Astronomical mortgage rates in Mongolia have made the prospect of owning a house unattainable for the majority of Mongolians in Ulaanbaatar. With commercial bank mortgage rates hovering around 16-19.2% APR as of early 2011, it is easy to see why only 9% of real estate transactions in Mongolia are currently mortgaged. In a country where the average age is 20-24, the availability of urban housing and infrastructure is critical for the Mongolian economy as well as to ensure sustainable capital growth yields for real estate investors.
On November 2011, the Mongolian Housing Finance Corporation announced it would provide first-time homebuyers with access to mortgages capped at an interest rate of 6% on a 25-year term for apartments of less than 50 square meters in size. This initiative, a part of the “100,000 Homes Project”, seeks to help low-middle income Mongolians relocate out of the countryside and Ger Districts that currently house approximately 700,000 of Ulaanbaatar’s 1.2 million citizens around the periphery of the city.
In a market dominated by cash transactions, Mongolian borrowers still tend to make large down payments, with commercial and state owned banks such as Khan Bank, Bank of Mongolia (BoM) and Trade Development Bank (TDB) requiring initial deposits of at least 30% of the total value of the property. In order to finance this project, the Mongolian government has asked the state owned Development Bank to raise MNT 200 billion, while commercial banks will also serve to facilitate some of the mortgage lending.
With currently only 116,000 total residential units in Ulaanbaatar, the 100,000 Homes project is destined to expand the market for low-middle income families seeking residential space in the city. However, only 2% of all mortgaged transactions in the country are nonperforming. As the requirements for down payments and credit requirements are lowered, commercial and government lending establishments will have to make adjustments to hedge against the increased risk of credit default and foreclosures.
Will Tindall, Chief Communications Officer of Asia Pacific Investment Partners, states, "The 100,000 homes project coupled with the increased penetration of the availability of mortgages, will fundamentally change the options available to nearly every Mongolian. The traditional three tiers of housing – ger/soviet block/western style apartments – will begin to reside as we see the ger communities on the periphery of Ulaanbaatar shrink”. The 100,000 homes project will undoubtedly serve to augment the already increasing presence of the middle class in Ulaanbaatar, as well as push up capital growth in Mongolia’s luxury real estate properties. With FDI totaling 5.3 billion and GDP growth at 17.3% in 2011, the success of the 100,000 homes project and subsequent emergence of the Mongolian middle class will be a true testament to the magnitude and sustainability of Mongolia’s economic strength going into the future.