Is the Russian housing market facing a coronavirus bubble?

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Later this week, one of the fastest growing Russian companies of the past decade will launch on the Moscow stock market – the latest in a small flurry of Russian. public offers ready to end the year.Real estate developer Samolet was founded barely eight years ago, but grown aggressively, building more than two million square meters of apartments in the hottest part of the housing market in Russia – Moscow and its surrounding suburbs. The company has an additional 15 million square meters in its land reserve for development over the next decades, and this week’s Initial Public Offering (IPO) could value the company up to $ 860 million.

The prospects for Samolet – Russian for airplane – have soared in recent years. The real estate development industry has been a big beneficiary of various government policies aimed at stimulating construction and increasing home ownership. Lower interest rates following the economic crisis of 2014, government support programs such as the “maternity capital”Allowance that gives families coupons to spend on down payments, and a general explosion in the use of loans, credit card and loans have helped more Russians move up the housing ladder than ever in recent years.

The government’s response to the coronavirus crisis has once again placed construction and homeownership at the heart of its action, helping to propel the industry even faster in 2020 with a new subsidized mortgage program which allows borrowers to get a home loan at just 6.5% for a newly built apartment. That rate – although high by Western standards – would have been almost unthinkable in the Russian market just a few years ago, when the average lending rate exceeded 14%.

The Russians did not hesitate to take out mortgages at these record levels. In August, Russian banks approved the second highest number of mortgages in history according to Central bank data – 48% more than last August. The total value of mortgages granted during the month grew even faster, rising by two-thirds to almost 400 billion rubles ($ 5.2 billion).

This dizzying acceleration in the Russian mortgage market – and particularly in Moscow – has left banks, buyers, real estate agents, analysts and the country’s central bank wondering if the market is on the verge of a bubble or if the crisis economic is just another chance. to stimulate Russia’s still small mortgage market.Central Bank Governor Elvira Nabiullina has given conditional support for extending government mortgage subsidies which are now expected to last at least until the middle of next year and provide nearly two trillion rubles (26 billion dollars) of cheap financing for at least 600,000 new apartments. When completed, the program could represent one-fifth of Russia’s mortgage outstanding.

Bubble brewing?

“The program is very effective in stimulating demand and has proven to be a very effective anti-crisis tool,” Nabiullina said at a press conference on Friday. “But looking to the future, we have to think about the consequences. Right now we don’t see any signs of overheating, but we need to be very aware.

“We also have to remember why we need this program: to increase housing availability,” she added, noting that while it would push housing prices up beyond the reach of most Russians, the program would have “cannibalized”.

Other bubble fears stem from the economic context, in which the rapid rise in mortgage loans is taking place. Russia has not escaped the global coronavirus recession, with GDP expected to decline by around 4-5% this year.

“The rapid growth of mortgage credit – in a context of declining real incomes – can lead to negative consequences that last for several years,” warned Alexander Pypin, founder of the real estate analysis site Dataflat.Ru. He fears a possible increase in distressed borrowers which could lead the government to intervene to support households, banks or the housing market in the event of default.

Some real estate developers may be worried about pushing the program too aggressively.

“Developers are very active in advertising the possibility of obtaining a mortgage with a reduced loan rate,” said Dimitri Taganov, head of the analysis department of Inkom Real Estate. “Often, borrowers drawn to these messages do not reasonably assess their financial capabilities.”

Play catch-up

Most analysts, however, share Nabiullina’s assessment of the situation: aware of the risks, but seeing the current housing boom as a positive point in the economy, helping to fuel the construction sector, revitalize the housing stock. Soviet Union and potentially put the housing market on a path to long-term development.

They point out that recent growth has come from a very weak base.

“As the share of mortgage transactions in the Moscow housing market is gradually increasing,” said Sergei Shloma, director of the secondary housing market department at Inkom Real Estate, “it is still impossible to compare us with European countries.

Russia’s total outstanding mortgage debt is expected to rise to around 8% of GDP this year, compared to 50% in the United States and 30 to 40% across Europe.

Experts also point out that the Russian mortgage market is no stranger to rapid growth. Mortgage debt has grown by at least 12% in each of the past seven years – well ahead of economic growth, inflation, incomes and most other economic indicators.

Mortgages themselves are becoming increasingly affordable, both those covered by the government program and those that are not. Amid successive central bank interest rate cuts, the average mortgage rate in Russia was 7.17% in August 2020 – down from over 10% at the start of last year and over 14% a year ago. is five years old.

“Right now people are in a real rush to take out loans because they remember a few years ago when interest rates were around 10%,” the chief economist said. from Alfa Bank, Natalia Orlova.

Strong foundations

Perhaps the most crucial factor in the mortgage rush is the role of government, Orlova added. The state was firmly committed to supporting the housing market “on all fronts” even before the coronavirus crisis, she said.

The Maternity Capital Program, for example, provides 400-500 billion rubles ($ 5-6 billion) per year to families for down payments – often the biggest obstacle to taking out a mortgage. Housing is central to Russia’s high profile National projects agenda which describes the socio-economic priorities of the State for the next decade. Regional governments, especially in Moscow, are also very developer friendly, she said. And the fact that state-controlled banks are behind about three-quarters of the mortgage market adds another layer of protection.

Analysts say the most watched indicator for signs of a bubble will be house prices. Here, too, Russia seems to have room to make up for lost ground. House prices have risen at a slower pace than inflation over the past decade – a trend that started to reverse around 18 months with rapid price increases, especially for newer apartments in Moscow and the capital.

Real estate agents are also reporting rapid increases since the inception of the subsidized mortgage program.

“We have several examples where presale prices have gone up 10% in a month,” said Kristina Tomilina, residential sales manager at Savills Russia, referring to the prices of new apartments.

The Cian real estate database indicates that prices for new construction have increased by 19% per square meter since the beginning of the year in Moscow.

A key test for the market will be the end of the program next summer. Nabiullina is worried about a possible “dramatic” drop in demand in the months that follow, because anyone considering buying an apartment would have advanced their purchase to capitalize on the program. This has the potential to create a vicious spiral of falling prices, weak demand, and reduced activity.

The central bank repeatedly insisting that it is monitoring the program closely is a sign that the market might not be allowed to get too foamy. Inkom Real Estate’s Shloma says he expects prices to drop after the program ends – in a repeat of what happened in 2015-18 following a flurry of buying at late 2014.

But Russia has learned from other crises, he said.

“Russia is not in danger of a mortgage collapse like the 2008 US mortgage collapse. In our country, the situation is completely different. ”

The notion of underwriting multiple or 100% mortgages is not part of the mix, he said, noting that fundamentals are much more secure than those that have seen the US market crash.

“For the Russians, real estate is a guarantee of stability in the event of a socio-economic shock.”

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