Mortgages and the Construction Boom: Why Cheap Rates Don't Work

On Mortgages and the Construction Boom

I wanted to return to the topic of how lending affects the country's economy.

Today I will talk about mortgages, and once again I will share thoughts that a banker is not supposed to have :)

Despite various crises, the construction boom in Kazakhstan is in full swing, and the volume of housing construction grows every year. The boom is fueled by cheap state mortgages, cheap state money and pent-up demand left over from the 2015 crisis.

As I have written many times, the mortgage itself is not an optimal economic instrument for creating sustainable economic growth, and there are several reasons for this.

The first reason is that any investment in the housing stock has a one-off effect on GDP. Given the low level of localization in construction, and especially in home renovation, every KZT 100 put into mortgages affects the economy by no more than KZT 50; the rest goes abroad in the form of imports of construction materials, equipment and furniture. A properly chosen imported machine tool or technology, by contrast, will generate income in the future that pays for itself and has a lasting effect on GDP, not a one-time one.

The second reason is that resources are limited, and ours, unfortunately, are limited to the savings in the National Fund. It is better to spend the money on investments that will bring a sustainable income in the future, and only on the basis of a steady, sustainable income can houses be built. With proper sustainable growth, incomes will be stable for all market participants, and housing will then be built by market mechanisms. Today, housing construction is fueled by non-market mechanisms, which creates distortions.

Therefore, at the macro level, stimulating housing construction through mortgages and cheap funding is not the best instrument, especially during crises, although as a tool for short-term influence on the economy it works almost instantly.

The only role of the mortgage in our conditions is a social one, but social mortgages should be available only to socially vulnerable groups of the population.

Any interest rate arbitrage will always flow into the price of the product, and we will not see the expected effect over the long or even medium term. This is a law of economics: when demand rises, prices rise. Cheap mortgages redistribute demand toward new-build housing, where cheap mortgages are available, and limited supply pushes prices up. If you have noticed, there is a price gap between the secondary and primary markets (the price should be calculated including renovation). That gap precisely reflects the difference in rates between the two segments. At some point I will find the statistics and do the calculation specifically. As a result, some time after preferential mortgages are introduced, the monthly payment returns, via the price per square meter, to the standard payment that prevailed before the subsidies.

And everyone knows the effect of cheap rates: growth in construction leads to growth in imports, imports put pressure on the tenge exchange rate, the exchange rate puts pressure on inflation, and inflation puts pressure on interest rates. If we want cheap interest rates for everyone, we need to lower inflation. To lower inflation, we need to reduce pressure on the exchange rate. To do that, we need to reduce imports. To reduce imports, we need to reduce demand for imported goods. And to reduce demand for imports, we need to give up cheap interest rates in various programs, so that in the end we get low inflation and low interest rates across the whole system.

That's about it.