The FINANCIAL -- Mortgage loan is one of the most common types of financial security securing the turnover of the real estate market. According to the representatives of development companies, over 70% of customers purchase apartments with mortgage loans. The devaluating Georgian Lari seriously jeopardizes the pay-off of mortgage loans as USD is dominating on the Georgian real estate market. The dominance of USD on this sector has a serious impact on the economy of Georgia.
If there’s anything we’ve learned from the subprime meltdown of 2008 and crash of 1987, it’s that we should all proceed with caution when borrowing money to purchase or refinance a home.
The dramatic fall of the Georgian Lari against the USD has already caused serious problems for our population. Mostly for those who have credit obligations in USD and income in the national currency. Stability of the Georgian Lari and its strengthening during recent months radically changed the picture last week when the Lari still started devaluating and dropped from 2.1272 as of 10 June, to 2.2941 per USD 1 as of 27 June.
The reputation of real estate as the most solid of all investment options
The real estate market is recognized as one of the most stable. Therefore, investing in real estate is rather justified. When it comes to investing in this type of property, the first thing that is worth considering is our debt obligation on the part of good and bad credit. We all need to understand that when people are massively buying homes with a mortgage thinking that they are investing in real estate, they are actually handing over a promissory note for normal liability.
Let’s consider the purchase of an apartment worth USD 60,000 with a mortgage contract of USD 40,000. Taking into account the entire commission, final repayment of the debt will amount to approximately USD 81,000.
On the condition that the house will be under your ownership for ever, of course, it is beneficial in terms of expanding your own portfolio. In the case of renting, a living area of the same space would cost one a lot more than the whole sum that we pay to commercial banks, which amounts to over USD 36,000.
When it comes to buying real estate for investment purposes, I would consider the purchase of living space as a last option. I would rather consider buying commercial space which can pay off credit obligations and with the right investment, pay rent for a residential apartment.
The risk of mortgage loans grows greater
According to the official data of NBG, the overdue loan portfolio is growing not only on foreign currency loans, but also on national ones. During the first five months of 2016, the volume of overdue loans increased by GEL 83 million.
From January to May 2016, the share of overdue loans at commercial banks increased by 21.5%, amounting to GEL 355.2 million. While the volume of overdue loans was GEL 292,124,000 for January 2016, for the end of May of the current year the figure consisted of GEL 355,254,000.
Taking into account the condition of the market and the high potential of the new devaluation, long-term commitments in the form of mortgage loans are carrying a very large risk. The losses in currency exchange as well as paying off a loan become quite risky as the cost of credit greatly varies in the national currency.