RIGA - The recent crisis in the U.S. subprime mortgage market raised the specter of a similar loan default, albeit on a much tinier scale, in Latvia, which has undergone an economic boom largely thanks to consumer confidence fueled by soaring real estate prices.
Fortunately, no such risk currently threatens the Baltic state's mortgage market, which continued to grow at a fantastic pace during the first half of 2007, experts say.
According to the Financial and Capital Markets Commission, the volume of individual real estate loans issued by Latvian banks amounted to 1.8 billion lats (2.6 billion euros) as of June, up 24.5 percent from the start of the year.
Mortgage loans accounted for almost 30 percent of all bank lending, the single largest sector, the commission reported.
By the end of the first half of 2007 Latvia's 21 banks had issued a total 990,700 loans to residents, or 0.44 loans per capita, the commission said. The number of loans issued to individuals rose by 8.1 percent or 74,500 loans as compared to the end of 2006.
But as commission chief Uldis Cerps recently explained to The Baltic Times, mortgage lending in Latvia is generally considered to be low-risk, which is why the country's banks have no qualms about increasing exposure to this segment of the market.
As Cerps explained, Latvians value their newly won properties most of all and will do everything possible to ensure timely repayment of their mortgage. What's more, the penalties for late payments on mortgage loans are severe, he added.
The statistics seem to bear out this line of reasoning. According to the commission's data released Aug. 24, the increase in the number of loans with tardy payments was slight. Thus if the percentage of loans paid on time was 95.1 percent in late 2006, then that number decreased slightly to 93.9 percent by the end of June.
Over the first six months of the year the overall quality of bank loans has remained constant, while the volume of watchlist and lost loans rose 0.1 percentage points, the commission said.
At the end of June, 99.3 percent of loans granted by banks were assessed as standard loans, the same level as at the end of 2006. Some 0.3 percent was evaluated as watchlist loans and 0.4 percent as non-performing loans.
Another crucial factor keeping the number of bad loans down is rising wages, which grew by a staggering 33 percent annually as of the first quarter of the year and show no sign of seriously decreasing. Indeed, while wages and salaries continue to rise, there seems to be little or no threat of a bad-loan scare in Latvia like the one that has impacted world markets in recent weeks.
What's more, the high level of loan growth in Latvia is set to fall due to both market saturation and the government's anti-inflation plan, which aims to crack down on easy money and force banks to lend on the basis of Latvians' official income, Cerps explained.
At the end of June 2007, aggregate standard loans in the Baltic state amounted to 13.1 billion lats (18.7 billion euros), 21.2 percent more than the end of 2006 and equivalent to approximately 82 percent of GDP.