It boomed while the rest of Russia bled. Now mortgage lending offers the best chance yet of unlocking what may be the economy’s greatest untapped resource.
With almost half of Russians living in disintegrating Soviet housing stock built before 1980, banks have taken advantage of state subsidies to hand out mortgages with abandon while other consumer lending withers. As the economy stabilises following two years of recession, the number of people taking out home loans is set for a record in 2017 after the amount has grown 29% so far this year. Mortgages as a share of economic output in Russia are still at about a third the level of former communist states in eastern Europe.
“Where is Russia going to find growth?” Charles Robertson, global chief economist at Renaissance Capital in London, said by phone. “The housing market is one of the only solutions available.”
After searching far and wide for an answer to its longest recession this century, the Russian government has hit upon a solution closer to home.
If the strategy works, the ripple effects of a mortgage boom would sweep up a slew of industries from construction to retail, feeding appetite for housing and converting it into a new source of wealth in a nation where the World Bank estimated every other person has less than 10 square meters (108 square feet) to themselves.
Cheerleading the way is President Vladimir Putin. His message for anyone looking for new digs? Don’t wait.
“Whoever wants to and is ready, better do it now,” he said at a meeting with the head of Sberbank, Herman Gref.
The message is resonating. Mortgage loans issued in the first nine months of the year reached over 1tn roubles ($15.2bn), up by a third from the same period in 2015, central bank data show.
Growth in home loans single-handedly kept Russia’s retail credit from shrinking this year, with non- mortgage lending down 8% in the first eight months, according to Alfa Bank, the biggest private lender.
“The mortgage market has grown throughout the recession,” Moody’s Investor Services Vice President Olga Gekht said by phone from London. “Mortgages are the safest loans as far as the retail market is concerned and have naturally become a larger proportion of it. Demand for new and better housing will continue to fuel appetite.”
Russia still has a long way to go to catch up with its peers. Outstanding mortgages are at 5% of gross domestic product, compared with the average level of 15% in central and eastern Europe, Alfa Bank estimates. That compares with 2015 ratios of 62.9% in the US and 67.6% in the UK, according to the European Covered Bond Council.
Even though Russia’s home-ownership rate is among the highest in the Group of 20, much of the housing stock is tired, with pent-up demand from young families after the country last year matched its highest fertility rate since 1991. The government gave most of the state-owned apartments built during the communist era to their residents after the Soviet Union collapsed a quarter century ago.
State-controlled banks Sberbank and VTB Group, which together control three-quarters of the market, say there’s room to expand and forecast double digit growth will continue next year as the economy picks up and demand for new housing remains high.
“It’s definitely realistic that we grow the ratio of mortgages to GDP in Russia to 20%, just like in eastern Europe,” the head of VTB’s retail banking unit, Mikhail Zadornov, said in an interview. VTB’s 1% delinquency rate for mortgages this year compares with an overall share of 7.1% for non-performing loans at its parent group at end- August, he said.
Russia’s underdeveloped market and banks’ insistence on large down payments should insulate the industry from the threat of a real-estate bubble fuelled by easy credit, according to RenCap’s Robertson. And unlike countries like Poland and Croatia, which have struggled to contain the fallout from mortgages denominated in foreign currencies, the share of non- rouble home loans in Russia was at only 1.9% of the total on October 1, according to the central bank.
The appeal is strong also because the gap between retail loans and mortgage rates runs at as much as eight percentage points, according Sberbank CIB, the investment arm of Russia’s largest bank.
“This helps explain the continued rise of mortgage volumes,” Sberbank CIB analysts including Anton Stroutchenevski said in a report. “We expect mortgages to continue growing as a comparatively more attractive space for prudent spending, which should be positive for investments and negative for consumption, as higher mortgage debt service lowers consumer spending.”
One reason the expansion of home credit has raised no objections from the central bank may be that it creates little upward pressure on consumer prices. Inflation is the keystone of policy for the Bank of Russia, which targets price growth at 4% in 2017 after overshooting its forecasts for a fourth year in 2015.
“If the authorities get inflation down to a stable 4 to 5%, they can use mortgages to kick-start growth,” Robertson said. “With every mortgage, you’re looking at people buying new kitchens, paying someone to wallpaper the bedroom and spending more money. It’s one of the few domestic demand growth stories open for Russia.”
The Russian economy needs a more potent treatment than mortgages, according to the European Bank for Reconstruction and Development.
Barring major structural changes, it won’t be able to grow at more than 2% a year, Sergei Guriev, the EBRD’s chief economist, said at a conference in Moscow yesterday.