Experts called the main danger of preferential mortgages

More than half of the systemically important Russian banks increased their mortgage rates by 0.5-1%. Now, in the country’s largest financial institutions, housing loans are issued at an average of 10-12% per annum. Changes in rates in banks was a natural result of the July increase in the key Central Bank index to 8.5%. In this regard, market experts expect further growth in demand for state programs. Maxim Osadchiy, head of the analytical department of one of the Russian banks, said what consequences the dual state of the domestic apartment market could turn out to be dangerous.

— Housing lending has now become less accessible to Russians. In such conditions, it is expected that the demand for preferential types of mortgages will grow. The state uses this leverage to stimulate the Russian economy, right?

– The benefits seem to be obvious: the intensification of housing construction leads to an increase in GDP and employment growth, contributes to the flow of activity into related industries, for example, into the production of building materials. However, the devil, as always, lies in the details – in unaccounted for risks and costs.

– What do you have in mind?

– Firstly, the mortgage bubble is inflated in the conditions of economic stagnation. Compare: as of April 1, the annual mortgage growth rate reached 25%, while GDP growth in 2023 is estimated at 1.5-2.5%. This contradiction sets the stage for a mortgage crisis. The mortgage bubble is being inflated by stimulating programs of the state, that is, various types of preferential mortgages: mortgages at 8%, family mortgages, Far Eastern and others.

– Where does this lead?

– Firstly, to the growth of prices for new buildings, ahead of inflation. This is due to the fact that the growth in supply, that is, construction, does not keep pace with the growth in demand, fueled by subsidized mortgages. Indeed, the actual volume of housing commissioning in multi-apartment buildings in 2022 increased by only 5% compared to the volume of commissioning in 2021, while the average price of one square meter for apartments in the primary housing market increased by 28.7%. Moreover, a situation arises when, due to preferential mortgages, prices in the primary market increased significantly more than in the secondary market, since mortgages with state support apply only to new buildings.

An additional effect on the rise in prices for new buildings is made by the “preferential mortgage from the developer” with a very low percentage, sometimes close to zero. Preferential mortgages are a new tool for Russians. Inexperienced people see only a low rate and do not understand that the cost of an apartment is often overpriced by tens of percent compared to its market value. A convenient marketing ploy: the mortgage rate is significantly lower than the market level, and the cost of the apartment is significantly higher. And naive people snap up such apartments like hot cakes. It is especially convenient when a financial and industrial group has both a bank and a developer. This is absurd, but the prices of two identical apartments, one of which passed through someone’s hands, but no one lived in it, and the second still belongs to the “primary” can differ by tens of percent – provided that the “primary” is sold with using a mortgage. The just published statistics of the Central Bank for the 1st quarter of 2023 are impressive: in the 1st quarter of 2023, the average price of one square meter of housing in the primary market was 40% higher than the average price of one square meter in the secondary market. Prior to the hype associated with preferential mortgages, for example, in Q1 2019, this excess was only 6.5%.

“Prices are a real problem. The market has long been saying that for real regulation, in addition to preferential mortgages, it is also necessary to limit the appetites of developers. But she’s not the only one, is she?

— Of course, the second important consequence of subsidized mortgages is that the growth in demand for new buildings contributes to the development of the construction industry. And since a significant part of the labor force in the construction industry is migrant workers, it turns out that subsidized mortgages contribute to their massive influx. In the first half of 2023, 2.5 million labor migrants arrived in Russia, one and a half times more than in the same period last year. 1.2 million people came from Uzbekistan, 0.7 million from Tajikistan, and 0.3 million from Kyrgyzstan. Migrants live crowded, far from being in the most comfortable conditions. These are predominantly young men, often with a low level of culture. Numerous offenses, mass fights, conflicts with the local population occur in places where labor migrants are concentrated.

Favorable conditions are being created for the radicalization of migrants. Where do migrant workers go? They spend part of the money in Russia, which contributes to inflation. They send a significant part of the money to their families at home. Billions of dollars are being withdrawn from Russia.

— This cluster of the economy has been living in this mode for many years. Regulators take it easy.

– But that’s not all. Finally, subsidized mortgages increase the demand for credit and, as a result, lead to higher interest rates. Government incentives for mortgages, like any external intervention in the economy, lead to its deformation.

Preferential mortgages are subprime mortgages (during the 2008 crisis, this was the name for housing loans issued with some serious drawback, for example, issued to borrowers with a bad credit history – ed.), “low-quality” mortgages aimed at people with relatively low income. This category of people is most exposed to economic and financial risks. When a crisis breaks out, the poor are the first to suffer. One of the reasons is the absence or low volume of a “liquidity cushion”, that is, savings for a “rainy day”. If the borrower is unable to service the mortgage, the apartment is thrown onto the market, massive home sales cause prices to collapse. The mortgage bubble bursts, the mortgage crisis begins, which can develop into a financial and economic crisis. This scenario was realized in the USA in 2007-2008.

— Do you consider it possible to repeat the events of those years in Russia?

– In the context of the transition of the economy to mobilization rails, stimulating housing construction with the help of preferential mortgages is a waste of resources and can be regarded as obvious sabotage. Who stubbornly supports subsidized mortgages, despite the obvious risks and costs associated with it?

Powerful financial and industrial groups, including developers and banks. This force is opposed by the Central Bank of the Russian Federation. The regulator sees the threats associated with preferential mortgages. However, it is impossible to turn it off quickly, otherwise the housing market will inevitably collapse. The Bank of Russia is cooling down the overheated mortgage market by tightening regulation and reasoning with overly greedy bankers. The tightening of monetary policy, the increase in the key rate also contributes to the cooling of the mortgage market.