Russia’s mortgage bubble

The Bell

Hello! Welcome to your weekly guide to the Russian economy — written by Alexandra Prokopenko and Alexander Kolyandr and brought to you by The Bell. Our top story is on Central Bank concerns about a mortgage bubble caused by state subsidized lending, and we also look at the €50 billion aid package for Ukraine agreed by the EU.

Central Bank steps up warnings amid record-level mortgages

One of the most significant aberrations in the Russian economy at the moment is an apparent mortgage bubble. According to data published this week, the total mortgage portfolio of Russian banks rose a record 34.5% year-on-year in 2023 (compared to 20.4% rise the year before). There’s no mystery about the reason: state subsidized lending. As the mortgage boom continues, the Central Bank is lobbying for an end to most preferential mortgages, arguing that low-income taxpayers are subsidizing homes for those rich enough to save a deposit and service a loan. But the war in Ukraine makes this a politically sensitive topic: those most likely to benefit from subsidized mortgages are often in the security forces or the military – groups the Kremlin must keep on side.

What's going on?

The Central Bank on Tuesday released data about Russia's banking sector in 2023. According to the figures, Russian banks issued 2 million mortgages worth 7.8 trillion rubles ($92 billion) last year. That’s 60% more than in 2022, and three times what it was in 2019 (the last year before the government began offering significant mortgage subsidies).

At the end of 2023, subsidized mortgages made up the majority – 60.8% – of all issued mortgages. And, over the course of the year, this proportion has steadily increased: according to the Central Bank’s figures, it reached a peak of 83.4% in December. The total volume of preferential mortgages doubled in 2023 compared with the year before. 

Russia currently runs seven different programs offering state-supported mortgages. Most of them are targeted at specific social groups: for example, families with young children, servicemen, IT specialists, and residents of remote regions. But the biggest program is not limited to certain groups: it provides mortgages to purchase an apartment in a new-build to anyone at just 8%, exactly half the current Central Bank base interest rate. This scheme was launched in 2020 as a temporary boost to the market during the first coronavirus lockdown. The pandemic may be long forgotten, but the program remains.

The Central Bank started speaking out against extending the program of subsidized mortgages for new-builds shortly after the scheme was introduced, but the government has ignored its objections. The deadline for deciding on the next extension is July. 

Central Bank vs. the government

The latest spat between the Central Bank and the government over the subsidized mortgage scheme began back in the fall – and has not yet been resolved. While the bank believes that a mortgage bubble carries significant dangers, developers make up a powerful lobby group (they are led by one of Putin’s new favorites, Deputy Prime Minister Marat Khusnullin).

Mortgage subsidies help both commercial banks and developers. However, due to rising interest rates, they drive up state spending: when the new-build program was launched in 2020, the state guaranteed borrowers a 6.5% rate against a Central Bank rate of 6%; today, it promises 8% loans against a 16% base rate. According to Finance Ministry figures, it would cost the state 1 trillion rubles to extend the program for two more years. 

Moreover, in its current form, the scheme reinforces social inequality. The only people who can access subsidized loans are relatively wealthy Russians who have to be able to afford to save up for a deposit (about 15% of the cost of the apartment) and service the loan. “Taxpayers who do not use these discounts are paying for a mass program of preferential credit,” Central Bank head Elvira Nabiullina said Tuesday. In simple terms, the open-to-all mortgage at 8% means that everybody paying VAT – including the poorest in society, who spend all their money on essentials – are subsidizing mortgages for part of the middle class.

Both the Central Bank and the Finance Ministry are in agreement that the non-targeted subsidized mortgages schemes should be scrapped. 

A compromise solution

Another further problem is that more than 60% of Russian borrowers are spending over half their incomes on servicing their mortgages. And subsidized mortgages are particularly popular among members of the security forces, state employees and others involved in Russia’s war effort. If they lose the subsidies, it could become very difficult for them to service their debts – especially if high inflation persists.

A compromise solution is possible, perhaps like that implemented in 2023 when the government decided not scrap the subsidized mortgage scheme for new-builds, but instead tightened the terms: the required deposit was increased from 15% to 20%, and the state subsidy reduced by one percentage point. 

The banks complain that the more rigorous requirements make it unprofitable for them to issue such mortgages. According to state-owned banking giant Sber, in July 2023, before the changes, their margin on the mortgages under the state subsidized program was 0.6% and now, after the changes, it is -1.2%. The Central Bank, however, takes the opposite view: according to Alexander Danilov, director of the Central Bank’s department of banking regulation, the margin before the new rules was 20% and they remain profitable.

Overall, it’s difficult to imagine anyone having much sympathy for the banking sector, which made bumper profits last year. Net profits for the sector in 2023 amounted to a record 3.3 trillion rubles, an eye-watering 16 times more than the year before. 

Why the world should care

Scrapping subsidized mortgages would mean developers build fewer homes, and construction ceases to be a key driver of economic growth. However, there is also an important social dimension to these subsidies. Russia’s middle class is now mostly made up of members of the intelligence services, the military and other state employees, whose high wages are linked to the ongoing prosecution of the war. And a significant part of this group benefits from discounted mortgage programs. In effect, this is driving the government into a trap: wages for the “new middle class” will have to be maintained at all costs – even if state revenues fall. Causing economic problems for those with combat experience, and access to weapons, could have serious political consequences.

EU agrees on  €50 billion aid for Ukraine

An aid package worth €50 billion ($54 billion) over four years was agreed Thursday by all 27 European Union member states. It follows months of wrangling, and means that the aid will be issued in a well-established manner, and will not require complicated work-arounds

  • Hungary's Prime Minister Viktor Orban, who initially opposed the aid package,backed down after facing intense pressure from other European leaders. 
  • EU leaders also agreed that they would discuss this economic support plan for Kyiv every year and, if necessary, it will be reviewed in two years. The Guardian reported that, in two years, the European Commission will carry out a spending review that will subsequently be put to a vote.
  • In addition, EU leaders issued a statement that mentioned using income from Russian investments currently frozen in Europe as a means of funding support for Ukraine. “Potential sources of income may appear on the basis of relevant EU legislation regarding the use of additional income that comes directly from frozen assets held by the Central Bank of Russia,” they said. While the U.S. has pushed for this money to be seized, European countries – where most of the frozen funds are held – have been much more cautious.

Why the world should care

Despite the West's obvious war-weariness, it's not willing to give up on Ukraine just yet – whatever Moscow might say, or hope. This means that there is no point expecting compromises over sanctions. Of course, this could change if Donald Trump returns to the White House, but even if that happens it won’t be for another year.

Figures of the week

Weekly inflation between Jan. 23 and Jan. 29 increased to 0.16% from 0.7% the previous week, according to the Economic Development Ministry. Annual inflation fell from 7.28% to 7.24%. Over the course of January, prices in Russia increased by 0.62%.

The amount of cash held by Russians rose 2 trillion ruble to 18 trillion last year, the Central Bank reported.

The International Monetary Fund (IMF) doubled its forecast for Russian GDP growth next year to 2.6%. That’s significantly higher than the Central Bank’s forecast (between 0.5% and 1.5%), and just above the Economic Development Ministry’s prediction of 2.3%. In October, the IMF predicted that Russia's GDP would grow by just 1.1% in 2024.

Further reading

Mobilizing Russia’s Immobilized Reserves

Containing Russia, Securing Europe

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