Upward trend in real estate prices and rising interest rates will  reduce pace of mortgage lending growth

ArmInfo.The upward trend in real estate prices and rising interest rates will reduce the pace of mortgage lending growth. This is the opinion of the analysts of the  AmRating National Rating Agency affiliated with ArmInfo, referring to  the extremely high growth rates of the mortgage market, which reached  42% in y-o-y terms.

According to the Financial Rating of Banks of Armenia as of March 31,  2022, prepared by ArmInfo IC, the volume of mortgage lending has  reached 711.1 billion drams ($1.5 billion), with a stagnating 0.01%  growth in the total loan portfolio of banks, remaining at the level  of 4.3 trillion drams ($8.9 billion), which increased the share of  mortgages in total loan investments from the pre-Covid 8.5% to the  current 16.5%.

However, according to analysts, the already recorded acceleration in  the growth of real estate prices and the emerging increase in the  price of AMD loans suggests that this year the dynamics of mortgages  will weaken somewhat.

Thus, in Q1 2022, real estate prices in apartment buildings in  Yerevan and regions of the republic increased by 12.4% and 15.5% per  annum, respectively, with an increase in interest rates on AMD loans  from 11.9% to 12.5%, while a year earlier real estate prices were in  decline - by 6% in Yerevan and 4.1% in the regions, and loan rates  were only trying to get out of the sideways trend.

As a comparison, we note that in the comparable period two years ago  (2020 to 2019), mortgage growth accelerated from 30% to 45%, while  the growth of the loan portfolio slowed down from 14% to 22%, after  which, in 2021, mortgage growth slowed down to 24% and loan  portfolio up to 8%. In the case of the loan portfolio, the weakening  of the upward trend continued in 2022, while mortgages, on the  contrary, accelerated growth almost to the previous level.

However, according to the data of the Ranking of Credit Companies of  Armenia as of March 31, 2022, also prepared by ArmInfo IC, the total  volume of mortgage lending of all 17 banks and four mortgage  companies is the National Mortgage Company , Affordable Housing for  Young Families, First Mortgage Company, FIDES - reached 935 billion  drams ($1.9 billion), having increased by 28% year-on-year. Moreover,  among mortgage companies, the dominant share is held by National  Mortgage Company and Affordable Housing for Young Families, to  refinance mortgages - 12.8% and 9.8%, respectively, of the total  portfolio or 53.4% ??and 40.8% of the total portfolio of mortgage  companies. However, it is worth noting that National Mortgage  Company's mortgages has shown a downward trend, while the growth of  Affordable Housing for Young Families portfolio has moderately  accelerated. While all banks, except one, ensured the growth of the  mortgage portfolio, and most of them significantly accelerated the  pace. The composition of TOP-3 among banks in terms of mortgage loans  has not changed. These are: Ameriabank, Ardshinbank and Converse Bank  - with a total coverage of about 46% of the banking mortgage  portfolio or about 34% of the total mortgage portfolio (including  National Mortgage Company, Affordable Housing for Young Families,  First Mortgage Company, FIDES).  In order to maintain high growth  rates of mortgage loans, accompanied by a tangible y-o-y increase in  prices in the real estate market, as a result of the complementary  impact of which, the accumulation of risks in mortgage loans is  possible, the Central Bank of Armenia has launched the LTV  (loan-to-value) macroprudential instrument since April 2022 to  effectively eliminate them.  These are 5/1 and 5/2 norms with a  maximum credit/collateral ratio limit of 90% for loans in AMD and 70%  for loans in foreign currency.

 Macroprudential instruments such as LTV are widely used by Central  Banks in international practice, preferably to address the imbalance  between mortgage loans and real estate price dynamics, under the  influence of which structural risks accumulate.  At the time of the  introduction of LTV, the Central Bank of the Republic of Armenia  (CBA) noted that there are no real prerequisites for the accumulation  of structural risks in the credit market, and the Armenian economy  continues to be in the phase of recovery of the financial cycle. But  at the same time, CBA considered it necessary to emphasize that the  further development of the lending market may fall under the  influence of high uncertainty due to the current tense geopolitical  situation.