Despite the growing economic uncertainty due to the COVID-19 pandemic, the property market remained quite stable with little slowdown on the demand side and property lending rising in the double digits amid practically frozen interest rates. As the initial wave of COVID-19 swept through the country in spring, the amount of new mortgage loans issued per month went down in April and May compared to previous months, according to central bank data. However, the decline didn't last long and in June the market recovered to its usual speed with 297 million levs (153 million euro) worth of newly issued property loans. By comparison, in 2019 the monthly average was 277 million levs.
Moreover, according to Bulgarian National Bank (BNB) data, there was no visible deterioration in the banks' mortgage loan portfolio despite rising unemployment. The share of non-performing loans in that segment even declined, from 6.2% at the start of 2020 to 5.3% at the end of November. However, it should be noted that the moratorium on loan repayment first introduced in April may be obscuring a more pessimistic picture.
Demand is high
As at the end of November, mortgage loans in the banking system increased to 11.9 billion levs (6.1 billion euro) from a little over 11 billion levs at the end of March. The drop in the percentage of non-performing loans in the segment, however, may swing to an increase in 2021 when the opportunity to defer payments on loans is scheduled to expire. According to central bank data, by the end of November, 1.9 million households have requested to defer repayment of consumer and mortgage loans worth 1.7 billion levs in total, or about 7% of all outstanding household loans.
The mortgage portfolio continued to grow despite the economic shock from the full lockdown in spring, albeit at a slower pace. In April, the lockdown was in full swing - public places were forced to shut down, travel between cities was blocked and many workers were either fired, sent into a leave of absence or asked to work from home.
Understandably, the amount of new mortgage loans issued to households decreased, but not as much as one would think looking at the record lows set by economic indicators at the time. The data shows that banks reported issuing new loans worth 260 million levs in April compared to 320 million the month before. In May, the amount decreased to 190 million levs but recovered to 297 million in June. Yet, new mortgage loans issued in the first eleven months of 2020 totaled 3.3 billion levs, which is an increase of 11% on an annualized basis.
Central bank data also shows that mortgage loans remained very cheap in the period under review. The average interest on such loans denominated in levs was 2.83% at the end of November - a fresh historical low after the previous record of 2.85% reached in April. The annual percentage rate of charge, i.e. the total cost to the borrower (interest payments plus all fees, commissions and other charges), also hit a historical low of 3.09% in November compared to 3.26% at the beginning of 2020.
What COVID-19 did bring about in the Bulgarian banking system was a tightening of lending conditions for both corporations and households such as collateral requirements, the premium for riskier loans, the amount and term of the loan. According to the central bank's latest Economic Review, in the second quarter of 2020, the deterioration of the macroeconomic environment and banks' lower risk tolerance drove stricter lending standards and conditions for approving credit applications, most significantly for consumer loans. "Other factors behind credit policy tightening include the unfavourable housing market prospects, the reduced solvency of borrowers, the deteriorated business climate in the sectors with a large share in the credit portfolio and the higher collateral risk," the central bank explained.
Because of the temporary credit moratorium still in place at the time of writing there are no prospects for a slowdown in the growth of mortgage lending during its term. Demand for consumer loans is high, supply is abundant and affordable. To what extent the situation will change after the end of the moratorium depends on the repercussions of the crisis for both sides in the process. If bankruptcies increase, unemployment will surely follow, and with that - retention, reduction or interruption of household income can be expected, which would affect consumers' prospects for getting approved for credit or their ability to repay outstanding loans. Meanwhile, banks' ability to lend under the current conditions will depend on how many of their customers stop servicing their debts and the amount of losses the lenders would be able to afford.
The moratorium serves as a mechanism to postpone the negative effects of the crisis on borrowers. While banks set aside provisions to absorb potential future losses, borrowers facing financial difficulties have a few months to find a solution. State aid is also a means of limiting losses and remains available.
In general, the growth of mortgage lending between March and November shows that the demand for property outweighed the concerns regarding the economy and the risks of declining household income or unemployment in the near future. They also illustrate how consumer attitudes differ from the logic of economics textbooks: instead of waiting to see what the repercussions of the crisis will be while saving some money for, perhaps, a better property purchase in the future, Bulgarians preferred to take a risk so as not to miss the moment.