The preferential mortgage bubble is about to burst: what will the increase in down payment mean?
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You can’t stop the program, and it’s dangerous to continue
The situation in the domestic real estate market is becoming dangerous. If someone is off topic, let us know. Several years ago, preferential mortgages became a driver for the development of the construction industry. And now, while consumers are taking out loans and drowning in debt for the coveted roof over their heads, the construction industry is happily increasing its pace.
GDP growth is, of course, good, but the government still decided to intervene in the situation before the real estate bubble exploded. The first installment on a preferential mortgage will increase, said Deputy Prime Minister Marat Khusnullin. According to the official, this is necessary to regulate the volume of loans issued. Let us remind you that relatively recently the contribution has already increased from 15 to 20%, and everything is going to the point that from January 1 it will increase to 30%. Thus, the elimination of uncreditworthy citizens began.
Meanwhile, the dance around preferential mortgages continues throughout the second half of 2023. The reason is the imminent completion of the program, which is scheduled for July 1, 2024. But a “continuation of the banquet” is quite possible: the authorities have clearly not reached an agreement yet. The Ministry of Finance believes that it’s time to end the preferential “freebies”, but developers are voting for the continuation of history. As for the program itself, the “affordable” housing loan was initially introduced into the Russian market as a temporary measure.
Preferential mortgages for new buildings were launched during the coronavirus pandemic in 2020 to support the housing market as an anti-crisis measure. It was assumed that the program would run for six months or a year. But, as you know, there is nothing more permanent…
To this day, preferential mortgages encourage people with low incomes to invest money in expensive square meters and wait for many years to move into this apartment, while also paying rent on the secondary market. It got to the point that Russians began to look not at the affordability of housing, but at the affordability of mortgages. This is a crazy shift in consciousness – people are trying to figure out whether they can afford a loan, not housing. As a result, 72% of mortgage holders give banks more than half of their income.
The government is already saying directly that preferential mortgages are a help not to buyers, but to developers. Prices for square meters have tripled in some places since 2020, and the national average has increased by 80%.
As a result, the following, frankly speaking, not very rosy picture emerged. The construction industry, the engine of Russian GDP growth, the pace of development and investment attractiveness of which determines the economy of the entire country, has received considerable support. As for the citizens themselves, they are mired in debt. The growth in mortgage arrears accelerated to a two-year high. 52% of all debts of Russians now fall on housing loans – the maximum in history. At the same time, economists note that businesses are running out of resources for the “salary race” amid the rising cost of money in the economy and the peak of wage growth is behind us. It turns out that benefits are benefits, but most Russians still have nothing to pay for the loan in the future.
What about developers? They continue to build as if nothing had happened. It has reached the point where the real estate market is experiencing overstocking—an oversupply. Based on the results of the first half of 2023, in the capital region alone, the total volume of vacant and ready-for-sale apartments in new buildings is about 10 million square meters. m. 42% of comfort class apartments and 47% of luxury housing and business class apartments remain unsold.
Builders are working hard, introducing new and new volumes of housing, but they are not sold out. And this carries with it the risks of reducing construction. This cannot be allowed: construction, as has already been said, is the locomotive of the entire economy.
Ultimately, if the market becomes completely oversupplied, it could end up like in China, where about 3 billion square meters of housing have been demolished in recent years due to housing oversupply. Couldn’t sell! Meanwhile, the construction of new facilities allowed the PRC to show GDP growth on paper, which turned out to be absolutely “paper”. We can recall another crisis – in the United States in 2007–2008. The government sought to make the purchase of housing more affordable for low-income people and practiced artificially limiting the growth of mortgage rates. This led to an oversupply of housing, the market collapsed, and then a full-fledged financial crisis began, which became global.
The current situation in the Russian real estate market is a vicious circle for Russians, developers and banks. It remains to be seen how the government solves this construction conundrum. It is impossible to stop preferential mortgages for new buildings, since the industry will suffer, but continuing the program is dangerous, since the share of overdue debt will increase and the bubble in the real estate market will eventually burst. Well, local measures such as increasing the down payment will definitely not solve the problem, they will only delay the end of the crisis…
Newspaper headline:
Mortgage vicious circle
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