What threatens mortgage market and housing construction in Georgia?
FROM THE REDACTION
The world’s leading economists are alarmed by the US mortgage crisis. It was the most profitable and liquid market of international investments.
Citizens of the United States took loans and invested in housing, hoping that apartment prices would increase on housing market. Housing business became so popular in the United States (as well as in Georgia) that banks set quite liberal approaches – covering housing expenditures without initial payment. They face crisis today. According to the latest data, Merrill Lynch – financial management and advisory, wrote off the credit amounted to USD 8 billion. The same happens in England and Europe. The process created the problem of liquidity in Commercial banking world system, including in Kazakhstan and the places with lines of credit from the United States. Part of them was invested in Georgia as well.
As president Bush remarked, he will support some of really poor citizens and do his best not to leave them without accommodation. Although, according to experts, the above mentioned concerns only the 10 % of the citizens. Others are about to go bankrupt.
Therefore, this is not a solution. It naturally concerns Georgian housing construction as well, for important foreign capital has been invested in it. Its growth rate was high during the past years. What problems and tendencies may be formed in this field?
Below you can find world market survey of the field – (October), as well as Georgian Market survey together with Dimitri Japaridze, Professor.
Signs and symptoms:
– A problem occurred on the US mortgage market approximately In July – August. It suddenly turned out that in the US mortgage industry about 2 million 200 thousand mortgage contracts were under the threat of default.
There were certain signs indicating it earlier. International Monetary Fund noticed that the number of possible loan defaults on the US mortgage market was increasing. In 2000 – 2006 number of default mortgage contract on the US market was 400-450 thousand per year. In 2007 it is 750 thousand. 950 thousands are expected for the year of 2008. So, number of mortgage agreement defaults has doubled. The US real estate market price is about to change approximately in 9% . This is a huge indicator for American market as for today price decreases from 2% to 3%. During the past years American banks have shown unprecedented liberalization concerning giving mortgage loans. They gave mortgage loans to the customers having positive credit history without any initial payment. The tendency lasted from 2000 to the year of 2006. During this period majority of citizens started taking mortgage loans and participating in individual speculative games. The loan taken in 2002 was covered in 2005 and 2006 with the cost of the real estate that was owned by the debtor. The price difference during the given period had an utmost importance. This practically became a serious source for individual investment. Banks made one more mistake: while banks in our country give 50 – 70% of the real estate total cost to debtors, American banks increased the indicator to 100%. Therefore, the process of full liberalization had started in the United States to keep the growth of market, economy and income dynamics for American customers. Following to the cycle nature of economy, stagnation begins at certain stage. A big number of uncovered loans have accumulated, therefore banks, investment funds, brokerages and hedge funds brought the above mentioned real estate for sale.
Wall Street’s secret plan
Approximately in 2003-2004 Wall street finance engineering have worked out a strategy to be competitive to Asian Securities.
According to Wall Street strategy passive American product was created in the end that had a high profitability and it was supported by a serious rating company view. One of the best means of investing was created on American market, funds began to take cheap means. Cheap sources from other countries (Japan, Netherlands, Britain and China) moved to American market.
As for china, there is an example, when USD 3 billion was directly invested in one of American investment funds from China’s state monetary reserves. This happened about two month prior to August crisis. After about two or three months the market price of the above mentioned fund fell by 30 %. The same happened toward the funds of France, Netherlands, Germany on American market. Americans blame “Paribas” that these speculative cause and reason connections were crated after “Paribas” announced that he stops the operation of its three investment funds in America by the reason that he can not regularly estimate the cost of his assets. This indicated that assets on financial market are difficult to estimate and forecast. Europeans blame American market in over demonstrating American securities and real estate attractiveness on markets. After developing these types of tendencies it is natural that liquidity problem arises on financial market. Withdrawal of cheap resources being invested on American market began. Accordingly the problem of liquidity moved to British market, that is so closely integrated with American economy and 5 billion pounds were taken away.
Government support
In the US as well as in Britain the government, as a regulating body of a market and economy expressed their positions. Representative of the British government remarked that a state will interfere in this crisis to regulate depositors’ problems. According to the British legislation 90% of deposits are state guaranteed within 30 -35 thousand pounds. The US government announced that government will interfere and support the improvement of the given market, about 200-220 thousand mortgage contracts will be kind of saved. As for solving private sector and investment funds’ problems, according to government, it is impossible on the basis of state resources. Besides the reasons of the tendencies’ origins and general digital parameters, there is also a social physiological conclusion. Wile provoking the crisis customers got in the biggest troubles that followed the liberal policy of banking sector on the mortgage market and got involved in a huge mortgage liabilities. Although, for general economic estimation, it is worth noting, that the problems are localized on mortgage market and haven’t moved to other industries.
Situation in Georgia
In order to estimate the effect of the events on Georgian economy we should concentrate on the following issues: how Georgian economy is intergraded on the global economy at this stage and what is the scale of this activity.
The main issue of the given problem in the American economy is the fact that about 30- 35% of general assets is the mortgage loan share. In Georgia mortgage loans amount to GEL 600 million. According to the latest data banking assets amount to about 8 million and equals to 7-8%. Comparing 7-8% to 30-35 % means that we face different problems and issues. Besides, it defined 4% of Gross National Product, mortgage industry share is not so essential in the country’s economy and a short term strong changes are not able to affect the sphere. Georgian banking practice concerning mortgage loans is quite conservative, that is a positive aspect. In case of any type of stagnation, negative effect on financial mechanisms is ensured in comparison with American markets.
Georgia inherited from the old economic system shortage of housing resources on the market. If we take Tbilisi as an example, we will see that the above mentioned product is still rare according to supply-demand, that is used for this type of analyses. There is a great demand on the market. Demand will exist till the deficit is completed. The aspects affect the influence of the crisis.
As for real estate prices, their growth rate will supposedly fall soon. For the past three – four years the prices increased from USD 250 to USD 2500, that gives a huge possibility to individuals, business persons and especially companies to make investments. Are Georgian Banks about to face the liquidity problem? The answer requires Financial resource analyses. In America-Europe scheme we have noticed that important financial resources have moved to American market as mortgage loans
Financial resource in our country is presented by investment growth for the past 2 – 3 years.
Investment dynamics amounted to 1, 2 billion, this year it reaches 2 billion.
In my opinion, financial resources that flow to Georgia in foreing direct investment show the economic growth perspectives and is releated to certain refoming environment. Therefore, short term crisis on Western markets may not influance it. Banking policy in our country is not so liberal as in the West – they demand to cover the part of market cost from the debtor, that is quite enough for covering market loss.
Although housing price growth rate may fall, it may not be an exception in the year of 2008, in spite of it, this field of businessis about to be one of the most attractives next year as well. Housing area still remains to be rare, that plays an important role in the above mentioned process. Many people having real income build houses in order to improve housing.