Introduction to Mongolian real estate market: a longer historical perspective

Twin transition. Mongolia's real estate market underwent significant transformations as a result of the twin transition - the simultaneous transition from a centrally planned to a market-based economy and the political transition towards democracy. The pivotal period of the early 1990s represented a departure from Mongolia's previous alignment with the economies of former Comecon countries. Under the preceding socialist regime, housing was primarily state-controlled, resulting in minimal new construction. However, following the shift towards democracy and market-oriented economy Mongolia has experienced rapid migration primarily triggered by extreme climate events that drove rural residents to seek better economic and social stability in urban areas. Approximately 20% of the country’s population has migrated to Ulaanbaatar over the past three decades and much of this migration has occurred without substantial built-in affordable housing units for lower-income citizens.

https://www.theguardian.com/world/2017/jan/05/mongolian-herders-moving-to-city-climate-change

?Proliferation of Ger Districts. In?2003, Mongolia adopted a policy granting each Mongolian citizen access to approximately 700 square meters (m2) of land to acquire and own for residential, agricultural, or other purposes, which may have driven migration further, and as a result, many low-income citizens without other housing options built “gers” (traditional Mongolian round dwellings) on the property.?The swift migration, coupled with a lack of infrastructure investments, a shortage of formal housing units, and the absence of official and sustainable long-term housing financing options fueled the proliferation of ger districts. Ger districts are characterized as peri-urban informal settlements which are marked by a multitude of challenges, including deficient urban infrastructure, restricted access to basic services, overcrowding, escalating risk of soil and water contamination, sanitation-related diseases, and socio-economic hardships such as limited access to education, healthcare, and employment opportunities.?Nearly, half of Ulaanbaatar's population now resides in ger districts, exacerbating the issue of air and soil pollution, which continues to deteriorate.

Housing Policy and Finance Development. In 1997, the Government of Mongolia, in partnership with the Asian Development Bank (ADB), established a comprehensive legal and policy framework for the housing sector. In 2002, a crucial milestone was achieved when the ADB approved the first housing finance project totaling 15 million USD, which introduced long-term mortgage lending to Mongolia's banking system. The lack of long-term financing options and past inadequacy of the legal framework for property rights kept Mongolian commercial banks from engaging in lending for housing. For many low- and middle-income households, the primary sources of housing finance were their own savings and family assets. The introduction of long-term mortgage lending was a significant step towards making housing finance more accessible to a broader population, facilitating homeownership and housing development in Mongolia. To further support the development of a secondary mortgage market, the Mongolian Mortgage Corporation (MIK) was established in 2006.

Affordable Housing Finance Program. Enabling the transition to formal housing remained a high-priority national social objective for Mongolia and the Affordable Housing Finance Program (AHFP) represents a pivotal initiative in Mongolia's housing finance landscape. Launched in 2013 by the Bank of Mongolia (BoM) and implemented by MIK since then, the program aimed to enhance formal homeownership for low- and middle-income Mongolians. In the first year of implementation, the AHFP achieved remarkable success, resulting in a substantial 129% increase in the total outstanding mortgage loans. The AHFP has achieved noteworthy milestones, with mortgage market penetration doubling as a percentage of GDP, rising from 5.1% in 2012 to a remarkable 12.3% by 2022. Additionally, the program has led to a substantial increase in the number of borrowers, surging from 29,900 in 2012 to 108,000 in 2022, signifying its pivotal role in expanding access to housing finance for Mongolian citizens.

Addressing the demand for housing. For the last two decades, the government of Mongolia, in conjunction with the Municipality of Ulaanbaatar (MUB), has launched various programs aimed at bolstering the supply of affordable housing units. However, despite these well-intentioned efforts, several challenges such as a lack of infrastructure investment, financing support to developers, and sustainable housing financing mechanisms have hindered the successful implementation of these programs. A 2016 survey by Capital City Housing Corporation estimated housing demand at 150,000 units, while available affordable housing stock was about 4,000 units; with 60% of ger area residents willing to move to apartment units if acceptable and affordable solutions are proposed. There is an imperative need to better balance housing supply and demand, particularly in the domain of affordable housing which necessitates innovative solutions, increased infrastructure investments, enhanced support for developers, and sustainable housing financing mechanisms.

Patterns and Cyclicality. Mongolia's housing sector has evolved significantly over the years, influenced by various economic, demographic, and policy factors. The mortgage market has grown substantially, but challenges remain in ensuring equitable access to housing finance for all income groups. Some key patterns and cycles include:?

·????????? Urbanization and Migration:?Factors such as extreme climate events in rural areas and better economic and social opportunities in urban areas drive migration patterns. This can create cycles of increased housing demand in Ulaanbaatar.?

·???????? Housing Finance Availability: Accessible mortgage options, like the AHFP, have led to spikes in housing construction and sales during their implementation. Conversely, interruptions or changes in mortgage programs can impact market activity.?

·???????? Political Stability: Political events, elections, or policy changes can affect market dynamics by stimulating construction and demand, leading to fluctuations in housing supply and pricing.?

·???????? Demographic Trends: Given that over 32% of Mongolia’s population is below the age of 15, the country is highly likely to see a significant increase in mortgage demand in the near future as younger generations begin to reach adulthood and seek homeownership.? ?

·???????? Economic Cycles:?During periods of economic growth and stability, there is increased demand for housing, leading to rising property prices and construction activity. Conversely, economic downturns can lead to reduced demand, falling prices, and decreased construction. ?

·???????? Construction costs: Border restrictions and global inflationary trends can lead to significant fluctuations in construction costs, impacting housing affordability and development.

Overview of the housing finance market?

The mortgage portfolio outstanding soared eightfold, surging from 800 billion MNT to 6.5 trillion MNT between 2012 and 2022. This surge signifies a doubling of the total mortgage loans to GDP ratio, climbing from 5.1% in 2012 to a substantial 12.3% in 2022. The introduction of subsidized long-term mortgages has played a pivotal role in enhancing the mortgage market. Over the last ten years, there has been a significant decrease in the average mortgage loan interest rate, dropping from 16.4% to a more favorable 11.8%. However, in 2022, the number of new borrowers witnessed a decline due to the mortgage deferral program (implemented due to COVID-19), resulting in a reduced count of 13,000 new mortgage loan recipients, marking a 28% decrease from the previous year.

There has been a significant increase in the number of family homes being constructed over the years. Between 2003 to 2012, an average of 6,000 family homes were built annually. However, in 2022, this number jumped to 23,000. Between 2013 and 2021, the construction industry commissioned 187,000 household apartments. Notably, the period from the latter half of 2013 to 2015 saw a dramatic increase in the number of apartments being constructed. This surge was due to the implementation of the AHFP. However, by the end of 2016, the government temporarily halted loan financing, affecting the construction industry's investments and subsequently leading to a decrease in the number of commissioned apartments. According to a report from "Tenkhleg Zuuch" LLC, 2018 witnessed the largest surplus of housing supply compared to other years, with a total surplus of 6,607 housing units.?

There has been a notable escalation in the construction and major repair works. By 2022, the economic turnover of the construction sector had surged, experiencing a six-fold increase since the inception of the AHFP. This growth was reflected in the construction and major repair projects, which amounted to 6.3 trillion MNT. Within this sector, residential housing construction and major repair work accounted for a substantial portion, totaling 2.4 trillion MNT. This represents a remarkable seven-fold increase compared to the levels observed in 2013, underscoring the program's significant impact on these aspects of the construction industry. The program's temporary halt in 2016 affected investments in the construction industry and resulted in a decrease in completed apartments.?

House prices exhibited substantial growth, averaging a 20 percent annual increase from 2000 to 2007. This upward trajectory reached its peak during the second half of 2007 and carried on to the second quarter of 2008. However, house prices declined in 2009, primarily due to the economic crisis that prevailed during that period.?As the economy gradually rebounded, housing prices underwent a significant resurgence between 2011 and 2012. A noteworthy observation since 2013 has been the direct correlation between housing prices and the availability of mortgage loans. For historical Home Price Index (HPI) data, the only consecutive source available is the data that Tenkhleg Zuuch LLC and the Bank of Mongolia collaborated on and published between 2013 and 2021, which is provided below. The growth in housing prices may have shown signs of slowing down in 2023.??Starting in 2021, the Bank of Mongolia (BoM) and the National Statistics Office (NSO) commenced their independent calculations of the HPI index using market data. ?

As of the second quarter of 2023, there has been a significant increase in the construction cost index, rising by 26.7 percent when compared to the same period in the previous year. The most significant surge, reaching 46.5 percent, occurred in the first quarter of 2022, driven by rising raw material costs influenced by border restrictions and global inflation.???

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