On a Sound Mortgage Programme

There is much debate about what a state mortgage programme should look like. We should start by understanding what the state's functions and tasks actually are. In this case, the state has two main tasks:

a social task, which means using redistributed tax revenue to support socially vulnerable groups;

raising citizens' welfare, which is achieved, first and foremost, either by increasing incomes or by reducing expenses.

I believe that mortgage programmes should support both of these tasks, but the programmes themselves should be entirely different in nature.

For socially vulnerable groups, the criteria must be clearly defined. They should certainly not include having many children or marital status. They should focus instead on income per family member and on people with disabilities. Income should be assessed using not only official earnings but also indirect income. Nor should separate housing be built for this category of citizens: they should live within existing residential complexes, because the people around us strongly influence our behaviour and habits. When a person enters a particular environment, he or she tries to adapt to it. A favourable environment allows socially vulnerable people to grow and improve. For this reason, I think such a programme should be implemented through Otbasy Bank or the Housing Construction Savings Bank (KZhK). People who go on to earn higher incomes should not continue to receive support, so it is important that the mechanism work through direct rate subsidies rather than cheap financing.

The question of what the programme for the second task should look like is more acute. It is a very difficult one. Any mortgage funded by money issuance only drives up apartment prices and puts pressure on the tenge exchange rate. State stimulation of construction of any kind does not lead to sustainable economic growth; it leads to higher prices and pressure on the tenge. In effect, stimulating housing demand cannot be the basis for GDP growth, because the effect is one-off and its multiplier will always be below one.

So we need to find niches where construction will have a positive effect on the economy. In my view, these are reducing people's transaction costs and raising labour productivity through a new environment and competition. How is this possible? Through the development of large agglomerations and the creation of integrated, block-by-block neighbourhoods designed around value creation. There are many examples. In Dubai, for instance, there are separate districts or centres that are entirely self-sufficient; in Moscow, there is Moscow City, and so on.

Creating autonomous centres within agglomerations significantly reduces transaction costs for both businesses and individuals. And concentrating residents in areas with high competition raises the overall level of knowledge and skills that create value, because people learn and develop in a social setting. Take, for example, someone living in a district centre: he is unlikely to learn how to serve customers properly in a restaurant. Working side by side with colleagues in a chain restaurant with set standards, he will quickly acquire skills that allow him to earn much more. The same is true in any industry. Well-designed agglomerations also attract tourists and the right kind of investment. In Astana, for example, there are residential districts such as Green Quarter and Highvill which, besides residents, have attracted many micro-businesses, and foreigners, as a rule, choose precisely these complexes to live in.

Now, on the mortgage itself. In such districts, it is important to offer mortgages as close to market terms as possible and adjusted for inflation. We cannot currently build a yield curve for long-term debt instruments, but we should at least use historical inflation figures and derive a notional average for these types of mortgages. For example, average inflation over the past 5–7 years was around 10–12%, so a mortgage could carry a rate of around 12–14%. As inflation falls, the cost of the mortgage should fall too. Mortgages should be provided only for the new-build market and only for residential complexes that create integrated neighbourhood development with a positive economic effect. To this end, there should be, for example, criteria requiring certain infrastructure that makes a district economically viable (a shopping centre, commercial premises, restaurants, retailers, schools, kindergartens, hospitals) and so on. In the initial phase, entrepreneurs in these districts could be offered Damu Fund support instruments, and if such a district receives KZhK accreditation, mortgages should be issued at the construction stage, so as to avoid developing separate programmes for the builders themselves. Liquidity for this should be raised from the market through long-term bond issuance. Given that the market currently has no sense of a fair tenge rate, it would be advisable for now either to subsidise part of the bond rate, or to issue collateralised foreign-currency bonds and agree a swap with the NBK, instead of the 7-20-25 programme. It is not an easy task, but it is a solvable one.