Central Europe's mortgage markets to avoid US fate

By bne IntelliNews September 4, 2007

Jan Cienski in Warsaw -

Central Europe's stock markets have lurched down and then back up in synch with Western European and US markets, buffeted by the fallout from the sub-prime crisis. However, the mortgage markets in those countries are very unlikely to suffer the same fate as that in the US.

The reason is that the markets in Poland, the Czech Republic and Hungary are much less developed than in the US. In most countries the ratio of private mortgage loans to GDP is only about 10%, while it is about 100% in the US and about 75% in the UK. That means that lenders are still dealing with prime borrowers, says Emil Szweda, an analyst with Open Finance, a personal finance advisory firm.

Crucially, once those loans are made, they are kept by the banks that made them and not bundled and securitized as they have been in the US. A recent study by the International Monetary Fund found that securitization of loans was so low in most European markets as to be almost impossible to measure.

With banks holding loans until maturity, they tend to keep a much closer eye on the quality of borrowers, knowing that riskier loans cannot be sold on to other investors.

Marcin Mrowiec, an economist with Poland's BPH bank says: "One of the arguments supporting that thesis that we are not in danger of seeing an American-style sub-prime crisis is that the rules for making loans are much stricter here and that we have only had a mass mortgage market for a few years. That means banks are lending to prime borrowers, who have a much better credit profile than on the American sub-prime market."

Just three or four years ago, mortgages in Poland were quite hard to get, and 100% mortgages were unknown. While lenders will now grants loans for the full value of a house or apartment, exotic US innovations like "teaser" rates designed to lure in borrowers or "no-paper" loans, under which borrowers had to provide no documentation, do not exist in Central Europe. Last year in the US, about 50% of all sub-prime loans, which made up about 15% of the overall mortgage market, were granted on such a no-questions-asked basis.

Capital gains

Other differences include that real estate prices throughout the region have continued to do well, with most owners sitting on very large capital gains. In Warsaw, the average apartment price has more than doubled over the last two years. While such rapid price increases are now a thing of the past in larger cities, there is no sign of a price drop.

Strong economic growth in Central Europe is cutting unemployment and propelling wages higher, which is increasing clients' abilities to make their mortgage payments. In Poland, where the economy grew at a 7.4% annual rate in the second quarter, wages rose by about 9.0%. Even with recent interest rate increases by the central bank, the average client has a better ability to pay than a year ago.

"We can be calm about trends on the labour market, which means that many households will have growing credit capability," says Szweda.

Finally, about half of Poland's mortgage loans are made in Swiss francs because the interest rate tends to be two or more points lower than those denominated in zlotys. Romania and Hungary have even higher rates of foreign-currency loans. The Czech Republic, where interest rates are below those set by the European Central Bank, is an exception.

Because local currencies like the zloty have risen against the franc in the last few years, most borrowers are still sitting on substantial exchange rate gains, despite recent interest rate increases in Switzerland.

"Summing up, we don't face a sub-prime crisis," says Mrowiec. "The risk is only a scenario whereby the sub-prime issue sets off a global fall in real estate values – then the results would be felt by us."

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