LM Legal Services Blog

Last year 60% of the mortgage applications in Bulgaria have been made for the purchase of a second home, according to Bulgarian bankers. Bulgarians used to buy properties for investment, expecting high returns and constantly increasing property prices.

This year the number of the mortgage applications have decreased ten times. According to bank managers this is due to the different expectations of sellers and buyers. The buyers expect prices to go further down and do not rush to buy, while sellers do not drop the prices of their properties and wait for the market situation to change back to the time of the property boom.

The banks lend much less money than before and cover a much smaller proportion of the price of the properties. At the same time prospective buyers are unwilling to take large mortgages and prefer smaller ones. Most of the buyers now have savings but they still need to borrow some money to buy a property.

Leading bankers think that the lending will not go back to the levels during the property boom of the last two years. They expect that at the end of the recession the ratio of the savings to the size of the mortgage will be 50:50 and in the following new boom it will go to 30:70.

The Bulgarian bank managers expect that in the next 6 months two new types of clients will enter the property market. The first type are people with good incomes and substantial savings. Currently, in Bulgarian banks there are 110 000 savings accounts with amounts exceeding 30 000 levs (15 000 Euros) with 76 000 levs (38 000 Euros) on average per account, according to the official statistic of the Bulgarian National Bank. Obviously, these people wait for the right moment to invest.

The second type are people who are not covered by the official statistics. They either keep their money at home or have incomes from the grey economy. Such kind of customers usually apply for mortgages that cover 20% to 30% of the price of the property.

At the moment the mortgage interests of Bulgarian banks are between 8% and 10%. Nobody expects any change until the end of the year, as bankers wait for the first encouraging signals from the U.S.A and Europe, in order to make a move.

The maximal new foreign debt of Bulgaria in 2009 will be increased by 25% or 2.5 billion levs (about 1.2 billion Euros) according to the decision of the parliamentary budget and finance committee. The council of Ministers will not make any changes in the credit framework during the year as the loans and the beneficiaries have been already chosen. The largest loan is of 600 million Euros and it is for the construction of the nuclear power station Belene.

The sales of properties have decreased twice in the first three months of 2009 in comparison with the same period in 2007. The main reason is the shrinking of the market. The investments in the property market are much less than in previous years.

In order to attract clients the construction companies now tend to building longer – up to 3 years. At the same time they  accept smaller instalments during the construction and a bigger final instalment when the project is ready. It is difficult to make predictions at the moment but for the time being there are no significant changes in the cities.

According to Credit Centre the most popular mortgage in Bulgaria at the moment is for a plot of land and a prefabricated house. More and more Bulgarians prefer to move in the outskirts of their cities and to build their own house, rather than to buy an apartment in a block, where two-bedroom apartments are in the same price bracket.

Another new trend is the increasing number of customers who restructure their debt, due to the increase of the interest rate. Many Bulgarians face difficulties repaying their mortgages and some even their utility bills. According to Credit Centre in September each sixth credit has been taken to pay old debt.

In general more than 79% of the mortgages are for the purchase of property and only 1.3% for construction.

Another tendency is that for a second consecutive month the average size of the mortgage has decreased to 43 000 Euros, while during the peak of the property boom it has exceeded 50 000 Euros. Customers freeze their purchase or redirect to a cheaper property. The change is more obvious among the most popular customers – the middle class ones – who used to take a 80 % mortgage for the purchase of one-bedroom apartments. Now these clients are seeking smaller apartments and try to pay a large proportion of the price with their own funds.

The collapse of the banks in the West is a serious warning for the future of Bulgarian banks. In the last three-four years, the Bulgarian banks enjoyed enormous profit and record growth levels but the world financial crisis is going to put an end to this.

Almost all Bulgarian banks have started to change their development policy following September, 14.  Almost all plans for the opening of new branches have been frozen. The major problem in the banking sector is the lack of fresh money. The foreign financing has stopped and now all Bulgarian banks have focused on the domestic market to keep their growth. It is expected that a within a year a real war to attract deposits of new clients will unleash and the perks for the clients will include holidays abroad and golden watches.

However the biggest loser will be the business and the ordinary consumer. Many banks have changed their policy to attract new clients and now focus on keep the reliable clients with a good track record. It will be very difficult to get a credit if you are a new company. The price of this will be high for the Bulgarian economy – so far the banks have been the major force of the economic growth.