A brief history of mortgages in Ukraine
By Sergii Meleshchuk (UC Berkeley)
On Thursday, July 3, Verkhovna Rada accepted the bill onto conversion of foreign currency mortgages into hryvnyas (286 votes for). According to the law some individuals can convert the dollar-denominated mortgage liability into Ukrainian currency preserving the interest rate but at exchange level effective on January 1st 2014. The law was adopted at the third attempt, after Speaker Turchynov threatened to close underground exits from Verkhovna Rada so that MPs would have to face angry debtors who meanwhile demanded adoption of the law under the walls of Parliament. Those debtors suffered from the rapid devaluation of Ukrainian currency in the first half of 2014. When UAH/USD nominal exchange rate plunged from roughly 8 UAH per USD to slightly less then 12, dollar liabilities denominated in Ukrainian currency increased by almost a half in nominal terms. According to the new law debtors who made their payments on time and whose mortgage level is below 1 mln UAH can benefit from interest-preserving currency conversion of their loans. This episode is the second currency crisis in the last 6 years; both had adverse effects on Ukrainian mortgage market, however, the main is problem high cost of funds for Ukrainian banks that makes hryvnia lending unattractive and makes consumers borrow in foreign currency.
One of the goals of Ukrainian monetary policy is the “stability of national currency”, which National Bank of Ukraine (central bank of Ukraine, hereinafter NBU) has been interpreting as exchange rate stability. UAH/USD exchange rate has been effectively flat (see Figure 1), except for rapid devaluations at the end of 2008 (by approximately 60%) and at the beginning of 2014 (40%), and a crawling but substantial devaluation in 98-2000 (almost 200%). All devaluations were associated with large shocks to financial system, such as the Asian Crisis of late 1990s, the Global Financial Crisis, or current crisis in Ukraine.