Bulgarian banking system and housing market

This report explores one aspect of this sector -- housing finance. It discusses the current state of the banking and housing finance systems, explores housing finance issues that must be addressed over the short- to medium-term, and briefly suggests areas in which the system might benefit from technical assistance. Although all banks are legally able to provide housing finance, problems such as negative real interest rates, undercapitalization, and the Bulgarian government"s policy of not insuring commercial banks have kept virtually all banks out of the housing market, except for the State Savings Bank (SSB). SSB"s lending was extremely high in 1990 (166,461 loans), reflecting the government"s massive sale of state-owned housing at pre-1990 prices and deregulation of the inter-household real estate market. In the first semester of 1991, housing loans were also high, though somewhat lower than in 1990. Although the SSB has interest rates on deposits and loans that are extremely negative in real terms, the rates are still too high for most households due to the equal-monthly- installment mortgage product. Even more damaging to housing affordability is the fact that housing prices rose 10 to 17 times from Spring 1990 to Fall 1991, which was well above the inflation rate. The report concludes that the Bulgarian housing finance system could benefit greatly from the introduction of alternative mortgage instruments such as the dual-index mortgage and the price level adjusted mortgage. It could also benefit from training in internationally accepted underwriting and collection procedures.