Why is the global turmoil not affecting the Romanian real-estate market?

The credit crunch has instigated stock market tumbles, interest rate hikes and job cuts in the City. For the property investor, the most serious effect is the downturn in domestic property markets which is predicted to last several years. But what is the credit crunch and why is Romania one of the countries least effected by it?

The Origins of the Credit Crunch

The credit crunch is the sudden difficulty in obtaining credit due to the unwillingness of banks to lend to each other and to the customer. The origins of the crunch stem from banks selling on their mortgages to a mortgage bond market. In a process termed 'securitization', the mortgage profits and also associated risk of payment defaults became a commodity that could be bought by third parties. The amount of mortgage-backed securities held by financial institutions is now a serious issue following the sub-prime crisis.

The Sub-prime Crisis

In America mortgages were offered to customers with poor credit histories and/or questionable ability to repay the loan; the 'sub-prime' market. After an initial 2-year period at a fixed low rate, the rates were reset to the default value, often double the initial amount. Caught out by this, customers often had no option but to foreclose.

The Consequences

It is estimated that financial institutions face a direct loss of between $220bn and $450bn from the sub-prime crisis. Fallout from the sub-prime crisis includes major stock market losses, hikes in interest rates and even the collapse of major banks e.g. Northern Rock. For the property investor, the major concern is the unwillingness of banks to lend to applicants without excellent credit ratings, which is typically affecting first-time buyers. In a related PIE article, we discuss changes to the UK and Irish property markets. Here, though, we would like to outline how Romania represents a refuge from the global turmoil.

Romania and the Credit Crunch

As with every country around the world, Romania's stock market suffered a dip in the wake of the sub-prime crisis. The LEU also depreciated but has now bounced back again to the level recorded at the start of the year. The credit crunch's greatest effect is to increase volatility of inward capital flows, which affects financing of major industrial projects. However, unlike most Western countries, the mortgage market did not fall victim to the credit crunch fallout, due to a combination of historical prudence on the part of Romanian bankers and the tiny size of the Romanian mortgage market, which accounts for less than 2% of the country's gross domestic product (as opposed to 65% in the UK).

Mortgage Markets – Weighing Up the Difference

Romanian banks have followed a very 'traditional' stringent approach to lending, offering mortgages only to minmial-risk applicants. When comparing Romanian with Western mortgage markets, a good analogy to use is a pair of scales. The scales are in balance when mortgages are available only those who can afford them. The subprime crisis is the result of tipping the scales to accommodate borrowers who were in no position to repay their loans. However, Romanian banks have in the past kept the scales tipped in the opposite direction, limiting their lending and excluding many who were indeed in a good position to service their mortgage. Nowadays the Romanian banks are rapidly developing the mortgage market by extending their offers to more of the ever-growing middle class. In contrast, the credit crunch is Western banks' approach to rebalancing the scales.

Taking Sides

"Romania's mortgage market could double by 2009 to reach €8 billion", Ana Cernat, mortgage division manager of Bancpost

The aftermath of the credit crunch demonstrates the intimate link between mortgage availability and property prices. A key priority of the property investor is to now find a dynamic real estate market where mortgage availabilities are growing. Romania represents an ideal territory for this reason and a whole host of others.

© Property Investment Expertise 2008