According to a Poll, Cheap Mortgages Are the Topic Most on My Readers' Minds

This is a very pressing topic, and one that provokes many arguments. Many people point to Western countries, where mortgages cost 3-4% a year, while ours cost 15-18%. In this context, I would of course add that theirs are denominated in euros or US dollars, and ours in tenge.

The state's wish to provide cheap mortgages stems from the goal of giving the population housing. Unfortunately, I have to disappoint everyone: the effect will be exactly the opposite. Neither from the macroeconomic nor from the everyday point of view will cheap mortgages solve the problem of providing people with homes of their own. The reason is that the cheaper the mortgage, the higher the price of housing, and the growth in housing prices will not correlate in any way with the growth in incomes. This means that the monthly mortgage payment relative to the average salary will not fall, so even a cheap mortgage will be affordable only to the middle class. It is a basic law of economics. Mortgages are indeed needed, but market-based ones, developing in balance with the overall economic situation.

In normal economic conditions, demand for mortgages and housing is always a consequence of rising prosperity, so what is needed first of all is real growth in incomes.

At the level of the state, the government should create conditions for the development of market-based mortgages, and then the question arises: what needs to be done to achieve that?

I have written many times that the cost of mortgages and their availability depend on the following:

1. Creating a legal framework for recovering problem debt. The time it takes a bank to foreclose on mortgaged housing directly affects the cost of risk, which is part of the interest rate. Unfortunately, we have done the opposite. The impossibility of foreclosing on a borrower's only home, and the lengthy procedures of foreclosure and then eviction, lead banks to tighten scoring and cut supply. In other words, good borrowers suffer because of bad ones: they either cannot get a mortgage or pay higher rates, since the losses from such cases are covered at their expense. Yet good borrowers outnumber bad ones many times over; it is just that the bad borrowers are always the ones who "shout" the loudest.

2. Creating mechanisms for securitizing mortgage loans and selling them or raising funding against them. Right now this market simply does not exist. With a proper mechanism for recovering problem debt, secured loans should in essence be a highly rated financial instrument, one that would be bought not only by pension funds and insurance companies but also by foreign institutional investors. Nothing is being done in this direction, and nothing has been done, because it is also tied to point 1. This would make it possible to attract the long-term funding that mortgages require. Banks now try to offer mortgages for 10 years, whereas they should offer 25 to reduce the monthly payment. And if this market is built properly, rates on such instruments should differ from those on short-term bonds.

3. Reducing the cost of housing itself. The monthly payment depends heavily on the price of the home, and to lower it we need to cut barriers for construction companies and create conditions for building. In this respect I am in favor of developing large agglomerations and cities; I will write a separate post about this. We need to simplify the procedures for issuing technical specifications, approving projects and obtaining permits. We need to build infrastructure, schools, hospitals, kindergartens and parks, build metros and develop public transport. More construction companies will bring competition and lower housing prices.

4. Bringing down inflation. The main component of the mortgage rate is the risk-free cost of funding, which is now closely tied to the base rate, which in turn broadly correlates with inflation. To lower the rate, we have to defeat inflation. This requires doing many things, but I can say one thing for certain: any rate set below the market rate will simply fuel inflation, and therefore push the market rate higher. If we want a cheap rate, we should reduce inflation, not print tenge.

In short, if we want cheap mortgages, we need to raise people's real incomes, remove the obstacles to foreclosure, create a market for funding, create conditions for competition among construction companies, and fight inflation. Only then will we get truly affordable housing with cheap mortgages. The task is difficult and will take a very long time; there are no quick wins.