Feb. 3 (Bloomberg) -- Romania, using record-low interest rates to rebuild a housing market devastated by the economic crisis, is forcing homebuyers like Vlad Popescu to abandon cheap euro-denominated mortgages in the name of financial stability.
In October, the government changed the terms of a four- year-old program for euro loans to only cover credit in the Romanian currency, the leu. In the following months, banks, led by Erste Group Bank AG’s Banca Comerciala Romana SA and BRD- Groupe Societe Generale SA, accelerated leu mortgage lending. It grew at a record annual pace of 90 percent in December.
Romania is providing $4.2 billion in loan guarantees to first-time homebuyers such as Popescu. The government is betting that borrowers in the European Union’s second-poorest country will accept higher payments in exchange for local currency loans that won’t jump in cost if the leu plunges against the euro. In Popescu’s case, it’s working.
“I got used to the idea,” said Popescu, who initially sought a loan in euros for his two-bedroom, 295,000-lei ($88,000) Bucharest apartment before taking a leu-or-nothing offer for a government guarantee. “My monthly payments went up by 300 lei, but they’re fixed now and I don’t expect any significant changes in the next few years.”
The changes come after hundreds of thousands of homebuyers in neighboring Hungary took out Swiss-franc loans, only to be hurt by a slump in their own currency. The forint has depreciated by about 75 percent since 2008, when most of the loans were issued.
The plan guarantees 50 percent of the value of mortgages worth as much as 75,000 euros, with a 5 percent down payment. That reduces the risks for banks, allowing them to make cheaper loans. On Jan. 8, the Romanian central bank lowered its benchmark interest rate to a record 3.75 percent, the latest in a string of cuts that began in July 2013. It is expected to trim the rate again tomorrow to 3.5 percent, according to 12 of 18 economists in a Bloomberg survey.
The revised government program is intended to protect leu- earning home buyers against exchange-rate swings, such as when the leu plunged 12 percent against the euro at the end of 2008, driving up euro-denominated loan payments.
The guarantees -- $602 million for this year alone -- are also designed to counteract a squeeze from western lenders that have cut back euro funding to their Romanian operations before the release of EU-wide stress-test results in November.
Romania has lagged behind Poland and neighboring Hungary in limiting foreign-currency loans. Hungarian Prime Minister Viktor Orban effectively banned such debt in 2010, while Poland allows it only for borrowers whose incomes are based in foreign currencies.
After coming to power in 2010, Orban effectively banned foreign-currency mortgages. It was part of a series of measures aimed at phasing out such loans and helping hundreds of thousands of Hungarians whose repayments of predominantly Swiss- franc denominated loans ballooned in the aftermath of the global financial the crisis.
In 2011, he forced banks to swallow $1.7 billion in losses on the early repayment of some mortgages at below-market exchange rates, expanded a program allowing debtors to temporarily repay their mortgages at fixed exchange rates and pledged to take further steps to eliminate all such loans.
About 100,000 Romanian borrowers took part in the government’s initial four-year program, with the state guaranteeing loans amounting to about 4 billion euros ($5.5 billion).
That’s good news for developers struggling to recover from a real estate collapse that left the Bucharest skyline marked by half-finished office buildings and idle cranes. On the city’s outskirts, hundreds of buildings and houses stand empty along unpaved roads.
“This program is the best idea the state has had in years,” Alexandru Tiron, a construction engineer, told Bloomberg. “It will be extended. If not, the construction market will plunge again and take the entire economy with it.”
Bad loans in Romania stood at 22 percent of all lending at the end of November, the sixth-worst ratio in the world in 2012, according to World Bank data. That has left credit scarce.
The state-guaranteed loans are the exception. With a default rate of 0.1 percent, they now account for 90 percent of new mortgages, according to Alpha Bank Romania SA Chief Executive Officer Sergiu Oprescu.
“The program had a pretty good start, but lately it has received a very strong boost from the central bank’s rate cuts,” he said in an interview in Bucharest. “It totally eliminates the foreign-exchange risk.”
The average leu mortgage rate fell to 6.11 percent at the end of last year, less than half of 2009’s record-high of 14.76 percent, central bank data show. In comparison, euro mortgage rates averaged 5.87 percent, down from 9.17 percent at the end of 2008.
Now local developers are rebuilding after a two-year recession starting in 2009 that torpedoed projects backed by international companies such as Charlemagne Capital Ltd. and Asmita SA.
The 120 million-euro Asmita Gardens project in Bucharest, Romania’s biggest private residential investment, failed in 2011. A few streets away, developer Tiron sold out his third apartment building in six months at about 800 euros per square meter. That’s 24 percent less than today’s prices at Asmita’s project, built before the crisis.
“There’s an extraordinary demand for cheaper, smaller apartments,” Andreea Comsa, managing director of real estate broker Premier Estate SA said in an interview in Bucharest. “Local developers are buying land and building tailor-fit houses for the program. They sell very quickly.”
The average apartment price in Romania plunged to 898 euros per square meter at the end of 2013 from more than 2,000 euros in 2008, an index from property listings website and consultancy imobiliare.ro shows. Still, the government’s First Home program may be keeping prices artificially high, according to Andrei Radulescu, an analyst at Romanian brokerage SSIF Broker SA told Bloomberg.
“The program prevented a possible natural adjustment of the market that would have brought home prices closer to their fair value,” he said. “Without it, I think the banking sector would also have adjusted more quickly.”
The government is pledging to continue its First Home program “for as long as the market needs it,” according to the Finance Ministry. After its initial euro-based plan lured 14 lenders, the revamped program is attracting more.
ING Romania Chairman Misu Negritoiu said his bank applied to join this year and wants to tap as much as 50 million lei in state guarantees.
Half of all lending at BCR, Romania’s biggest bank by assets, is from First Home loans, with a portfolio now at about 5 billion lei, retail manager Andrew Gerber said.
“I see a huge amount of potential,” Gerber said in an interview from his office in downtown Bucharest. “It’s the right place to be if we want to build a sustainable mortgage market.”
Popescu, meanwhile, is looking forward to moving into his new 85-square-meter (915-square-foot) home in Titan, a neighborhood in the east of the capital that got its name from a cement factory. Before then, though, he plans to spend the last of his savings on a trip to Paris with his girlfriend.
“It was either that or a new couch,” he said.
--With assistance from Marta Waldoch in Warsaw and Edith Balazs in Budapest. Editors: Michael Winfrey, James M. Gomez, Andrew Blackman, Rob Urban