Russian mortgages are facing a Chinese-style crisis

— What do the new requirements for mortgage loans, introduced from day one, mean for Russians?

— Mortgages are becoming less affordable for Russians with a high level of debt. The new measures of the Central Bank of the Russian Federation are caused by the fact that banks are increasingly issuing loans to already over-leveraged borrowers. Thus, the share of mortgage loans under equity participation agreements (EPA) provided to borrowers with a debt burden above 50% in the 3rd quarter of 2023 amounted to 72% of the total volume of issuances. And the share of loans provided to borrowers with a personal income tax above 100% reached 33.8%. Let me remind you that a mortgage under DDU is predominantly a preferential mortgage.

— Why was it necessary to tighten mortgage conditions now, and not a year or two ago?

“Two years before, the situation was significantly better. The share of mortgage loans provided to borrowers with a debt burden above 50% in the 3rd quarter of 2021 amounted to 51% of the total volume of issues. And the share of loans provided to borrowers with a personal income tax above 100% was 17.1%.

— What does the term “debt burden indicator” mean?

— This is the ratio of the borrower’s average monthly payments for all loans and borrowings, including newly issued credit (loan), to the borrower’s average monthly income.

— It turns out that if the PDI is more than 100%, then the borrower’s expenses for servicing debts exceed his income?

– Absolutely right. But I will note: official income. And the bank can also take into account unofficial income, for example, “grey”, unaccounted for wages, the so-called “salary in envelopes”, social benefits and some other income. I don’t know whether banks take into account the bribes and kickbacks received by borrowers, especially from among the PEPs…

– So we are completely confused in abbreviations… Who are PDL?

— PEPs are public officials. It is difficult for banks to calculate PIT for PEP. And it’s dangerous to give them loans now. Let’s say a bank issued a loan to a borrower secured by real estate, but then it turned out that the borrower was a corrupt official or his close relative. Corrupt official – surprise, surprise! — found himself in places not so remote. His property was seized and the loan was not serviced. And here the bank is punished a second time – the mortgaged real estate is confiscated in favor of the state.

— I believe that PEPs are unlikely to be the target audience for receiving a preferential mortgage. Let’s talk about what else worries the regulator in the mass segment of this product?

— In addition to the high personal income tax, there is also a low down payment. Mortgage loans with low (up to 20%) down payment reached 60% of all mortgage issuances in the 3rd quarter of 2023, while two years earlier, in the 3rd quarter of 2021 – 43%.

— What’s dangerous about a low down payment?

— The down payment signals the borrower’s “prosperity” and indicates that he is not a “rogue” who is unlikely to be able to service his debt.

– But this “signal” is easy to fake – for example, through an unsecured consumer loan, which is taken out on the eve of applying for a mortgage? Or, God forbid, a microfinance loan…

— Something often happens that also worries the regulator. The share of mortgage loans for which borrowers could use unsecured consumer loans to finance the down payment is growing. In October 2023, according to the Central Bank of the Russian Federation, this share was 6.5%.

— The regulator’s main concern is about preferential mortgages?

– It’s her. Because of it, the mortgage market and the housing market as a whole were overheated. Moreover, concerns about preferential mortgages are expressed not only by the Central Bank, but also by the government of the Russian Federation. On January 1, stricter conditions for preferential mortgages began to apply. The maximum loan amount that can be taken out under the state program at 8% has been reduced in the capital regions – Moscow, Moscow region, St. Petersburg and the Leningrad region – from 12 million to 6 million rubles. In all regions, the minimum down payment increased from 20% to 30%. The state is consistently tightening the screws on the mortgage market, primarily on preferential mortgages. With a high probability, the preferential mortgage program will be completed on July 1. At the same time, an increase in the key rate reduces the attractiveness of market mortgages.

“But it’s unlikely that any Russians will be ready to take out housing loans at 18%. Thus, the refusal of preferential mortgages will actually “freeze” this lending segment. What are the possible risks here?

— A sharp contraction in mortgages could cause a crisis in the real estate market, similar to the one that has been developing in China since 2020. There is a massive bankruptcy of developers in China, which began with the collapse of mega-developer Evergrande. Housing prices are falling and millions of apartments remain unsold. He Keng, former deputy director of China’s statistics bureau, said China has enough available apartments to accommodate the country’s entire population of 1.4 billion people. The domino effect is spreading to the financial sector, to Chinese banks. I wouldn’t want this “Chinese” disease, like the coronavirus, to reach Russia.

But I want to draw attention to the fact that the market is not completely abandoning preferential mortgages, but only its excessively widespread use. Addressed programs are saved.

— Do you mean the preferential seed mortgage, which, as President Putin announced, will be extended until 2030?

— I mean the entire set of targeted preferential programs, which includes preferential family mortgages and Far Eastern mortgages at 2%, and at the same rate, participants of the Northern Military District will be able to obtain a mortgage in the Arctic and Donbass, as the President of Russia stated in his message to the Federal To the meeting. Targeted professional support programs are also possible: this includes, for example, mortgages for IT specialists from government-required areas and from a government-approved list of companies.

— Developers have already stated that preferential family mortgages will support the construction market. Will the totality of preferential targeted programs be enough to avoid a crisis according to the “Chinese scenario”?

– Do not count your chickens before they are hatched. In one or two quarters after the completion of the “non-specialized” preferential mortgage, it will be clear how much the housing market is “taking the hit”.