Written by Andrey Vakulenko – MACON Realty Group, EECFA Russia
Housing construction remains one of the biggest segments of the Russian construction market, affecting both related industries and the overall macroeconomic situation, including GDP dynamics and labor market indicators. Because of the stagnating real income of the population over the past years, housing demand was stimulated by affordable mortgages. State programs that started back in 2018 targeted specific groups, but due to the pandemic in 2020 they became part of a comprehensive anti-crisis package to stimulate the economy, and unprecedented measures were launched to support construction. Thus, preferential mortgage became available to everyone. This excess demand caused record price increases in 2020-2021 and the rapid exhaustion of the positive effect of cheaper loans. As a result, housing has become even less affordable for buyers, and the market has become addicted to cheap mortgages whose issuance was supported exclusively by the state. Owing to the economic crisis caused by the events in early 2022, the central budget will experience a shortage of funds and spending on certain areas will be reduced. The mass subsidizing of mortgage rate is also likely to fall under sequestration, which may have negative consequences on the market in terms of demand.
Subsidized mortgage schemes then and now
Subsidized mortgage schemes to stimulate housing demand and support housing construction as a whole started in 2018. By then, the real income of the population had been declining for more than 3 years (from 2014 on). Subsidized mortgage rates (at the time about 10%) could stimulate demand and help those in need of buying a new home:
- ‘Family Mortgage’: launched in 2018, it was the first program to reduce mortgage rates to 6% for families with children.
- ‘Far Eastern Mortgage’: a targeted state program that started at end 2019 (a reduction to 2% for buying a home in the regions of the Far Eastern Federal District). Both programs are still in effect (with minor changes in conditions) and are valid until the end of 2023.
- ‘Rural Mortgage’: a targeted mortgage scheme, though geographically limited, started in 2020 (this year it was announced to become indefinite) for citizens intending to buy or build an own house in settlements with a population of less than 30,000. Participants can take up a loan for a new home or for a used home. The goal is to increase the number of people living in rural areas.
All three programs apply only to borrowers meeting certain conditions. All of them supported demand and stimulated buyer activity. But:
- The ‘Preferential Mortgage’ program (as part of anti-crisis measures to restore the economy at the onset of the pandemic in early 2020) had the biggest impact on the market. During this time quarantine restrictions caused a large-scale economic crisis and a major drop in the real income of the population, reducing the solvency of potential homebuyers and the number of transactions. It endangered housing construction, which is a critical segment for the economy. To aid the construction industry, the government implemented the scheme dubbed ‘Preferential Mortgage’. Unlike the other three schemes, it was available to everyone and citizens were able to take up a mortgage at 6.5%. Initially planned to be valid until November 2020, it was extended first until July 2021, and then until end 2022, but with tightened conditions: the maximum possible loan amount was greatly reduced, and the loan rate was raised to 7%. The events in early 2022 led to macroeconomic instability and a sharp increase in the key rate of the Central Bank. The rate under the Preferential Mortgage program also rose to 12%, although by June 2022 it was reduced to 7% again. It also became possible to combine soft loans with mortgages on market terms, which greatly increased the maximum loan amount.
- The latest state program to support the mortgage market has been the so-called ‘IT mortgage’ introduced in May 2022 for the employees of IT companies. It has become part of the large-scale measures to promote the development of IT industry in Russia and stop the brain drain.
The impact of subsidized mortgages on the housing market
In 2018-2019 the volumes of the mortgage market stagnated: the number of issued loans dropped (-8% in 2019 against 2018) and there was a minimal positive correction in the total number of transactions in the primary market (+1% in 2019).
The targeted schemes launched in 2018 helped certain categories of citizens to solve housing problems but did not have a huge impact on the whole primary market of multi-unit housing. But everything changed in 2020 with the Preferential Mortgage program available to everyone without exception. At end H1 2020, the number of transactions in the primary multi-unit housing market was 37% less than in 2019 due to quarantine measures and the general economic downturn after the start of the pandemic. However, the Preferential Mortgage program launched in Q2 2020 contributed to a sharp increase in demand, and in H2 2020 the number of transactions was already 33% higher than in H2 2019. In general, according to the results of 12 months of 2020, transactions slightly decreased, but the effect of the program in the second half of the year almost made up for the decline at the beginning of the year.Continue reading How subsidized mortgages changed the Russian housing market