Banks in Kazakhstan are cutting back on lending to the construction sector out of concern over the stubborn rate of defaults among homebuyers, according to research published by economic monitoring agency Energyprom.kz.
The lack of available credit threatens to gravely undermine an ambitious government program launched this year to provide affordable housing to hundreds of thousands of families in the coming decade.
At the end of March, the volume of outstanding banking loans to the construction sector stood at 961 billion tenge (more than $3 billion), which is 3.8 percent down from the same period a year earlier. That marks a long-term trend. Over the past three years, credit to construction has shrunk by 34 percent. As a percentage of overall credit in the economy, the share extended to construction has dropped in that timeframe from 12 percent to 7.7 percent.
Further, the size of long- and short-term loans has been shrinking, by 26 percent from March 2014 to March 2015. The size of loans has fallen again at 5 percent annually since then.
The diminishing attractiveness of construction stems from a systematic trend of insolvency among companies in the sector. Following the major restructuring of Kazakhstan’s banks in 2015, the default rate for construction companies fell from 26.4 percent in January to 7.5 percent by the end of the year. But the situation entered a new cycle of decline in mid-2016, with the default rate for the sector creeping back up to more than 12 percent by the end of March this year.
Energyprom.kz analysts argue that the impact is going to be felt strongest in the implementation of the government’s Nurly Zher program, which got underway this year. The idea of the program is to help hopeful homebuyers by providing subsidies to contain the size of mortgage interest rates.
While this assistance helps, it still leaves paying off debts a startlingly onerous undertaking hard to imagine for homebuyers in the West, where rates are far more competitive.
In essence, under Nurly Zher, the government meets the costs of 7 percent of annual interest charges. Homebuyers in Kazakhstan typically have to make interest payments equivalent to around 15 percent of their entire outstanding debt every single year — the subsidy in the case of 15 percent mortgage would bring the annual interest owed down to a more manageable 8 percent. At that rate, debtors are required to pay back an amount equivalent to their entire original mortgage in interest alone over the span of a few years. It is no surprise that so many prospective homeowners fail to keep up with payments.
According to the ambitious vision for Nurly Zher, around 1.5 million families should be acquiring new homes in the coming 15 years, but if the banks are unwilling to take the risk, it is hard to see how those targets will come anywhere close to being met.