Mongolia's home-owning dream could become a nightmare

Three months away from parliamentary elections, Mongolia's leaders are making some bold and expensive promises to turn the Mongolian dream of home ownership into reality.

At the hustings at the end of June, politicians from the ruling Democrat Party-led coalition will have a tough time trying to persuade voters that life is better than four years ago, when they took power. The economy today is no longer an investors’ darling —economic growth has fallen from a world topping 12.3% toprobably less than 3% this year, and the once booming coal industry is earning a third less than what it did a year ago amid falling prices and weak demand from China.

Rather than making the politicians exercise restraint, the country’s economic problems have only encouraged the government to promise even more subsidies to enable Mongolians to buy their own homes.

The promise reflects the housing crisis in the capital Ulaanbaatar. The population of the city has tripled to 1.3mn over the past 30 years, but only 40% of residents are living in formal apartments, while the rest live in traditional yurts, called gers, and simple houses without access to city utilities.

Damdin Gantugs, a board member for the state-backed Mongolian Mortgage Company (MIK) that buys up mortgage portfolios from commercial banks, remembers back when Mongolia's capital was a sleepy city of about 400,000 people.

Growing up, she lived in a modest government-owned apartment block (built and financed by the Soviet Union) that her parents had moved into in 1967. “It wasn't easy getting a home back then, and it was done through a distribution system,” she says. “They had to wait 10-15 years for approval.”

In 2013, a year after the Democrat-led coalition took power, the government began providing commercial banks with funds at 4.5% annual interest. The banks then lent the money to homebuyers at 8%, with a 30% downpayment. Since then, the number of mortgages has grown 58.5% to 76,583, up from less than 5,000 in 2005.

This programme has kept the real estate and home-building industries alive and boosted home ownership to an all-time high. According to bankers in Ulaanbaatar, a mortgage outside the programme might cost between 18% and 20% in interest a year.

But even with interest on mortgages four percentage points below the 12% policy rate set by the central bank, most of those who could afford to buy homes have already done so and many Mongolians still can’t afford to.

So, to reinvigorate the programme, the government has guaranteed to cut upfront downpayments by two thirds to 10%. They've also made the hasty promise to spend millions more a month to cut the annual rate on the subsidised mortgages by three additional points to 5% by March.

A growing city

MIK, which is 20% owned by the government's Development Bank of Mongolia and nearly 80% by the commercial banks, underpins the current programme by buying mortgage packages from the banks. “It is their choice, but usually banks want to sell those mortgages to us because for them it is profitable,” says Gantugs.

MIK's portfolio has grown from 16 billion to 2.16 trillion tugrik (€966mn) since 2013 from the mortgage packages it's purchased. “In 10 years this portfolio increased 1,500%,” boasts Gantugs. She says MIK plans to expand its portfolio by 1.32 trillion tugrik by 2019.

MIK is shielded from the first 10% of the default risk with junior bonds the banks agreed to buy when selling their mortgage packages. “There is a swap agreement,” says Gantugs.

The junior bonds are paid out on a quarterly basis on top of fees paid to the banks for their services in lending and verifying the finances of borrowers (MIK paid out 5 billion tugrik to banks last year), which makes a nice deal for the banks, which are currently starved of liquidity. Mongolia's banks are responsible for about 90% of all financing in the country, but funds are hard (and expensive) to come by while the economy is stagnating.

The government secures the remainder of the portfolio through senior bonds bought by the Ministry of Finance at 4.5% interest.

The recent thinly veiled attempts at keeping the electorate happy before the election now have some bankers privately worrying about the risk, given that there is no sign that Mongolia's economy will improve dramatically any time soon.

If the economy deteriorates further, given the backlog of property built in the lead up to and during the mining boom, property prices could fall sharply, while defaults could climb. The commercial banks securing the first 10% of defaults through the junior bonds would then be most at risk. As one banker stated, “It's a time bomb ticking, with the way things are going.”

Gantugs, however, plays down the danger, given that only 2.5% of MIK’s mortgages are currently in arrears, with only 48 defaults.

Recalling her own humble beginning and parents' struggles in getting their home, Gantugs says Mongolians have a strong appreciation for the responsibility they have for paying back their mortgage and they won't risk losing their homes.

“For the Mongolian people who used to live in nomadic-style gers, buying an apartment is the dream,” says Gantugs.