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Bad laws belie bold mortgage forecast

A recent government pledge to make mortgages a cornerstone of house and flat construction in the next few years has given faint hope to thousands of Slovaks unable to make first-time home purchases.
But despite the pledge - an August 17 announcement by the Construction and Regional Development Ministry that by 2005 mortgages would constitute 39% of the financing of home construction in Slovakia - analysts say that no mortgage boom is likely to occur unless something is done to reform current mortgage legislation.
"Right now it's just a thing for rich people. Currently you have to have 140% collateral, and because the building you are going to buy can't be used to secure the loan, you need another source of collateral, another piece of real estate," said Juraj Kotian, analyst at state bank Slovenská sporiteľňa.


The Construction Ministry says that by 2005, 39% of new flats like these will be financed by mortgage loans. Analysts are doubtful, saying the government must first iron out legislative and financial wrinkles.
photo: Spectator Archives

A recent government pledge to make mortgages a cornerstone of house and flat construction in the next few years has given faint hope to thousands of Slovaks unable to make first-time home purchases.

But despite the pledge - an August 17 announcement by the Construction and Regional Development Ministry that by 2005 mortgages would constitute 39% of the financing of home construction in Slovakia - analysts say that no mortgage boom is likely to occur unless something is done to reform current mortgage legislation.

"Right now it's just a thing for rich people. Currently you have to have 140% collateral, and because the building you are going to buy can't be used to secure the loan, you need another source of collateral, another piece of real estate," said Juraj Kotian, analyst at state bank Slovenská sporiteľňa.

"It's very difficult, a huge problem," he added. "Things are OK if you are young and you can rent a house with some friends, but if you want to start a family and buy a house or flat it's very hard [to get a mortgage]."

At present, 61% of the financing for flats comes from construction savings funds offered by four select banks. Under the terms of such funds, a customer pays money into an account over a period of years until the sum in the account reaches half the value of a desired property; a credit is then extended for the remaining half. However, reaching the half-way total is often an enormous struggle for Slovaks, with the national average wage at a little under 11,000 crowns per month before taxes ($234).

"If I want to buy a one room flat [in Bratislava] it might cost me 500,000 crowns [$10,500]. To save half of that is almost impossible, it would take me years and years," explained Martina, a 24 year-old office worker in the nation's capital. "Of course it would be much better to get a mortgage and pay for something I own rather than just to throw money away every month in rent," she said. "Really, I don't know why it's so hard to get a mortgage."

Real estate consultants, however, say the problem is twofold. Banks are generally reluctant to lend because they have little legal assurance that they can get loans or mortgages back if clients default. And even if they do end up in possession of a real estate property given as collateral, housing legislation makes it almost impossible to evict people who are not paying their mortgage.

"There are mortgages to be had and plenty of money about, but there is a problem in that 90% of people in Slovakia do not have mortgages available to them because 90% of people in Slovakia do not have stable jobs," added Laurie Farmer of real estate firm Spiller Farmer. "Also, unlike in most of the rest of Europe, you cannot evict someone if they are not paying their mortgage."

"It's almost like lending on the basis of only potential success and not 100% success. Mortgage lenders are worried that they will not get their money back if something goes wrong," he said.

Farmer added that new legislation could help solve this problem. "It would help if we had legislation that would deal with the situation that when people don't repay their mortgages the lender cannot recover that mortgage."

The government is at present not planning any legislation to facilitate the availability of mortgages. And while last year an amendment to the Banking Act introduced a government subsidy, currently of 6%, on mortgage interest rates, in an effort to get the mortgage market moving, according to the Construction Ministry the task of keeping the state budget within limits is stifling more legislative changes.

"Every law on mortgages has to be proposed by the Finance Ministry, and they are trying to watch the state budget, so there is an unwillingness to pass any more legislation," said Pavol Giller, director of the department for housing construction finance at the Construction Ministry.

There is also little sign that the controversial legislation on eviction is likely to be changed. "It's an incredibly sensitive political issue. But it would need to be changed to make a difference [to the mortgage market]. Even still, the market will grow in the future," said Vladimír Tvaroška, economic advisor to Deputy Prime Minister for the Economy Ivan Mikloš.

Despite the problems with mortgage legislation, more banks are looking to offer the service to clients. The highly-successful Tatra banka, along with Československá obchodná banka, Polnobanka and Bank Austria-Creditanstalt are looking into launching mortgage services.

Falling yields on government securities have left many banks looking for new places to put their money, and the mortgage market, although unlikely to yield huge profits for banks in the next few years, is viewed as one with enormous potential.

"It's a new market with a lot of room for growth. Even if there are no gains for banks in even the next three years, it is still a good market to be in," said Tomáš Kmeť, banking sector analyst at Slovenská sporiteľňa bank.

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