Apartment Prices Surge in Russia, Raising Fears of a Bubble
(Bloomberg) -- Mortgage subsidies introduced in Russia this year to stimulate the economy have fueled a surge in apartment prices even after incomes plunged by the most since 1998.
Real estate developer PIK says it’s seen a surge in demand right across the nation of 147 million after new government mortgage subsidies were introduced in April. In Moscow, prices have jumped by 10% in the past three months, according to Andrey Ryabinsky, a co-owner of MITS, a Moscow-based group of construction and real-estate companies.
The subsidies were introduced, alongside interest rate cuts, to try to inject some life into an economy that had already suffered years of stagnation before the global pandemic and slump in demand for oil, Russia’s biggest export earner.
But the lower rates have fueled demand even as new housing construction isn’t growing fast enough to keep up, leading to higher prices. With incomes unlikely to recover soon, that could leave borrowers stuck with loans they can’t afford.
“The authorities think that if they pump subsidies into mortgages, it will revive the economy,” said Oleg Vyugin, a professor at Moscow’s Higher School of Economics, who warned a bubble is already forming. “It won’t work. To revive the economy, we need an increase in incomes.”
The concerns have reached the Kremlin, with a top official reassuring President Vladimir Putin in a televised meeting this week that the government is working to boost new construction so prices don’t take off further.
Central bank interest rate cuts pushed average mortgage lending rates down to 7.5% in June, the lowest level in recent Russian history, according to real estate researcher Cian. A government-funded program that will run until November gives all Russians access to a 6.5% mortgage if they are buying a new apartment.
Subsidies from before the pandemic that offer lower rates to families and 2% mortgages for citizens of the country’s sparsely-populated Far East will remain in place beyond November.
The number of mortgages issued in the first half in the Sverdlovsk region jumped by 12% compared to a year earlier. Novosibirsk region had an increase of 8.4% and Moscow had an increase of 3.4%, according to Cian.
The stimulus has created “explosive” growth in lending and could create a housing bubble because some people aren’t solvent enough to repay their loans, Deputy Finance Minister Alexei Moiseev said last month.
About one-third of the 277 billion rubles ($3.8 billion) in mortgages that banks lent in June were subsidized, according to real estate research house Dom.rf. Housing loans grew 29% in June from a year earlier.
In wealthier parts of the country, such as Moscow, the price surge has also been aided by an increase in savings as border closures limit travel abroad. Meanwhile, 250 basis points of interest rate cuts in the past year have increased demand for alternatives to bank deposits.
“People whose incomes remained intact and who had savings are propping the market up right now,” said Oleg Repchenko, an expert from the Moscow-based researcher IRN.ru. “But overall incomes have fallen, so it’s not sustainable.”
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