10.11.23 Review

(In)stability Factor: Subsidised mortgages in Russia are gradually feeling the squeeze

Mortgage lending in Russia fell by almost 20% in October, the first result of efforts by the Russian economic authorities to curb inflation. However, this reduction falls short as the volume of preferential loans remains at a high level. The surge in interest rates has led to a fourfold increase in budgetary expenses to compensate for the difference between the subsidised and market rates, along with the rising cost of housing. Despite the economic measures to contain inflation, the subsidised mortgage programme remains a political project for the authorities. Against the backdrop of the devaluation of other signs of 'social stability' as a result of the war in Ukraine, the mortgage boom is viewed as a crucial compensatory factor. Consequently, there are no plans to roll back the most popular programmes before the presidential elections, despite the fact that retail lending remains a key factor contributing to inflation.

In October, the volume of mortgage lending in Russia fell sharply — by almost 20% compared to September, to 775.6 billion roubles, according to Frank RG. This decline reflects the first visible impact of the tightening of monetary policy and the shift of Russia’s economic authorities towards a policy of disinflation, or at least their efforts to curb price growth. Nonetheless, the figure for September was the highest in the history of the mortgage market, and the October figure still exceeds the annual average. Banks have issued 6.3 trillion rubles worth of mortgages since the beginning of the year, an increase of 500 billion compared to the record-breaking amount issued in 2021. Given that mortgages account for more than half of the total retail portfolio of Russian banks, this has become one of the key pro-inflationary factors. Mortgages are also fuelling demand for consumer loans. According to the estimates of the Central Bank, in the first half of the year, the initial payments of 6% on mortgage loans could be financed by consumer loans. In addition, approximately one in four mortgage borrowers take out an unsecured consumer loan for home renovations.

In late summer, the Central Bank began a series of key rate hikes to combat inflation and the weakening ruble, ultimately raising it to a prohibitive level of 15%. However, this may not be sufficient to cool down demand for mortgages. Announcing the rate hike in August, Central Bank head Elvira Nabiullina noted that it was largely large-scale preferential programmes, primarily for mortgages, that ensured high rates of lending: 'For the rate hike to work on the necessary scale, it is necessary to raise it more than if such a programme did not exist'.

In October, the main reason for the decline in mortgage lending was not so much the tightening of monetary policy but changes in the conditions for obtaining government-supported loans, the rates on which are fixed and do not depend on the key rate, analysts at Frank RG note. From September 20, the down payment for such loans was increased from 15% to 20%. Moreover, from October 1, banks have increased risk coefficients for loans with low down payment.

The first government-supported programme, targeting families with children, was launched in 2018 with a loan rate of 6%. In 2020, the preferential mortgage programme emerged, allowing individuals to obtain a loan, for the purchase of housing in the primary market or for the construction of a house, at 8%. The state subsidised rates on both programmes up to the key rate, adding up to 5 percentage points — depending on the programme. For comparison, the average market rate in the 20 largest banks in early November reached 16%, according to analysts at 'DOM.RF'. The preferential mortgage, initially designed to support developers during lockdown, was expected to last only a few months. However, this programme has been extended multiple times, becoming more popular than the family programme, despite the higher rate, as it does not require having children.

The volume of mortgage loans issued in Russia, 2022–2023, billion rubles

In addition to the two most popular government-supported programmes, there are several other niche programmes such as the 'Far Eastern Mortgage', 'Rural Mortgage' (suspended in August), 'Military Mortgage', and 'IT Mortgage' programmes. Up to 90 per cent of all mortgages in the primary market are now soft loans. Taking into account the secondary market, their share is about 50%. According to calculations from the real estate Telegram channel Domus Verus, between the start of 2020 and October 2023, approximately 425,000 loans were issued under equity participation agreements exclusively thanks to subsidised programmes. This accounts for one in four loans. 

However, the main beneficiaries of these programmes have not been borrowers with low incomes but rather developers and banks. The low interest rates have contributed to the rise in property prices, primarily in the primary market. Elvira Nabiullina notes that since 2020, prices have doubled, while salaries have increased by only 35%, and consumer prices have risen by approximately 25%. The head of the Central Bank believes that despite the apparent affordability of preferential mortgages, housing may have become less accessible in recent years. Analysts from the 'Property Market Indicators' project put this more explicitly: 'Inadequately cheap mortgages have inflated prices and made housing unaffordable for most.' Tinkoff Magazine has calculated that, in 2022, the time it would take a family to save up for a home, if they saved all their income, was over four years, compared to around three years before the introduction of preferential mortgages.

Nevertheless, cheap mortgages, albeit with expensive housing, have become a significant political project. In 2022, according to a VTsIOM survey, 22.7 million Russian families (that is, one in three families) expressed the need to improve their housing conditions. Economists have long pointed out that accessible housing credit is a powerful social tool and a driver of growth for the construction industry and the economy. Against the devaluation of other indicators of 'social stability' due to the war in Ukraine, the mortgage boom was considered an important compensatory and stabilising factor. Although it became clear during the summer that credit measures were contributing to economic overheating and rising inflation, the most popular programme for new developments has been extended until the summer of 2024, guaranteeing that it will continue until after Putin's re-election.

Within the conditions of tight monetary policy, maintaining government-supported programmes requires a fourfold increase in budget expenditures on subsidies. According to the current budget, subsidies for preferential mortgages were projected to amount to 46.5 billion rubles in 2024, and to 72.9 billion rubles for family mortgages. The budget for 2024–2026 anticipates expenditures of 230 and 223.8 billion rubles, respectively, i.e. a total of 454 billion instead of the initially budgeted 119 billion.

Although it was the government-supported programmes that contributed to market overheating, the government will be forced to continue these schemes to avoid a complete freeze, which would be caused by high market rates combined with inflated prices, according to Yuri Belikov, managing director of ‘Expert RA’ rating agency. In his opinion, the market will be able to return to normal if citizens' real incomes grow evenly, and monetary policy is relaxed. However, Elvira Nabiullina, speaking in the State Duma, promised to maintain strict credit policy for at least several quarters.