The preferential mortgage “bubble” threatens Russia with a full-fledged financial crisis

— The positive consequences of preferential mortgages are obvious: it stimulates the construction industry and contributes to GDP growth. Millions of Russians are improving their living conditions. What negative consequences do mortgage benefits lead to?

— Mortgage benefits are subsidies to some groups of the population at the expense of others. This redistribution of money leads to market imbalances and a decrease in economic efficiency. Therefore, with the same contribution of mortgages to GDP growth, not everything is so simple. Also, mortgage benefits lead to unpleasant “externalities,” that is, external effects. For example, preferential mortgages stimulate the growth of the construction industry, but the main workforce of this industry is guest workers. Accordingly, millions of labor migrants are flocking to Russia, which causes an increase in social tension. In addition, the influx of millions of migrants is a powerful factor in both inflation and devaluation.

— It’s clear with inflation – millions of migrants create additional demand in the Russian market, especially in the most sensitive segment of cheap food products. But why do they contribute to devaluation?

– So they send a significant part of their earnings home. And this is an annual outflow of billions of dollars abroad.

—What other negative effects does a preferential mortgage lead to?

— It only applies to primary housing. Therefore, prices for primary materials are tens of percent higher than for secondary materials. This is an extremely dangerous effect that can cause a collapse in prices in the housing market. Well, the main negative effect of preferential mortgages is the notorious “bubble”.

— Is the mortgage “bubble” inflated by accident, due to a lack of understanding of the threat, or does everyone just understand everything?

— Judging by how rapidly the mortgage “bubble” is inflating, it seems that an effective way has been found to inflict maximum damage on Russia with virtually no costs on the part of “unfriendly” states.

— Do you mean stimulating housing lending with the involvement of increasingly less creditworthy borrowers?

– Yes. If the mortgage “bubble” bursts, then a collapse will begin in the domestic real estate market, similar to the one that occurred in the United States in 2007-2008. This process, in conditions of economic stagnation and geopolitical conflict, can develop into a full-fledged financial and economic crisis.

— Regulators claim that everything is under control, and stimulating housing lending is necessary to support the economy in the face of sanctions. Look: the authorities are discussing new benefit programs.

— If you analyze the scheme, you will see a lot of similarities between the current situation in Russia and what happened in the US on the subprime mortgage market more than 15 years ago, that is, before the global crisis. Subprime mortgages target borrowers with low credit scores. And in Russia, state-subsidized mortgages are aimed at borrowers with relatively low incomes. For example, in the regions the limit on preferential mortgages is 6 million rubles, which is about $60 thousand. Even a person with an average level of income is unlikely to be interested in purchasing such inexpensive real estate, except for investment purposes.

— What does this dangerous, in your words, scheme look like?

— At the first stage, we need to warm up the market thoroughly. To achieve this, we are pursuing a soft monetary policy, pumping the economy with cheap money, maintaining low interest rates. Inevitably, “bubbles” begin to inflate in the real estate market and the stock market. Then, when the “bubbles” have inflated, we sharply cool the market: we tighten monetary policy, quickly raising rates. Let us recall a well-known physical experiment: if you sharply cool a steel tank with boiling water inside, the tank will flatten. The same thing happens with an overheated and quickly cooled market: the market “crooks and flattens”—a crisis begins.

This is precisely the scheme that was implemented in the United States in 2007-2008. And it is precisely this scheme, whether by accident or intentionally, that is now being implemented in Russia. With a significant addition of Russian “know-how”: government subsidies artificially reduce mortgage rates. Gasoline is added to the fire, and the fire is lit on a barrel of oil.

– Maybe you’re exaggerating the threat? The Central Bank of the Russian Federation, judging by the statements of its leaders, sees a threat posed by the situation in the mortgage market.

– That’s right, he sees it. The head of the Bank of Russia, Elvira Nabiullina, said at the XX International Banking Forum on September 29 that the regulator sees signs of overheating in this area, as mortgages are growing by 30% per year. In addition to the high growth rate of mortgages, the Central Bank is concerned about the quality of mortgage loans and their impact on the housing market. The growth rate of the mortgage “bubble” is frightening: in August, the issuance of mortgage loans reached 849 billion rubles, and in September – 955 billion rubles.

The Central Bank is trying to slow down the accelerating locomotive of preferential mortgages, which is madly rushing towards the abyss. In particular, in September the initial payment on it was increased from 15% to 20%. But the gap between the key rate of 13% and the preferential rate of 8% is too large, not to mention the rates of specialized programs. For example, rural mortgage rates range from 0.1% to 3%. In addition, the excitement in the preferential mortgage market is fueled by statements about the imminent completion of this program: it expires on July 1, 2024. People are trying to jump into the last car without thinking about the consequences – whether they will be able to pull this strap for years, especially in the context of accelerating inflation and declining real disposable income of the population.

— How might a crisis in the real estate market caused by the explosion of an inflated “bubble” affect Russians?

— Borrowers who have taken out a mortgage and cannot cope with the financial burden will be left without housing. Banks will throw the property obtained as a result of foreclosure onto the market. Housing prices will collapse. Bad debts and depreciation of collateral will lead banks to losses. The mortgage crisis could lead to a crisis in the real estate market and banking sector. The banking crisis will turn into a financial crisis, which in turn will turn into an economic one. It won’t seem enough to anyone. Everything is exactly according to the American scheme.

— What do you think the authorities should do? If you do not touch the preferential mortgage, then a “bubble” may appear in the market; if it is canceled, you will have to save developers with money. If you introduce preferential mortgages for the secondary market, prices there will go up, and if the Central Bank of the Russian Federation lowers the rate and the state does not have to support housing lending with its programs, then inflation will accelerate, which will have a bad effect on everyone.

— Classic zugzwang: any action leads to a worsening of the situation. What can you do, you need to look for the best outcomes from the available bad options. It is necessary to cool the mortgage market, but this must be done wisely and carefully so as not to collapse the housing market. The overall volume of government subsidies should be gradually reduced, while subsidies for specialized programs should be moderately increased.