‘The expansion of the preferential mortgage is like the expansion of a gunpowder warehouse during a fire’
Bank analyst Maksim Osadchy on why the stimulation of the popular mortgage tool is fraught with a crisis
President of Russia Vladimir Putin extended the preferential mortgage to buy a flat in new-builds until 1 July 2021 last week. Meanwhile, as early as in July, the federal Ministry of Finance and very cautiously the Central Bank began to talk about a possible mortgage crisis in the country due to subsidised mortgages. Bank analyst Maksim Osadchy told Realnoe Vremya if such a crisis was possible.
“It would be a much more dangerous idea to spend this money to help large families”
Mr Osadchy, in July Vice Finance Minister Aleksey Moiseyev and other functionaries began talking about the possibility of a mortgage crisis in Russia, they named the preferential 6,5% mortgage rate, which has been in force since this April and has gained a high speed, as the reason. Do you agree with these fears?
Indeed, the preferential mortgage is developing very actively in Russia — this programme accounts for over 90% of all loans for new-builds, more than 220,000 loans for 630 billion rubles have already been granted. But why is this growth causing concern? Because the crisis caused by the epidemic hasn’t disappeared anywhere, the second wave can worsen it.
The crisis favours a rise in unemployment and a fall in the population’s income. Borrowers who lost their income won’t be able to service their debts even in a preferential mortgage. And if it isn’t possible to weaken the second wave of the epidemic and it will lead to another lockdown, the consequences will be sad for both banks operating in the preferential mortgage market and borrowers.
Of course, in case of a lockdown, the authorities can prolong loan holidays, but this will just slow down the arrival of a wave of bad debts. The stimulation of the mortgage designed for low-income people is fraught with a mortgage crisis during a crisis like the subprime mortgage crisis in the USA. So the decision to extend the programme seems wrong. The expansion of the preferential mortgage during a crisis is like the expansion of a gunpowder warehouse during a fire.
It would be a much more dangerous idea for the authorities to spend the money allocated to subsidise the interest of the preferential mortgage to help large families that can’t repay current mortgages.
The preferential mortgage is developing very actively in Russia — this programme accounts for over 90% of all loans for new-builds, more than 220,000 loans for 630 billion rubles have already been granted
Can we say that the top began to understand this danger, this is why President Putin extended the preferential mortgage just until 1 July, not till late 2021, last week?
I think the term was shortened not because of the realisation of a risk of a crisis but because of the growth of the budget’s deficit: there is a lack of money for these subsidies.
What should the state do during a crisis in the mortgage market? It should help borrowers, especially large families, who lost their jobs or a significant part of their income due to the epidemic and crisis. It should help those borrowers who already suffered from the crisis, not to drive people into a minefield of preferential mortgage.
“The preferential mortgage is very profitable for banks, this is why its percentage of approval is much higher than that of usual”
Who lobbied the idea of the preferential mortgage?
State corporations, state banks as well as big developers. Of course, state subsidies stimulate housing development, but I repeat that this stimulation is dangerous during a crisis. Risks accumulate and grow. Though they aren’t so high that we can expect a crisis in the mortgage market next year.
How seriously should one take the fears that the prolongation of the preferential mortgage will raise prices for houses as a result of higher demand, which, in turn, will become another reason for a mortgage crisis?
At the moment we aren’t expecting a rise in realty prices in dollars, however, the preferential mortgage slows down the fall in prices. If not the mortgage, the prices would have been increased more abruptly and the reduction in the housing development pace would have been sharper.
Did the preferential mortgage really significantly help the economy?
Yes, it made its contribution to the stimulation, Russia’s GDP would have contracted by as little as a percentage point without it. But is the trouble worth it? The destructive effect of the mortgage crisis can easily outdo all this positivity.
Aren’t banks strict about potential borrowers?
The preferential mortgage is very profitable for banks, this is why its percentage of approval is much higher than that of usual. But it is a double-edged sword: in the early 2000s, the USA began to actively grant mortgage loans to low-income borrowers, these loans had very low rates, without the first instalment — a jobless Afro-American could get a $1-million house. If he didn’t pay, the bank got his house.
The preferential mortgage made its contribution to the stimulation, Russia’s GDP would have contracted by as little as a percentage point without it. But is the trouble worth it? The destructive effect of the mortgage crisis can easily outdo all this positivity
When house prices grew because of the mortgage bubble, such a scheme was profitable enough. But then the process of a rise in prices stopped, a crisis began, and this scheme turned out to be a scheme of a time mine. When an analogous process starts to develop in Russia, there’ll be hell to pay for banks. Yes, a bank gets the real estate and should be happy, but the house’s price goes down, the bank carries losses. Such feedback makes the mortgage more dangerous than it seems at first glance.
Can’t the state secure itself in the case of the preferential mortgage?
Now the state is allocating money to stimulate the demand for the mortgage, and then it will possibly allocate much more money to put out the mortgage fire that will burst because of the reckless subprime mortgage stimulation.
“The Spanish flu epidemic lasted from 1918 to 1920, there were three waves”
What would you advise to people considering the preferential mortgage?
If you don’t have a stable job, if you can easily lose your income, why should you become a mortgage slave? It is important to remember the risks of such a decision: you can easily lose both the house and the money you paid to the bank for the mortgage. Moreover, you can owe the bank. During a crisis, the mortgage is a very dangerous product, and one unlikely should bury one’s gold coins in this minefield.
Are there really a lot of risks?
The situation is just getting worse now. Russia has already faced the second wave of the epidemic, the economic crisis goes on. Threats of serious reinforcement of anti-Russian sanctions have weakened, but the neighbours’ state of affairs isn’t calm — the unrest in Belarus, Kyrgyzstan, the conflict in Karabakh... Risks of the Russian economy are growing, and we shouldn’t add the risks of a crisis in the mortgage market to them.
During a crisis, the mortgage is a very dangerous product, and one unlikely should bury one’s gold coins in this minefield
Everything will depend on how Russia will go through the crisis and when it will end. I will remind you that the Spanish flu epidemic lasted from 1918 to 1920, there were three waves. The situation with a vaccine is unclear either.
We have faced thick fog. When the ship turns out in the fog, it should slow down. This is also applicable to politics and economy: the higher the risks, the greater the uncertainty, the more cautiously one should act.