‘For Russians, real estate is a guarantee of stability in case of a socio-economic shock’

The Kremlin extended subsidised mortgage programme until mid-2021

‘For Russians, real estate is a guarantee of stability in case of a socio-economic shock’
Photo: pxhere.com

Real estate remains one of the few areas of the Russian economy that shows a rapid and steady growth thanks to a state-backed programme of preferential mortgage. Last week, the government announced the prolongation of the preferential conditions until next summer with the Central Bank keeping a close watch on the programme.

In Russia, mortgages have never been cheaper and lending is growing at an eye-watering pace, reports The Moscow Times. In recent years, the country’s property development industry has received extensive government support aimed to boost construction and expand home ownership. During the current coronavirus crisis, the state has launched a new programme of subsidised mortgages, which allows borrowers to get a loan for a newly built apartment at just 6,5%. Only a few years ago, the average lending rate was over 14%.

As a result, Russian banks approved the second-highest number of mortgages in history in August, according to the Central Bank’s data. The total value of mortgages issued over the month increased by two-thirds compared to August 2019 and amounted to almost 400 billion rubles ($5,2 billion). The Central Bank’s governor Elvira Nabiullina approved the extension of the state programme until 1 June 2021 but urged to “think about the consequences” and “be very cognizant”. She warned that if cheap loans caused house prices to rise beyond the reach of most Russians, the programme would have “cannibalized” itself.

“The rapid growth of mortgage lending — against the backdrop of a decrease in real incomes — may lead to negative consequences that last several years,” considers CEO of real estate analytics site Dataflat.Ru Alexander Pypin. A possible increase in distressed borrowers may cause the government to intervene to prop up households, banks or the housing market. Borrowers attracted by aggressive advertising often do not assess their financial capacities reasonably, agrees Dimitri Taganov, head of the analytics department of Inkom Real Estate.

The average mortgage rate in Russia was at 7,17% in August 2020. Photo: demonzak

Nonetheless, the majority of analysts sees the current boom as a bright spot in the economy and points out that the recent growth comes from a very low base. Mortgage debt has increased by at least 12% annually for seven years in a row being far ahead of economic growth, inflation, incomes and most other economic indicators. At the same time, Russia’s total outstanding mortgage debt is expected to total around 8% of GDP this year, compared to 50% in the US and 30-40% across Europe.

The average mortgage rate in Russia was at 7,17% in August 2020. By comparison, it exceeded 10% at the beginning of 2019 and 14% five years ago. However, while mortgages themselves are becoming more affordable, real estate agents are reporting rapid increases since the launch of the programme. According to Cian real estate database, prices for new housing in Moscow have risen 19% per square metre since the beginning of the year.

The Central Bank expects a “dramatic” fall in demand after the programme ends next summer, as people will bring their purchases forward to capitalise on the possibility. Director of the secondary housing market department at Inkom Real Estate Sergei Shloma also expects prices to fall as they did in 2015-2018 following a boom in purchases at the end of 2014. However, he believes that Russia is not in danger of a mortgage collapse like the US faced in 2008. “In our country, the situation is completely different, he says, as “for Russians, real estate is a guarantee of stability in case of a socio-economic shock”.

By Anna Litvina