Emerging Mortgage Finance in Armenia
The broad availability of mortgage finance accelerates the pace at which households improve their housing conditions by permitting them to leverage their current income and savings. While there were a few long-term housing loans in the former Soviet Union, such loans were really little more than an element of centrally allocated credit.2 So, Armenia, like the other former Soviet republics, entered the transition period with no tradition of mortgage lending. The development of such lending has been hampered by the immaturity of the banking sector and macroeconomic setbacks.
Stability and impressive growth rates have been the key Armenian economic characteristics of recent years (see Table 1). Under these conditions the demand for housing has expanded and can be expected to continue to grow. The Central Bank of Armenia (CBA), the Ministry of Finance and Economy (MoFE), and the private banking sector all recognize the need for improved mortgage finance services to augment this demand. They see the commercial and development opportunities that development of mortgage lending entails. In recent months there has been an impressive degree of discussion and planning about how to undertake this improvement, as evidenced by the frequent articles in the news media on trends and development and the preparation of concept papers by the CBA and MoFE.
This is the appropriate time, therefore, for a systematic analysis of how private mortgage lending can develop in Armenia. This article summarizes the results of such an analysis. The analysis was prepared as the response of KfW (Kreditanstalt fuer Wiederaufbau) to a request from the Government of Armenia to develop the concept for mortgage market development, building on the work already done by Armenian experts.
To set the stage for the discussion of the development of mortgage market, the balance of this introduction outlines the general economic and housing situation in Armenia in which mortgage market development will occur.
Macro-economic Environment
Armenia’s early transition was exceptionally difficult. Its economy was battered by three separate factors. First, the country was still trying to recover from its severe 1988 earthquake. When the Soviet Union dissolved in 1991, assistance from the USSR came to an abrupt halt and resources that could be spared had to be allocated to this disaster zone. Second, the NagornoKarabak conflict drained resources from the private economy to the battlefield and severely isolated Armenia economically. Third, Armenia like other former Soviet republics began the “shock therapy” transition to the market economy. The impact of this combination was devastating, as shown in Table 1.
From the year 2000, the economy has steadily improved and has grown at very respectable rates for the past three years. Reflecting the huge underutilized capacity in the country, inflation has remained lowto-moderate despite the strong economic growth. (The spike in 2003 is attributed to a supply-induced increase in the price of bread.) There is a general sense that growth has been concentrated in Yerevan. Some observers think that increased levels of international aid will result in realized growth in the next years over the levels projected in the table.
Still, household incomes remain at low levels. In 2002, per capita Gross National Income (GNI) was $790 according to the World Bank.3 On the other hand, poverty rates were very high: 49 percent of households lived in poverty and 17 percent in extreme poverty.4
With respect to the financial system, a low degree of monetary depth and intermediation activity are common among the so-called CIS-7 countries, the poorest of the successor states to the Soviet Union that include Armenia (Table 2). The CIS-7, as a group, compares poorly even with the countries of Southeastern Europe, not to mention Central and Eastern Europe. Low intermediation is associated with higher interest rates and bank spreads.5
Further data, specifically for Armenia and selected Eastern European transition economies, Russia, and two western European countries, are presented in Table 3 for 2002. These figures illustrate the challenges remaining for Armenia’s financial markets to become deeper and more efficient. The magnitude of Armenia’s interest rate spread and risk premium on lending figures are particularly noteworthy. At the end of 2003, the CBA reported spreads on AMD and dollar deposits and loans of 17.8 and 14.9 percentage points, respectively.10
Improving financial depth is important beyond the housing sector because of its clear relationship with sustained economic development. At the same time it is important to note the positive role that development of mortgage lending can play in increasing financial debt.
After a period of instability beginning with the transition, the commercial banking sector has gained its footing. Some further consolidation among the 20 existing banks is anticipated as banks must meet higher capital requirements in July 2005.