Russia's government-subsidised mortgages come to rescue of the construction sector

Russia's government-subsidised mortgages come to rescue of the construction sector
Russia's government-subsidised mortgages come to rescue of the construction sector / bne IntelliNews
By Filip Brokes in St Petersburg January 22, 2018

As the Russian presidential elections slowly approach, the government is looking for ways to give its electorate an incentive to re-elect Russia’s leader Vladimir Putin. One of the key issues for many Russian citizens is the question of housing and the availability of cheap mortgage loans. With that in mind, the Russian government has allocated RUB600bn to offer subsidised mortgages to young families. The aim of this governmental initiative is not only to boost the approval ratings, but also to revitalise the construction sector, which has been hit particularly hard by the ongoing economic crisis.

According to the government decree issued on December 30, 2017, signed by Russia’s Prime Minister Dmitry Medvedev, families with a second or third child born between the years of 2018 and 2022 will be allowed to participate in the new governmental programme, giving them the opportunity to take on mortgages at prices significantly below the market level, which currently fluctuates around 9.25% per annum.

With the government subsidies, the annual interest rate will be artificially lowered to 6%, at which level it will be fixed for the period of three to five years (depending on the amount of children). After this initial period, the interest rate will be recalculated according to the following formula: Russia’s central bank key interest rate + 2%, which would currently amount to 9,75% per annum. However, as inflation is going down, Russia’s central bank is likely to continue cutting its key interest rate.

“Today, we see that the average mortgage rate is already below 10%. We will be paying close attention to the further development on the mortgage market. What we can see already today is the falling rate of inflation and the steady decrease of the CB key rate. It can’t be ruled out that towards the end of the subsidy programme, the average mortgage rate will have already dropped to 6%,“ the Minister of Construction Industry, Mikhail Men, said in an interview for Rossia 24.

The government subsidies won’t go directly to the families. The plan is to offer this money to commercial banks willing to sell mortgages at below-market-price interest rates.  Those banks will be then financially compensated from the federal budget.

These discounted mortgages will only be available for financing apartments in new housing projects. They will also be available to young families interested in refinancing old debts. 

According to the Agency for Housing Mortgage Lending, more than 600,000 families across Russia will be eligible to take advantage of the governmental initiative, which could in turn create a demand for 13mn square metres of housing. This will give a further impetus for the growth of the Russian mortgage market. According to the Russia’s CB statistics, 813,400 mortgage loans worth RUB1.5 trillion were sold in the first 10 months of 2017, a 30% year-on-year gain.

Pointing at the falling mortgage rates, some Russian experts argue that the construction sector will come out of the crisis mode already in this year. According to the recent study conducted by the Russian Higher School of Economics, 2018 will see a growth of the index of entrepreneurial confidence in the construction sector. The authors of the study titled “The key results of construction companies in the 4th quarter of 2017” make the claim that the Russian construction sector will be out of crisis already in the second quarter of 2018.