks reduced or completely suspended the volumes of loans issued as a whole.

Some banks explain putting the brake on their own mortgage programmes by the absence of surplus finances. 

We would like to note that at the present time, 30 out of 45 banks in Azerbaijan are issuing loans through the Mortgage Fund, while the rest of 

the banks have either issued loans within the framework of their own programmes or have stopped issuing mortgages altogether. In January and February 2015 loans to the tune of 14m manats were issued via Azerbaijan's Mortgage Fund, which is 2.19 per cent more than the similar figure for 2014. Up to the present day, the number of borrowers who have obtained a mortgage has reached 16,452, and the total volume of financing is more than 660.28m manats.

The government is prepared to provide back-up

Thus the government has not suspended the financing of mortgages, but on the contrary the Central Bank of Azerbaijan (CBA) has submitted a proposal to the Cabinet of Ministers that the volumes of financing should be drastically increased. As CBA CEO Elman Rustamov recently stressed, the proposals included an increase in the volume of financing, both with regard to mortgages for social projects as well for ordinary mortgages, the financing of affordable housing construction and expanding the opportunities to obtain mortgages in the regions and so forth.

The Central Bank is moreover set on creating a mechanism which will allow young families as well as the medium-income population, for example teachers and doctors, to acquire housing with a mortgage. The Central Bank is also planning to allow new-builds, which are the object of the mortgage, to be accepted as security. Today the population is known to be experiencing great difficulties with regard to this element owing to the existing restrictions, according to which only property on which there is a deed of purchase can serve as security for the loan. Those wishing to buy housing are forced to ask parents or neighbours to offer their own property as security so that a mortgage can be obtained.

Taking these problems into consideration and also basing itself on world practice, the Central Bank is proposing going over to a system of primary registration of real estate. Thus, in a number of developed countries, a document equivalent to the right of ownership is issued in relation to flats in buildings, whose construction has been permitted, but has not yet started. Thus, flats that still under construction can be used as mortgage security. In Azerbaijan for the moment agreements concluded between the construction company and the client are not recognised by the state, and the rights of client are not registered.

As Azerbaijan's Finance Minister Samir Safirov noted at his recent briefing, increasing the volume of mortgages in the country is one of the steps aimed at eliminating the cash shortage on this market, and therefore the Finance Ministry is only too pleased to support these measures. "We can agree to increase the sums of mortgages. The relevant work is already being conducted. I believe that the Central Bank will propose additional means for activating the market and, if the need arises, then the government will provide an additional state guarantee," he said. In his view, changes in issuing mortgages will also provide support to local producers of construction materials, as well as increasing liquidity on the market.

The golden rule

At the same time, the price of property is not the only thing to affect the demand for mortgages, and here, as mentioned above, certain chaos and unpredictability reigns for the moment. Since the beginning of the year real estate experts have being making various forecasts  connected both with the change in the manat exchange rate, which has remained stable for a lengthy period, as well as with the situation in the banking sector.

Whereas the year started with price rises, according to the results for the first quarter the prices in dollars have dropped by 18 per cent, but those in manats have risen by 10 per cent. 

According to data from the "MBA Group" director general Nusrat Ibrahimov, the number of properties on offer has decreased by 8.3 per cent, although on the whole, a growth in activity has been observed on the housing market throughout March. The population has started to invest its savings in real estate so as to safeguard them against possible inflation. Moreover, the seasonal factor (April-June is the period of the most activity) is most likely to have an impact on the market, so experts are expecting certain changes. N. Ibrahimov thinks that the price of housing in Baku will rise for the moment, but by the end of the year a certain fall in prices is to be expected, owing to which interest in buying real estate should be boosted. Although once again, a great deal depends on the financial possibilities of the potential clients. This means that activating this market will actually facilitate an expansion of access to mortgage resources. 

But no borrower is protected against the risk of losing his regular income at least for a certain time. You see the mortgage repayments have to be met in any case. In this connection, a number of pieces of advice can be offered to cut down the risks of being unable to meet the repayments. In order to avoid the risks of devaluation, loans should be taken in the currency in which you have a stable income. It is desirable that the deposit [first payment] taken towards the mortgage from your savings should be equivalent to something like 20-30 per cent of the property price. It is not wise to sink all of your funds into the deposit, since a certain amount of savings need to be retained as a "safety buffer" in the event that you lose your income. 

It is best not to keep your savings in the bank from which you have taken the mortgage. In the event of the bank's license being withdrawn the amount of your deposits may automatically be written off to cancel the loan. You should only take a loan from a reliable and stable bank, which can agree to restructure you debt in the event of force majeure incidents or repayment problems. You should be careful about the amount you borrow, so that no more than 40 per cent of the family budget is spent on the mortgage repayments. It is more reliable to take out the compulsory insurance to safeguard yourself against all the possible risks that might affect the mortgage repayments.

From an economic point of view, paying off the mortgage ahead of time is advantageous to the borrower when there is low inflation. In this case the money slowly loses value with time. With regard to this, the Azerbaijani borrower does not need to worry for the moment, taking into consideration that the Azerbaijani government has aimed to keep inflation low.