Bulgarian mortgage rates are about to "normalize"

For several months now, Bulgaria has been in the process of normalizing interest rates on corporate and consumer loans. However, this does not yet apply to mortgage interest rates, whose level remains close to a record low of around 2.6%. This has led to the unusual situation in which Bulgaria now has one of the lowest interest rates on housing loans in Europe.

Economists and the Bulgarian Central Bank expect mortgage rates to start rising faster in the coming months thanks to the financial institution’s measures, such as raising the countercyclical capital buffer (CCyB) and banks' minimum reserve requirements.

The unusual situation is the result of Bulgarian banks pricing the interest on mortgage loans in a special way – by using the price of the deposits that the banks have attracted. That’s how the restrictive policy of the European Central Bank (ECB), during the last more than a year, has failed to influence the price of mortgage loans in Bulgaria.

There was a similar situation in Croatia, where banks used to price mortgage interest also based on deposits, but through a reference index determined by that country’s central bank. In Bulgaria, however, there is no common index, and banks use their own reference interest rates for this purpose.

After Croatia entered the Eurozone, banks abandoned this approach entirely and started using the Euribor index, the price at which the government borrows money, or by using a fixed interest rate.

Something similar is emerging in Bulgaria. The reason for this change in pricing is the transmission mechanism of the ECB, which is expected to kick in. This is probably the change we are facing. If we have to talk numbers, we can talk about a process of normalizing mortgage loans to values of around 3.5% in the next 1-2 years. This is a level that in no way poses a risk to the quality of the loans," believes Kristofor Pavlov, chief economist of Unicredit Bulbank, who took part in the banking and financial forum of Manager magazine.

Mr Pavlov expressed the opinion that there are no immediate risks to the real estate sector in Bulgaria.

If there are problems in the labour market, they will quickly migrate to the property market. I don't see any particular risk in the labour market right now. It is positive that we are working at full capacity. Bulgaria looks good now, but the external environment doesn’t," he pointed out and gave an example of the lowering of real estate prices in a number of European Union countries.

According to him, 10 EU member states are experiencing a drop in property prices on an annual basis. In half of the rest, such a drop is forthcoming.

The real estate market may look good right now, but this is an economy that is very dependent on external factors," he added.

The main risks facing Bulgaria

According to Pavlov, the main risk for Bulgaria is the danger of renewed political instability.

That's the impression I get from meetings with investors. When we have prolonged periods of political instability, institutions reduce their work and subsequently stop functioning. Problems are starting to pile up, and the risk of a populist vote grows. For me, this is the main danger," commented Pavlov.

Evgeni Kanev, an economist, is of the same opinion.

It is important to have a stable government, which can make reforms," emphasized Kanev.

Translated by: Tzvetozar Vincent Iolov