Romania's buoyant first-tier cities drive up mortgage lending

Romania's buoyant first-tier cities drive up mortgage lending
Wage growth in major cities like Sibiu (pictured) has resulted in robust demand for housing.
By Iulian Ernst in Bucharest July 25, 2018

The stock of retail mortgage loans in Romania increased by 13.5% y/y to RON69.8bn (€15.0bn) at the end of June, Romania’s central bank reported. 

Mortgage lending remains the most dynamic segment of the banking market, but the central bank is increasingly concerned by the sluggish corporate lending.

Behind the soaring mortgage lending there is robust demand for housing in country's first-tier cities, which demonstrate much faster expansion compared to lower cities where the labour opportunities are less abundant the wages much lower. 

The average net wage in Bucharest was RON3,100 in 2017 versus the RON2,400 country-wide average, while the average wage remained below RON2,000 in Moldova and rural southern counties. Other counties with major urban concentrations like Cluj, Timis and Sibiu also boast above-average wages (RON2,500-RON2,700). 

Real estate developers in Bucharest are already complaining about labour costs in construction having increased by some 40% over the past couple of years, while the prices of the construction materials have increased by some 20% as well. These higher costs (well above the inflation or currency's depreciation) are covered by larger mortgage loans contracted by customers who need housing in the large cities.

Separately, the rise in overall retail loans (+10% y/y, up from 7.8% y/y at the end of last year) arguably supports the idea of robust consumer confidence. This comes in contrast with the economic slowdown and the poor administrative capacity of the administration — which are visible and should result in rising propensity for saving (reported, indeed, by bankers and retailers of durable goods). 

The dynamics of the consumer loans shows more moderation: they increased by only 6.5% y/y in June at a time when wages rose by double-digit rates (+14.4% nominally in June) and prices gained momentum (+5.4% y/y in June). From a broader perspective, the stock of consumer loans has remained rather constant over the past three years and a half although indeed picking up (at rates similar to the mortgage loans) in recent months.

There is a trend toward excessive borrowing among families with below-average incomes, central bank governor Mugur Isarescu said at a conference in July, speaking about banks’ focus on mortgage lending. The average indebtedness ratio, namely the debt service as a share of debtors’ monetary incomes, has reached 51%, he warned. He urged banks to shift their focus to corporate lending, which is more likely to stimulate sustainable economic growth.

The sharp rise in mortgage lending illustrates the concentration of the active population in first-tier cities where work opportunities are more abundant. The vibrant residential real estate market in Bucharest and the other large cities (in contrast to the sluggish country-wide construction market) supports the idea. As a share of GDP, the stock of retail mortgage loans more than doubled to 8.0% in June 2018, up from 3.8% in June 2008, several months before recession. In absolute terms (in euros) the stock of mortgage loans soared more than three times (from €4.75bn in June 2008), to account for 28.8% of the total non-government bank loans up from 9.7% a decade ago.

The positive dynamics of consumer lending is driven by the rise in the average wages and by the distribution of the rise: namely low-income Romanians in the public sector saw their wages rising more than the higher-income families. This boosted consumer confidence, while the confidence of the higher-earning families maintained their consumer habits despite stagnating incomes.

Speaking of corporate lending, the stock of loans to non-financial companies increased by only 3.5% y/y to RON107bn (versus RON128bn retail loans) at the end of June. However, the companies have the option of inter-company lending since many of them are subsidiaries of foreign groups and, for the largest ones, taking out foreign loans.

 

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