With the collapse of communism, state-owned drab concrete blocks were sold to residents at little cost. Since 1991, real estate investors in Ukraine took advantage of an undervalued market while construction firms doubled pace to meet soaring demand for European-quality housing. As the banking sector matures, the mortgage market offers plenty of room for growth.
On November 30, Ukraine's fourth-largest bank Ukrsotsbank announced it increased its mortgage loans by 10,000 since the beginning of this year to a total of 44,500. With a mortgage portfolio of $1.6bn, the Kyiv-based financial institution represents one of the most developed lenders on the market.
"Mortgage is our star product - having general agreements with a wide range of building companies," said the deputy chairwoman of Ukrsotsbank, Iryna Knyazeva.
Market growth in mortgages signals considerable expansion. In 2006, the total volume of mortgage lending in Ukraine tripled to $22.8bn, according to the National Bank of Ukraine. This is occurring even as the US subprime mortgage financial crisis has rattled global financial markets.
The growth of the mortgage market has spurred healthy competition. In November, Diamant Bank cut its domestic currency interest rates on five- to ten-year mortgage credits to 10.9%. Ukrsotsbank offers reduced interest rates for the first two years of mortgages - 11.5% annual denominated in hryvnia and 10.5% in dollars. Rodovid Bank announced that interest rates on its hryvnia-denominated mortgage credits would fall by up to 1% in 2008.
Although no considerable reductions of mortgage interest rates are expected for 2008, lenders are keen to shift to hryvnia-dominated loans. Around 80% of total mortgage loan amounts are held in foreign currencies. "We need to shift to the hryvnia so as to avoid the influence of global cataclysms on Ukraine, because the dollar is not the most reliable currency," said Oleksandr Bondarenko of the Ukrainian Realtors Association.
In a European Bank for Reconstruction and Development (EBRD) report released in November, Ukraine is experiencing the highest increase in real estate prices in Eastern Europe. Housing prices in Kyiv are expected to mushroom by up to 6% by the end of 2007, where the average cost of one square metre has grown to $2500. In larger cities such as Dnipropetrovsk, Odessa and Lviv it is anticipated prices will expand by up to 1.5% on a monthly basis.
The EBRD report also warned such high prices are unsustainable and moderation is likely as supply improves and credit conditions to homeowners are reigned in. To date, mortgages represent the bulk of financial liabilities for homeowners, as opposed to other forms of wealth. On the upside, mortgage debt to growth domestic product ratios in Ukraine are lower than average for the region.
The legal system must also undergo significant reform to improve Ukraine's mortgage market. In November, the World Bank urged the Ukrainian government to adopt a standard system of property and land ownership controlled by one agency. At present, the Ministry of Justice handles mortgage and real estate registers, while the State Agency for Land Resources keeps the registry of land ownership.
There are political considerations as well. If the new government led by a fragile coalition of BYuT (Yulia Tymoshenko Bloc) and NU-NS (People's Self-Defense) promotes the growth of small- and medium-sized businesses, then demand for mortgages will continue. With a brimming agenda, it is unlikely the new government will prioritise the development of real estate and property laws.