Mortgage subsidies: effective tool during the Covid slump or sectoral favoritism?

The Georgian government’s mortgage subsidy plan announced in June 2020 as part of a series of relief packages to offset the economic consequence of the Covid-19 crisis generated the most public discussion and apprehension of any of the other state response programs.

The program offered to subsidise 4% of the interest rate on certain mortgages taken out between June 2020 – January 2021, and for which 70 million GEL [around $23 million] was allocated with the aim of both helping homebuyers and stimulating the construction and development sector.

Several months have passed since the introduction of the initiative. How effective has the subsidy program been for consumers? How have the financial and development sector fared? And what objections have been raised about the program itself?

Preliminary results

As of early September, the subsidy program had already mobilized 90 million GEL worth of mortgages since the program’s introduction in late May, and the number of subsidized mortgages stood at 1,000 by mid-August.

The beneficiaries of the subsidiary program say the results have been ‘tangible.’ The banking sector has recorded serious gains thanks to the subsidy, and been encouraged to continue lending even in risky times thanks to the fact that loans provided under the subsidy are guaranteed by the state, thus decreasing the risk banks would be flooded by risky loans.

TBC Bank has been involved in the subsidy program since July 1, 2020. The bank’s press service notes the demand for mortgage loans increased significantly compared to previous months once the subsidy program was put in place.

Loans issued were up 16% in July-August year-on-year, TBC Bank said. 58.8 million GEL in subsidized mortgage loans were issued in this period, accounting for 33% of all mortgage lending.

Bank of Georgia reports similar gains, noting “the interest rate on mortgage loans for customers with state subsidies is quite low, therefore, this initiative and opportunity of the government is used quite actively by consumers, and has proved effective and beneficial for the bank as well.”

BoG notes that after a sharp fall off during the beginning of the pandemic, the initiative quickly revived demand for mortgage loans and significantly increased customer turnover and the number of applications. The bank believes enthusiasm will last until the end of the project – that is, until the end of the year.

Development company m² says the incentive came at a timely moment. m² Development CEO Nikoloz Medzmariashvili says that following the program launch, a sizable number of m² apartments were sold on subsidized mortgages.

“We’ve a positive view of the subsidy program at m². It was important not only for developers, but also for consumers–many had been unable to buy a home because of the regulation that banks cannot issue non-GEL denominated loans under 200,000 GEL, and the GEL interest rate, significantly higher than for USD or EUR, made it too expensive to take on a mortgage. With the subsidy, people were able to borrow in GEL at a rate very close to the euro and dollar interest rates”, Medzmariashvili says.

He notes some of the other positives of the stimulus program:

“Prices did not plummet, small developers were able to continue to exist and not go bankrupt. Buildings weren’t left unfinished. The subsidies have saved the industry, to an extent. Many businesses such as repairs, equipment, and furniture are tied to this industry. I think that what the government will pay for the subsidy program is a very small amount, compared to the damage that could have been done during this crisis,” Medzmariashvili says.

Concerns about the subsidy

There has been some conjecture the subsidy program is not targeting the most vulnerable groups and may result in several negative externalities, though mostly in the short term.

“The subsidies come straight from the taxpayer. Therefore, the entire public is paying for it, but only a portion of society is helped. This puts others in an unequal position who have non-mortgage loans,” Tbilisi Open University Professor Mikheil Tokmazishvili says.

Giorgi Kepuladze, founder of NGO Society and Banks, points out other issues of who is receiving what assistance through the program:

“We have to take into account that mortgages are mainly taken out by middle- and high-income households. With this program, it turns out that the poor and lower middle-class people are helping the wealthier classes.”

He adds: “Subsidizing mortgages is only smacking a bandaid on the problem. Falling real estate prices are still to be expected. Despite the fact that the banking portfolio grew, despite the fact that we have seen a slight revival in these activities, this still cannot give us the desired economic effect. The subsidy was not justified.”

Cushman & Wakefield’s Real Estate Market Consultant Anna Buyanova says the benefits have been substantial, but that there have been drawbacks for some segments of the real estate market as well.

“The subsidy program can be used only by those who buy real estate directly from developers, which has reduced the sale of second-hand apartments and further increased competition on the market. Owners of used apartments have been forced to reduce their asks, which could lead to an artificial reduction in prices in the short term,” Buyanova notes.

One other issue she points out is that the loan ceiling is 200,000 GEL.

“This may also have a negative impact on the sale of larger and high-priced real estate. Developers who position themselves in the market of premium real estate are unlikely to be unable to take advantage of the existing subsidy.”

Despite the myriad of arguments for and against the validity of the subsidy program, there’s one fact that can’t be denied: quantifying the results of the subsidy will take time.

Again, Professor Tokmazishvili: “The only way to somewhat answer this question will be to look, in the future, at how many business owners went bankrupt, in what fields, and how many were able to continue their activities. Only then will we have something of a clearer picture…”

____________________________ ADVERTISEMENT ____________________________