Nowhere to live. Without mortages, children like these will be unable to afford houses when they grow up.Vladimír Hák-Profit
Citing empty state pockets, István Harna, the Minister of Construction and Public Works, announced on November 17 that the government could no longer offer loans to citizens wanting to build homes and flats.
"The State Housing Development Fund has no more funds to satisfy eligible applicants," said Harna. "So far this year, the fund has been unable to satisfy 147 applications from 1997, amounting to 82.5 million Sk [$2.29 million]," he added.
According to Harna, so far this year the fund has received 8,631 applications totalling 4.9 billion Sk ($136 million), but has no money left in its coffers. "The previous administrators of the fund used up money allocated for 1998 in July this year when they used it to satisfy applications submitted in 1997," he explained.
Harna's announcement means that first-time home owners have virtually no chance of securing enough money to build or buy a new residence. It also means that the contractors and developers engaged in construction projects with state help will have to find other financial sources to complete their housing projects.
"The insolvency of the fund will have a negative impact on our projects," said Jozef Radošovský, project director with Bratislava construction company Sibamac. The company has already started a housing project of 193 new flats in the western Slovak town of Stupava. "We counted on the fund to cover about a half of the costs (500,000-650,000 Sk) per flat, but now we will have to tell our clients to find the money somewhere else," he said.
Slovak law does not allow the ministry to forbid the submission of applications for loans from the housing fund. But as Jozef Landl, director of a district fund office in the western Slovak town of Malacky explained, the ministry had in fact asked fund administrators to discourage loan applicants gently.
Landl quoted a letter circulated to district fund offices by Ľubor Čuda, general director of the housing section at the Ministry of Construction on November 18. "We ask you [the officers] to warn applicants that their applications cannot be approved, since the [money available to the] fund has been used up," wrote Čuda in his letter.
"In other words, you can apply, but the application will return to you with the remark that you should apply after the state budget has been passed," Landl explained.
The insolvency of the fund has left homebuyers in a quandary because mortgage programmes in Slovakia are prohibitively expensive.
Mortgages, currently offered by three banks (VÚB, Slovenská Sporiteľňa and Hypo-Bank Slovakia), bear annual interest rates of between 13 and 15%, compared to the fund's generous 1 to 3% tariff. "Once the interest rate goes over 10%, it becomes unbearable for citizens," said Pavol Giller, director of the economic and construction development department at the Construction Ministry.
An even greater problem with mortgages, Giller continued, was that Slovak domestic banks were extremely short of funds and were unwilling to lend money to homebuyers, even at the high current rates of interest.
But Giller insisted that mortgages would eventually replace the state housing fund as the most common home-financing option. The government was preparing a system of 'modern mortgages,' he explained, where the money for building a house does not come from the bank itself but from investors who buy 'mortgage bonds' issued by the bank at an interest rate of about 20%.
After the client pays back the loan, Giller explained, the bank pays off the mortgage bonds held by the investor, and never has to dip into its own resources to finance housing projects.
The only fly in the ointment is the fact that the bank must pay 20% interest to the investor, but would only charge housebuyers 13% on the money they borrow, creating a 7% shortfall "which makes the mortgage ineffective and uninteresting for a bank," said Giller. To his knowledge, Giller added, none of the three banks entitled to issue mortgages have used the 'modern mortgage' scheme so far.
And that, according to government deputies, is where the state enters the mortgage picture again. Róbert Fico, a deputy with the former communist SDĽ government party, opined that interest rates could be ratcheted down to 7% if the state were to subsidize the difference between yields on mortgage bonds and those on mortgage loans.
"If mortgages totaling one billion Sk (for example two thousand loans, each of 500,000 Sk) were to be provided, 56 million Sk in state support a year would be enough to lower the current interest rate (average 14%) to 7%, which becomes more interesting for citizens," he wrote in an article concerning flat construction in Slovakia.
Under these conditions, mortgages should be more widely available to home buyers while mortgage bonds should become more interesting for banks. "Banks will gradually have to realize that these bonds are safe securities," said Martin Barto, an analyst with Dutch investment bank ING Barings.
However, Barto said that the government's plan to subsidise interest rates for mortgages was scarcely realistic at the moment. "I can't see it," he said.
As for the future of the insolvent housing fund, Barto said that it could no longer serve as a substitute for mortgages. "The fund is not a market institution at all, but it should serve as support for socially weak families that cannot afford mortgages," he explained.
The government is already at work on revising the law on the State Housing Development Fund. The current law says that every citizen able to pay off a loan can get a subsidy from the fund. "Thus, money can be provided also for the construction of luxurious apartments and houses," criticised Harna, adding that since this is against the basic goal of the fund, the ministry was trying to ensure that housing subsidies go directly to those most in need of the money.
The new law, said Giller, intends to set limits for the cost of housing projects, the number of rooms planned, the average wage of the applicant and other factors.
