When the bubble bursts: analyst Osadchy spoke about a miracle in the Russian real estate market

Last year, Russian banks issued a record volume of mortgage loans worth 4.7 trillion rubles, the Central Bank of the Russian Federation reported. This is one and a half times more than in 2022. However, preferential mortgage programs have not made housing more affordable due to the sharp rise in prices for apartments in new buildings. Maxim Osadchiy, head of the analytical department of BKF Bank, told MK about when to expect a reduction in the cost per square meter.

— What is the main imbalance in the Russian real estate market?

— After the introduction of state-subsidized mortgage programs, an anomaly arose: the price of housing on the primary market sharply separated from the price of housing on the secondary market. Let’s take, for example, two identical apartments in which no one has ever lived. But one of them still belongs to the category of new buildings, and the second has already moved into the category of secondary real estate. So, the first one costs 40% higher than the second one. A miracle, and that’s all!

— Is this how market mechanisms work?

– Of course, the market decided. The fact is that preferential mortgages apply mainly to primary housing, so market forces restore balance in the segments of primary and secondary housing through price changes. You can’t argue with Lomonosov: “If it’s gone somewhere, it means it’s arrived somewhere”!

Let’s consider a simple example: two identical apartments are sold using a mortgage for a period of 10 years, the first apartment – using a preferential mortgage, at 8%, the second – using a market mortgage, at 16%. For simplicity, we will assume that there is no down payment. In the case of annuity payments (monthly payments in equal installments), the payments are the same if the cost of the first apartment is approximately 40% higher than the cost of the second. It turns out that the difference between the prices of these apartments is an additional payment for the right to use a preferential mortgage instead of a market one. The low preferential rate is compensated by the high price of housing.

— Why shouldn’t the state moderate the appetites of developers in this case? For example, limit the difference between the cost per square meter on the primary and secondary markets to 10%?

“I’m afraid the market will outwit the state here too.” The negative effects of price restrictions are well known: firstly, a shortage will immediately arise, and secondly, the quality of the product will decrease. Everything is like with people: if you are paid less, then you work, respectively, less and worse.

— The head of the Bank of Russia, Elvira Nabiullina, also said that preferential mortgage programs have not made housing more affordable.

– Yes, because in the end, the market equalizes for the consumer both ways of purchasing identical apartments – with the help of a preferential mortgage and with the help of a market one. Whatever mortgage you use, you’ll pay about the same.

– And if there is no difference, then, the question arises, who benefits from this?

— Developers and banks, since preferential mortgages have sharply increased the demand for new buildings. Many billions of government subsidies were wasted to inflate the mortgage bubble. After all, what happens is that investors bought apartments from developers using preferential mortgages for the purpose of further resale. Speculators profited from both ends: both from low rates and from rising housing prices.

“At the same time, banks still manage to complain that after tightening the requirements for preferential mortgages last year – raising the rate to 8% and increasing the down payment – it has become unprofitable for credit institutions. What are banks trying to achieve with their statements?

– It’s not a sin to be poor. Especially with record profits in the banking sector, exceeding three trillion rubles in 2023, including due to preferential mortgages.

— Is there a risk that, due to preferential mortgages, the real estate market is already showing signs of an approaching crisis in the construction industry?

— Back in 2016, there was virtually no difference between the price of housing on the primary and secondary markets. In 2017, this difference was 9%, in 2018 – 13%, and in the third quarter of 2023 this difference reached 42%. This imbalance is a sign of an extremely unhealthy situation.

— Last year, the requirements for issuing preferential mortgages were tightened. Will this help improve the market?

— After not only the Central Bank, but also the Ministry of Finance took up arms against preferential mortgages, the “bubble” in this market, hopefully, will begin to deflate, and the difference between prices on the primary and secondary real estate markets will decrease. Elimination of preferential mortgages will lead to the restoration of price parity between primary and secondary real estate. The main thing is that this process does not lead to a collapse of the mortgage market in general, a crisis in the construction industry and mass defaults by developers, as in China.

— By the way, there is evidence that every 10th Russian works in construction and related industries, and today this sector is considered the “locomotive” of the entire domestic economy. Is there a danger that if preferential mortgages are curtailed, GDP growth for the entire country will slow down?

– Not everything is so simple. In big cities, construction workers are mostly migrant workers. Millions of guest workers in places where they are concentrated create serious social problems. In addition, they transfer a significant part of their income abroad, thereby contributing to the weakening of the ruble. And the expenses of guest workers in Russia contribute to rising inflation. In addition, priorities should be set correctly: stability should come first – social, economic, financial. And only in the second place is economic growth.

— So, in the end, what is the most correct strategy regarding mortgages? Is it better to cancel it completely or, on the contrary, continue to bet on it?

— Preferential mortgages should and can become an effective tool of social, economic and regional policy precisely through targeted programs. For example, there are regions in which it is necessary to stimulate the influx of population, including through preferential mortgages. But at the same time, we must remember that the interests of the state in many cases are fundamentally at odds with the interests of developers – and not follow the latter’s lead.