Mortgage portfolio in the baltic countries: analysis of main factors

Abstract

During the last decade Baltic countries experienced a full economic cycle – slow recovery, fast growth and sharp deterioration of whole economy. On the growth period the portfolio of mortgage loans and real estate market developed extremely rapidly, thus, since 2007 - 2008 there was discussions about the overheating of economies and bubbles of the real estate prices in the Baltic countries. However, the majority of the citizens were still taking advantage of easy accessible mortgage loans for the acquisition of desired real estate even prices were going upwards. Unfortunately, doubts about overheating of the separate parts of economies were reasonable and economies of the Baltic countries contracted the most among all EU. Therefore, with a full picture of economic cycle the analysis of portfolio of mortgage loans is being developed. Identification of the main factors that are determining growth of the portfolio of mortgage loans is important for developing a strategy to avoid possible economic crises in the future or to ease the negative effects of economic downturn. The aim of the paper – to find out the most important macroeconomic factors that are determining the dynamic of mortgage portfolio in Lithuania, Latvia and Estonia. The object of the paper – the mortgage portfolio of the three Baltic countries and macroeconomic factors of the mortgage portfolio. To reach the aim of the paper such tasks were developed: 1) Examine the theory and the models that are analyzing the mortgage portfolio. 2) Determine the macroeconomic factors of the mortgage portfolio. 3) Study dynamics of the mortgage portfolio in the Baltic countries. 4) Build up a most suitable model for analyzing the factors of the mortgage portfolio in the Baltic countries. 5) Find out the most influential factors of mortgage portfolio in the Baltic countries. The paper consists of 52 pages, 22 graphs and 12 tables. The research was based on 52 references. The paper is split into 3 main parts. In the first part of paper the main economic factors of mortgage portfolio are indentified, and various authors and theoretical models are analyzed. Such factors as fluctuation of the inflation, negative growths of GDP, the growth of real interest rates, swings in real estate market, over leverage of the government and private individuals, should be closely monitored in order to maintain a sustainable development of the mortgage portfolio. In the second part of the paper, the current situation of the Baltic countries during period 1999 – 2009 is analyzed. The focus is on the rapid development of the mortgage portfolio during the credit boom times. Also, a sudden stop of the growth of loan portfolio and a rapid increase of the provisioning levels for non-performing loans are being discussed. The main causes of the artificial and unsustainable growth of mortgage portfolio are described. Afterwards, the model for factors of mortgage portfolio of the Baltic counties is build up. In the third part, the research of the Baltic countries mortgage portfolio is done based on correlation and regression analysis of the macroeconomic factors. Results of the research confirmed that real GDP is the main factor determining the development of mortgage portfolio in the Baltic countries. Analysis of the real estate market prices and real GDP growth showed that growth of economy is more sustainable when the main driver of mortgage portfolio is real GDP growth, but not growth of the real estate prices. Also, the results showed that changes of real interest rates did not have any significant correlation with mortgage portfolio. However mortgage portfolio showed significant negative correlation with nominal national interbank interest rates - Vilibor, Rigibor and Talibor. When average income was analyzed – it showed no significant relation to the mortgage market – and that could be one of the main reasons of the unsustainable growth of the mortgage portfolio in the Baltic countries