Russia’s biggest banks have reduced mortgage interest rates to below pre-crisis levels that will continue the boom in mortgage lending – currently the only dynamic part of Russia’s financial sector.

Mortgages are booming in Russia as banks have been cut off from retail loans thanks to the Central Bank of Russia (CBR) decision to increase prudential reserve requirements two years ago to prick a bubble that was forming. At the same time, the Kremlin is promoting home ownership for political reasons as home owners tend to be less likely to protest or foment social unrest.

The value of mortgage loans extended in Russia in January-October 2016 went up by 32% year-on-year to RUB1.15tn ($18bn), the Agency of Mortgage and Housing Credit (AHML) said in a report published on November 21. The agency attributed the growth to the lower interest rates, with the most recent CBR cut of the key interest rate of 10% “launching a new cycle” of cutting mortgage rates by main market participants. 

Between January and November 2016, banks used a total of 756,000 loans worth a total of RUB1.3 trillion ($21.3bn), an increase of 31% y/y, reports RBC, citing the AHML report. The same day, the market leader Sberbank, which accounts for more than half of Russia’s mortgage loans, released its statistics for the same period: Sberbank’s mortgage loans increased by 11% y/y in the same period, up by 419,000 to RUB636bn ($10.4bn).

Sberbank has cut its interest rates again to the pre-crisis level. In 2016, banks repeatedly lowered interest rates on mortgages. Sberbank, in particular, lowered them three times.

"In the autumn the average decline in interest rates was 0.45-0.55 percentage points. On the secondary market, you can get a loan at the rate of 11.9%, which is the same level as in early 2014,” AHML said in its report. According to the agency, on the primary market using government backed loans it is possible to borrow at a rate of 10.9%.

The banks are following through by dropping rates as the business becomes more competitive. For example, Sberbank cut rates for young families to only 10.25%, according to its director of retail products Natalia Alymova.

Mortgage lending has been boosted by the government’s mortgage subsidy programme, which was launched in March 2015 to help citizens in buying a home after a sharp rise in interest rates on loans, caused by an increase the key rate in December 2014 up to 17%. The programme is due to end in 2017 and while there are no plans to revive it, experts believe the mortgage segment has gathered enough momentum and will not be affected by the end of the subsidies.

The participants of the mortgage market are not ruling out that the downward trend in interest rates will continue in 2017, thanks to the competition but more importantly as the CBR is expected to continue making cuts to the key monetary policy rate from the first quarter of 2017 on the back of falling inflation.

The decline in mortgage interest rates may be partly offset by an increase for the buyers of its value, warns Sberbank’s director of department on work with partners, Nikolai Vasev. According to him, the decline in mortgage rates will result in an increase in demand and, consequently, increase the developers of housing prices.