Will the loan crisis lead to a real estate crisis?

Moldova is experiencing an obvious crisis on the consumer loans market, which influences the real estate market. However, the realtors show composure and still believe in an ascending development of the market. It's evident the dwelling immovable market show signs of nervousness and less optimism on the background of the almost two-fold drop of the credits for real estate for the last five months and a clear trend of reducing the bank loans. And this is happening in the conditions when the prices in the construction area surged by 8.5% in the second quarter of the year, compared with the first three months. The real estate is becoming more expensive, while the ones wanting to build a house or an apartment have less and less loan resources available. [One can expect a new drop in loans] Getting closer to "the burst of the bubble of prices and the high demand for dwelling real estate" could be determined by the dramatic drop in the mortgages offered by banks, generated by the harshening monetary policy of the Moldovan Central Bank, the decrease in lending and the high interest rates of loans. If in December 2007, the banks lent real estate loans worth 118.1 million lei, in February, the immovable loans sank to 61.5 million lei, the following months experiencing a trend of steady decrease in loans: in March – 59.8 million lei, in April – 52.8 million , in May – 52.2, in June – 34.4 million lei. The banks have been extremely cautious in lending to people in June, as the volume of loans offered to natural entities fell by 15.5 %, while the immovable-related loans registered a even larger drop – 24.1% and, respectively, the consumption-related loans fell by 11.5%. Many banks have severely reduced their population crediting programs, in the conditions in which the financial market shows concerns, as the Central Bank decided to gradually increase – by 6 percentage points – the norm of compulsory reserves from means attracted in Moldovan lei and non-convertible currencies, and the norm of compulsory reserves in freely convertible currency. The norm of compulsory reserves is to be raised to 22 % from July 21 to August 5, 2008, so one can expect a new drop in loans, especially lent to population, which actually are considered as loans entailing more risks for banks. Certain mortgage programs have been halted, as other have been reduced dramatically, while the interest rate has been increased up to 18-24 %. [Less loans could result in market stagnation] Reducing lending for immovable could lead to higher demand, in the conditions in which only 5 % of the people can afford building a house, to postponing the start of some residential projects and, finally, to the market stagnation and even to falling prices. Hopes related to launching cheaper mortgage projects by attracting external sources, to expanding the immovable leasing get doomed. In order to meet the requirements of all the people eager to improve their dwelling conditions, according to specialists, as many as 25,000 – 30,000 new apartments should be put in commission annually in Chisinau only. And the attainment of these objective is most likely to be postponed. The trend of less houses and apartments put in commission is likely to go on. After an annual hike of over 20 % during the last 5 years, in 2007 and the first quarter of 2008 a decrease on the segment of houses put in commission was registered. If the fall was 16.0% last year, in the first quarter of 2008, the number of houses put in commission fell by 26.3%. There is no data for the second quarter yet, but there are neither signs the trend might have reversed. One can also expect the people will invest less in immovable, since in 2003 it reached a maximum of 90.6% and it went down to 65.4% in 2007. [Although the apartment sales are down, the prices are up] In 2007, for the first time after 5 years of growth, the total surfaces of houses put in commission dropped by some 100,000 sq. m., from 507,200 to 418,600, as in the first quarter of 2008, they put in commission houses with a total area of 84,700 sq. m. The number of apartment sales is plunging severely – from 23,009 in 2005 to 16 ,150 in 2007, show data issued by the Cadaster Agency. The trends can get even worse, because of less crediting and, implicitly, investment in dwelling space. Although dropping, the people's weight in building dwelling immovable remains important, so, a fall in financing sources could have most negative effects. And if the real estate market starts stagnating or, if one admits the most pessimistic scenario, it goes into a crisis, it will determine the Moldovan workers abroad to invest in immovable, because it won't cease being attractive to invest in. The last couple of years, 30-40 % of the real estate market transactions were accounted for by labor migrants. The apartments prices go on rising. In the first half of 2008, the prices increased by 10-15% on average, the real estate bourse “Lara” assesses. Its experts find that “not all the participants in the real estate market can afford buying large areas in newly-built houses and additional expenses for a good repair.” The coming months, the number of citizens who will not be able to buy a new apartment soon will be rising.