The preferential mortgage market is frozen in anticipation of a shake-up: government spending is becoming unaffordable

The Federal Antimonopoly Service will check banks that have limited the issuance of preferential mortgages to Russians only to a list of partner developers, the agency’s press service reported. The Central Bank of the Russian Federation also drew attention to the “new practices” of its wards. In fact, credit institutions require developers to co-finance housing loans. According to lawyers, financial institutions may be punished for violating the law on protection of competition. And while the new practices may cool the market, they risk driving up house prices in the future. MK talked with Maxim Osadchy, head of the analytical department of BKF Bank, about what is happening in the real estate market at the beginning of 2024.

— What new trends have emerged in the mortgage market recently?

— The authorities are finally getting serious about cooling the overheated mortgage market. The Ministry of Finance, willy-nilly, joined the Central Bank’s position on the need to combat this overheating. In the context of an increase in the key rate to 16%, while maintaining the preferential mortgage rate at 8%, the costs of subsidizing preferential mortgages become unaffordable for the state. Moreover, the budget deficit remains: for 2024 it is planned at 2.2 trillion rubles. At the end of last year, on December 23, a decree of the Russian government came into force to reduce the amount of subsidies to banks under preferential mortgage programs by half a percentage point. The down payment on a preferential mortgage was increased from 20% to 30%, and the maximum loan size for capital regions was reduced from 12 to 6 million rubles. Banks are reacting to these innovations by tightening requirements for developers and increasing commissions. Developers may try to get back at buyers by raising prices, but given the declining availability of preferential mortgages, this attempt will inevitably encounter a sharp decline in demand.

However, during the pre-election period, negative trends in the socially significant market of preferential mortgages are clearly undesirable, so the FAS actively began to resolve the situation. Before the elections, it may be possible to stabilize the situation by “pacifying” developers and banks, especially since in 2023 both of them received record profits in the mortgage market. It is significant that so far the shares of developers have not collapsed, although it is unlikely that they will do as well this year as they did last year.

— Why did preferential mortgages lead to undesirable consequences? After all, the goal was the best possible – to provide more or less affordable housing for millions of Russians. But it turned out somehow crooked…

— How can one not recall Chernomyrdin’s immortal aphorism: “We wanted the best, but it turned out as always.” The negative consequences of preferential mortgages were not difficult to predict in advance on the basis of an initial microeconomics course. If the government stimulates demand through subsidies to buyers, then prices first rise. Of course, supply will also stimulate revenue growth, but this is a second-order effect, since supply does not keep up with demand. The logic is simple: buyers of new buildings were provided with subsidies at the expense of the state, and accordingly, they are more actively buying new buildings. But the amount of housing offered “at the moment” does not change due to the payment of these subsidies, so sellers raise prices. Of course, developers will use part of the profit to invest in expanding construction, but houses are not built instantly, so first there will be an increase in prices, and then, with a lag of many blocks, the volume of housing for sale will increase.

— Maybe then it would be reasonable to limit the cost per square meter under preferential lending programs?

– In no case! The market would react to such intervention either with a shortage or a decrease in the quality of new buildings. It would be reasonable to stimulate both demand and supply at the same time. It would be wise to manage preferential mortgages while avoiding market overheating. It would be reasonable to direct government subsidies to the most important areas, and not scatter them “from a helicopter” to the entire market. It would be reasonable to turn these government subsidies into an effective instrument of social and regional policy. But it didn’t work out. Suffice it to say that the bulk of preferential mortgages are in the capital regions. Why stimulate the primary housing market in metropolitan regions at the expense of the state? Mystery.

Familiarity with an initial course in microeconomics would be enough to understand: preferential stimulation of the primary housing market leads to a significant price gap between primary and secondary housing, to a dangerous imbalance in the market. Smart people are known to learn from other people’s mistakes. For example, in American or Chinese. But the Soviets, as you know, have their own pride.

— What could the Chinese experience suggest to our authorities?

— The Chinese tried to stimulate the economy by increasing domestic demand, primarily demand for housing. As a result, they were stimulated: a full-fledged crisis in the housing market is developing in China, which began in 2021 due to the default of the largest Chinese developer Evergrande. In 2023, another large Chinese developer, Country Garden, defaulted. Another manifestation of the crisis is the huge volumes of unsold housing. According to Reuters, “Even China’s population of 1.4 billion would not be enough to fill all the empty apartments scattered across the country.” There is a domino effect – the crisis in the construction industry is spreading to the financial industry. Bondholders of developers who defaulted face multibillion-dollar losses. The state is trying to stop the development of the crisis with the help of subsidies. China’s state-owned banks are cutting rates in an attempt to stimulate the mortgage market. If, however, the crisis moves into an acute phase, the consequences may be comparable to the American subprime mortgage crisis of 2007-2008.

— Of course, I would like to avoid both the American and Chinese versions of the crises. Does Russia have such a chance?

— For now, the mortgage market remains overheated. According to Frank RG, the volume of mortgages issued in 2023 could reach up to 7.9 trillion rubles against 5.7 trillion rubles – the previous record in 2021. For comparison: nominal GDP in 2022 amounted to 155 trillion rubles. It will be possible to judge whether a crisis in the housing market can be avoided based on the results of 2024. In the meantime, let’s “stock up on popcorn” and watch the actions of the Central Bank and the Ministry of Finance to cool the overheated market.