Ukraine's developing mortgage market

Southern Business Review, Spring 2003 by Roseman, Gary

Background on the Market

The conditions for a mortgage market began with the privatization of housing at the time of the breakup of the Soviet Union. Ukrainians could privatize the apartments or houses in which they had registered residence by filling out the necessary forms. The registration system, which still exists, requires the provision of a residential address to the civil authorities and a registration certification, called a propiska, to be stamped in the civil passport, which is the basic identity document in Ukraine.

In the cities, most Ukrainians live in apartments instead of single-family dwellings. The privatization of the apartments applied only to the apartments; the common areas and building exteriors remained the property of the municipality. Because of the municipalities' usually bad records of repairs and maintenance, apartment owners could form a communal group to take ownership of the common areas and exteriors, but rarely did so. Given the slow development of contract law, communal associations have limited leverage against a stubborn resident who refuses to join or pay dues.

The privatization decision is not without costs. In state-owned apartments, utility rates are lower, and the State is responsible for repairs. However, the State's response to requests for repair services is often slow, at best. The lower rate on utilities is a significant percentage but not much more than the discount that pensioners receive on their utility bills and, in absolute terms, not more than several dollars. The benefits of lower utility bills and a slow, State-provided repair system are set against the inability to sell or bequeath a property. The result of this household cost-benefit analysis is that 53.64 percent of the residential space in Kiev was privatized by 2000, with 7.13 percent of these privatizations completed in 2000 (Kyiv Municipal Board of Statistics, 2001: 149 and 214).1

The first signs of a mortgage market began with the financing of the purchase of apartments under construction. The pioneer in this effort was a firm called Arkada Bank, which is the financial arm of one of Kiev's largest residential construction firms. Arkada provided two-year payment plans for apartments in planning and early construction stages, with all payments due at the time of move-in. This financing covered the shell only; the cost of fit-out with floor covering, fixtures, and wall-finishing was not financed. The arrangements were a method of reducing risk for the construction firm, which often acted as the seller of the apartments.

While apartments were privatized, the land underneath was not. The country's rich agricultural land remained unprivatized as well. The lack of property rights of agricultural land was a hindrance to the development of Ukraine's agricultural potential. The country has rich land but output is low because of poor mechanical and chemical inputs. When agribusiness companies could acquire machinery or fertilizer from Western suppliers, it was on credit with guarantees from the Ukrainian government. Thus, Ukraine's poor taxpayers found themselves liable for failed agribusiness ventures more than once due to the absence of mortgaging.

In October 2001, changes in the Land Code allowed private ownership of land and the sale of land to begin January 1, 2005. At that time, landowners can obtain credit on the security of land. Also, under the law, land can be pledged only in mortgage loans and not as security for any other type of transactions. Foreigners are prohibited from owning agricultural land, but with non-agricultural land, the rights of foreigners are the same as those of citizens, and the law governing mortgages makes no distinction between citizens and foreigners.2 This new legal regime for land is a beginning that few observers thought would come in the parliament that passed the new rules, as communists and their allies had a substantial presence.3

The Nascent Market

For an idea of the potential size of the home mortgage market, a Kiev-based bank, Ukrsotsbank, estimated that new home sales were at $200 million in Kiev in 2001, based on new construction of 860,000 square meters at an average price of 1,200 Hr. (hryvnia, about $225) per square meter4 in the city. According to Vestnik Nedvizhomosti, a bi-monthly real estate publication in Kiev, the average sizes of apartments advertised for sale in the outer districts of the city have recently been approximately 35 square meters (approximately 377 square feet) for one-room apartments and 50 square meters (538 square feet) for two-room apartments.5 Housing prices have risen steadily as families have increased home equity with the rise in their incomes over the past several years with growth in real Gross Domestic Product (GDP). With these higher prices and even more construction, the bank estimates that Kiev's housing market6 is worth about $400-500 million annually, with the country's market at approximately $3 billion (Ukrsotsbank, 2002: 2-3). Kiev also accounted for 36.23 percent of the 2.3 billion Hr. (over $425 million) in new residential construction in 2000 (State Committee of Statistics, 2001: 214). Precise numbers are hard to obtain because of problems with information flow and the distortions in reporting caused by widespread tax evasion.