2024-07-23 08:34:54
Collage: UNIAN
Previously, mortgages in Russia were difficult to sell. Soviet propaganda was influential throughout the years, which condemned the credit as an unsustainable burden. Even after the fall of Communism, Russians still called mortgages “debt slavery.” However, in recent years, the number of Russians who take out mortgage loans has increased significantly thanks to a generous government subsidy program for buyers of new buildings, writes The Economist (translation – UNIAN).
“However, Vladimir Putin may have gotten more than he bargained for. Rampant government subsidies have fueled a hot real estate market, causing home prices to soar. Thus, the Kremlin got to collect a huge bill that was growing rapidly,” says the article.
It is noted that in 2020, when Russia was gripped by Covid-19, officials increased the benefits for those who buy real estate in new buildings in an effort to support the economy. Initially, banks offered a preferential mortgage rate of around 6%, which is around 2 percentage points below the market rate. The difference was compensated by the state. Similar discounts were later offered to workers and people moving to the Arctic, Siberia and the occupied territories of Ukraine. However, mortgage lending did not begin to increase until the war began. Banks issued $88 billion in mortgages last year, or 4% of GDP, a significant increase from 2020.
“This shows that Russians lack investment opportunities: sanctions are weighing on the stock market, and foreign exchange controls are making it difficult to transfer money abroad. Inflation, which broke out in mid-2023, also played a role – and not just because it gave Russians an incentive to invest in bricks. When the Central Bank of Russia started raising interest rates, the attractiveness of the scheme increased… In June, the gap between the government rate and the market rate for mortgages was more than 10 percentage points,” wrote the authors.
As a result, the Kremlin has a big coin bill. The Ministry of Finance has already spent almost half a trillion rubles on this scheme. Costs could soon rise if the Central Bank raises rates to 18% on 26 July. The boom in subsidized loans also created a housing bubble. Last year, 110 million square meters were built. m of housing compared to the average of only 59 million per year. At the same time, prices are rising rapidly. The Moscow Institute of Urban Economics estimates that they grew by 172% in the largest cities from 2020 to 2023.
According to journalists, the head of the Central Bank Elvira Nabiullina scared. She blamed government subsidies for “overheating” the housing market, citing the threat of “inflationary risk” if the Kremlin fails to cut them. Under pressure from the Central Bank and the Ministry of Finance, the Kremlin began to do this. In December, he raised the minimum deposit required for a loan from 20% to 30%. At the beginning of this month, it suspended the most popular scheme for buyers of new buildings. Analysts predict that the number of new mortgage loans could fall by around 50% in the second half of the year.
At the same time, the Russian construction industry and banks will suffer from this. For now, it seems that the housing market will avoid collapse. Vasily Astrov from the Vienna Institute for International Economic Research says that a “slowdown and possibly stagnation” is more likely than a significant drop in prices. Russia’s red-hot war economy, which has seen a sharp rise in wages this year, may be able to maintain a stable real estate market even in the face of higher rates and reduced government support.
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