ECONOMY
‘Even Doomed Developers Will Manage to Grit Their Teeth and Hold Out for a Year’
February 14, 2025
-
Tatiana Rybakova
Journalist and writer
Journalist Tatiana Rybakova speaks with an economist (name withheld) about Russia’s mortgage bubble, inflated by government subsidized loan programs. Is the real estate sector at risk of imploding?
The original text in Russian was published in Republic. A slightly shortened version is republished here with their permission.
According to NashDom.rf, which collects data on residential real estate, last year about 46% of new constructions in Russia were not fully sold as of December 2024. Is that a lot?
On the one hand, yes, it is; on the other hand, if this situation short-lived, then nothing really bad will happen. It would be a different matter if this situation was long term.
The problem now is that interest rates on regular mortgages have become virtually prohibitive. With a loan term of over a year or two, an almost 30% rate increases the cost of an apartment enormously.
It is better to rent and wait for things to change.
But this is the point of view of ordinary people, potential buyers. Currently, the situation looks much worse from the point of view of developers. Because a significant portion of their business was based on debt.
There is no public data, so no one can tell you exactly what that portion is. But clearly many developers relied on debt financing, and a key component of this was covering periodic interest payments to lender banks through sales at their properties – sometimes, incidentally, when they were still far from being completed.
There was even a correlation: the longer until completion, the more attractive the price. This practice has been around for a long time. At the same time, for more than a decade in Russia the share of real estate transactions involving mortgages steadily grew. Accordingly, developers were able to raise more and more debt financing.
In this situation, where debt in the business was getting bigger and bigger and equity, on the supply and on the demand side, was getting smaller and smaller, the [Central Bank’s] high key rate dealt a blow to developers’ business from both sides.
It is hard to say now whether the pressure on developers will bring down [the sector] or not, but in any case, it is significant. This pressure will force ordinary people to eschew transactions and take a wait-and-see approach. But heavily indebted developers, which thus need cash flow to service their debt, are heading toward bankruptcy in the current situation.
The pressure on developers is coming from two sides. There has been a drop in sales, which is reflected in the growth of unsold real estate that you mentioned. In addition, many developers’ financing model implied periodically refinancing debt. But now rates are much higher. This is creating pressure, as well. Sales are falling, and the situation is worsening.
At the same time, there are developers whose business relied heavily on their own cash or can survive for some time on capital injections from shareholders.
According to NashDom.rf, which collects data on residential real estate, last year about 46% of new constructions in Russia were not fully sold as of December 2024. Is that a lot?
On the one hand, yes, it is; on the other hand, if this situation short-lived, then nothing really bad will happen. It would be a different matter if this situation was long term.
The problem now is that interest rates on regular mortgages have become virtually prohibitive. With a loan term of over a year or two, an almost 30% rate increases the cost of an apartment enormously.
It is better to rent and wait for things to change.
But this is the point of view of ordinary people, potential buyers. Currently, the situation looks much worse from the point of view of developers. Because a significant portion of their business was based on debt.
There is no public data, so no one can tell you exactly what that portion is. But clearly many developers relied on debt financing, and a key component of this was covering periodic interest payments to lender banks through sales at their properties – sometimes, incidentally, when they were still far from being completed.
There was even a correlation: the longer until completion, the more attractive the price. This practice has been around for a long time. At the same time, for more than a decade in Russia the share of real estate transactions involving mortgages steadily grew. Accordingly, developers were able to raise more and more debt financing.
In this situation, where debt in the business was getting bigger and bigger and equity, on the supply and on the demand side, was getting smaller and smaller, the [Central Bank’s] high key rate dealt a blow to developers’ business from both sides.
It is hard to say now whether the pressure on developers will bring down [the sector] or not, but in any case, it is significant. This pressure will force ordinary people to eschew transactions and take a wait-and-see approach. But heavily indebted developers, which thus need cash flow to service their debt, are heading toward bankruptcy in the current situation.
The pressure on developers is coming from two sides. There has been a drop in sales, which is reflected in the growth of unsold real estate that you mentioned. In addition, many developers’ financing model implied periodically refinancing debt. But now rates are much higher. This is creating pressure, as well. Sales are falling, and the situation is worsening.
At the same time, there are developers whose business relied heavily on their own cash or can survive for some time on capital injections from shareholders.
“Shareholders of developers, especially in certain regions, are rather closely connected to local governments, which are ready to finance them temporarily.”
A residential complex, Lampo, in Murino, Leningrad Region. January 2025. Source: VK
“One man’s loss is another man’s gain”: the acute situation is even beneficial for developers that can count on help from shareholders. In fact, it is doubly beneficial. Firstly, some of their peers will go bankrupt. Secondly, as bankruptcies play out, many unfinished projects will go on the market at very attractive prices.
I remember the [crisis of] 1998, when there was no development activity as we are accustomed to now. Everything was just getting started then, but “philosophically” the situation is definitely similar.
At that time, many, for various reasons, were forced to sell their properties into a falling market. Those who were able to buy in these conditions had great opportunities at very attractive prices. In dollar terms, prices roughly halved in regions like Moscow, while they dropped almost fivefold in more remote, less economically developed regions.
And why are developers not lowering prices now, if their situation is so close to catastrophic?
For two reasons. First, they understand that if they start lowering prices, this will collapse sales even more. Again, recall 1998: lower prices collapsed sales for more than a year. When private buyers see prices going down, they begin to think: “let’s wait a little and they will get even cheaper.” This is a completely normal [reaction].
Second, the most important factor, which was not present before, is mortgages. Today, mortgages dominate real estate purchases by individuals. What does this mean? If the price drop in percentage terms is greater than the percentage due as the down payment, there is a chance that banks will collapse and a classic mortgage crisis will break out, like the real estate crisis in Japan. This is worrying for banks. Because until very recently, the most popular mortgages were those with a minimum down payment.
Yes, 10% and off you go.
So it’s easy to see that if prices fall more than 10% (most likely they will fall 20% or more), things will get ugly. I think banks play a certain constraining role, as without their approval the sale of mortgage-backed real estate is impossible. And I think they will try to avoid leaks to the media so as not to destabilize the market.
I think that banks will not only put the brakes on sales of mortgage-backed real estate now, but they will also try to support developers as much as they can.
That’s right, but developers’ situations vary. There are those, as I said, that have an almost unlimited source of funding thanks to their shareholders, so they know that if they get in real trouble, their owners will pump in as much money as they need. Many developers that are close to regional elites have this ace in the hole.
The head of the National Builders’ Association (NOSTROI) said that in 2025 developers are unlikely to face bankruptcies, but as soon as 2026 he expects them. He believes that Volgograd, Chelyabinsk and Omsk are high-risk areas. In your view, how accurate is this?
I absolutely agree with the geography. It is very likely that the middle class in these cities, even the lower middle class, will be hit the hardest. Here, however, the most important thing is not the geography but rather the degree of the developer’s indebtedness and the presence (or absence) of a shareholder that can help plug any funding holes.
The other day, Alexander Danilov, director of the Department of Banking Regulation and Analytics at the Central Bank, boasted that in 2024, thanks to the Central Bank, the share of mortgages with a down payment of less than 20% and loans where borrowers spend more than half of their income on debt servicing had fallen to 9%.
In 2023, this figure was almost a third. Of course, we can be happy for the Central Bank, which brought down the number of such borrowers, though people who borrowed in 2023 and earlier continue to repay loans, while their down payments remain less than 20%. And they still spend half their income on debt servicing. This comes as earnings growth is already slowing down.
And if the Ukraine conflict stops, everyone knows there will be no more [big] money to go around – neither to the army nor back at home. The entire economy will fly straight into a rather strong headwind.
How would that affect the real estate crisis?
Naturally, it would exacerbate all the risks. It is no secret that all economies going through a wind-down of a major military conflict see strong economic downturns. The world wars are textbook examples. Huge government orders were canceled, employment fell, wages fell, business volumes fell everywhere, directly or indirectly.
Everything related to debt is getting worse in the real estate sector. A separate issue is pressure on the Central Bank. I think that lobbyists from the sector are an important part of this pressure.
I see two opposing trends in mortgage lending. On the one hand, the amount of loans issued in Russia for the purchase of new constructions was down 57% in December. Banks simply began to turn away mortgage borrowers, clearly at the behest of the Central Bank. Moreover, they stopped accepting applications and issuing, for example, rural home mortgages, though that program has no end date and no one has canceled it. On the other hand, there are constantly new proposals to boost mortgage lending, supported at the highest echelons of power: for individual houses, for “preferential” [subsidized] mortgages if a child is born in the next two years. Preferential mortgages would be the best medicine for developers. In your view, between the Central Bank and the lobbyists with support at the top, who will win? And could there be any ugly moments as they compete?
We could be witnessing a very dramatic moment that marks a truly titanic shift: the Central Bank could be losing its independence. Most likely, it was pressured not to raise rates.
This was explicitly confirmed to me by a person who, so to speak, takes part in decision-making. There was pressure from the highest level, i.e., from “Him,” you get it? At this point, my source does not understand whether this is a one-off or the new reality. I think the answer will be clear after the February rate decision of the Central Bank. If this is the new reality, we cannot imagine what shocks lie ahead.
I remember the [crisis of] 1998, when there was no development activity as we are accustomed to now. Everything was just getting started then, but “philosophically” the situation is definitely similar.
At that time, many, for various reasons, were forced to sell their properties into a falling market. Those who were able to buy in these conditions had great opportunities at very attractive prices. In dollar terms, prices roughly halved in regions like Moscow, while they dropped almost fivefold in more remote, less economically developed regions.
And why are developers not lowering prices now, if their situation is so close to catastrophic?
For two reasons. First, they understand that if they start lowering prices, this will collapse sales even more. Again, recall 1998: lower prices collapsed sales for more than a year. When private buyers see prices going down, they begin to think: “let’s wait a little and they will get even cheaper.” This is a completely normal [reaction].
Second, the most important factor, which was not present before, is mortgages. Today, mortgages dominate real estate purchases by individuals. What does this mean? If the price drop in percentage terms is greater than the percentage due as the down payment, there is a chance that banks will collapse and a classic mortgage crisis will break out, like the real estate crisis in Japan. This is worrying for banks. Because until very recently, the most popular mortgages were those with a minimum down payment.
Yes, 10% and off you go.
So it’s easy to see that if prices fall more than 10% (most likely they will fall 20% or more), things will get ugly. I think banks play a certain constraining role, as without their approval the sale of mortgage-backed real estate is impossible. And I think they will try to avoid leaks to the media so as not to destabilize the market.
I think that banks will not only put the brakes on sales of mortgage-backed real estate now, but they will also try to support developers as much as they can.
That’s right, but developers’ situations vary. There are those, as I said, that have an almost unlimited source of funding thanks to their shareholders, so they know that if they get in real trouble, their owners will pump in as much money as they need. Many developers that are close to regional elites have this ace in the hole.
The head of the National Builders’ Association (NOSTROI) said that in 2025 developers are unlikely to face bankruptcies, but as soon as 2026 he expects them. He believes that Volgograd, Chelyabinsk and Omsk are high-risk areas. In your view, how accurate is this?
I absolutely agree with the geography. It is very likely that the middle class in these cities, even the lower middle class, will be hit the hardest. Here, however, the most important thing is not the geography but rather the degree of the developer’s indebtedness and the presence (or absence) of a shareholder that can help plug any funding holes.
The other day, Alexander Danilov, director of the Department of Banking Regulation and Analytics at the Central Bank, boasted that in 2024, thanks to the Central Bank, the share of mortgages with a down payment of less than 20% and loans where borrowers spend more than half of their income on debt servicing had fallen to 9%.
In 2023, this figure was almost a third. Of course, we can be happy for the Central Bank, which brought down the number of such borrowers, though people who borrowed in 2023 and earlier continue to repay loans, while their down payments remain less than 20%. And they still spend half their income on debt servicing. This comes as earnings growth is already slowing down.
And if the Ukraine conflict stops, everyone knows there will be no more [big] money to go around – neither to the army nor back at home. The entire economy will fly straight into a rather strong headwind.
How would that affect the real estate crisis?
Naturally, it would exacerbate all the risks. It is no secret that all economies going through a wind-down of a major military conflict see strong economic downturns. The world wars are textbook examples. Huge government orders were canceled, employment fell, wages fell, business volumes fell everywhere, directly or indirectly.
Everything related to debt is getting worse in the real estate sector. A separate issue is pressure on the Central Bank. I think that lobbyists from the sector are an important part of this pressure.
I see two opposing trends in mortgage lending. On the one hand, the amount of loans issued in Russia for the purchase of new constructions was down 57% in December. Banks simply began to turn away mortgage borrowers, clearly at the behest of the Central Bank. Moreover, they stopped accepting applications and issuing, for example, rural home mortgages, though that program has no end date and no one has canceled it. On the other hand, there are constantly new proposals to boost mortgage lending, supported at the highest echelons of power: for individual houses, for “preferential” [subsidized] mortgages if a child is born in the next two years. Preferential mortgages would be the best medicine for developers. In your view, between the Central Bank and the lobbyists with support at the top, who will win? And could there be any ugly moments as they compete?
We could be witnessing a very dramatic moment that marks a truly titanic shift: the Central Bank could be losing its independence. Most likely, it was pressured not to raise rates.
This was explicitly confirmed to me by a person who, so to speak, takes part in decision-making. There was pressure from the highest level, i.e., from “Him,” you get it? At this point, my source does not understand whether this is a one-off or the new reality. I think the answer will be clear after the February rate decision of the Central Bank. If this is the new reality, we cannot imagine what shocks lie ahead.
“At its last meeting, the Central Bank did not go forward with a rate hike.”
A residential complex, Gray, being built by the developer AlfaStroyInvest in Rostov-on-Don. February 2025. Source: VK
Most likely, it was pressured not to raise rates.
This was explicitly confirmed to me by a person who, so to speak, takes part in decision-making. There was pressure from the highest level, i.e., from “Him,” you get it? At this point, my source does not understand whether this is a one-off or the new reality. I think the answer will be clear after the February rate decision of the Central Bank. If this is the new reality, we cannot imagine what shocks lie ahead.
Now, the top man in Russia is turning into a total strategist. He just ignores all his advisers. Sooner or later, a total strategist begins to make fatal mistakes.
If the independence of the Central Bank has really been destroyed, it will be forced to soften monetary policy. That is broader than lowering the key rate; the Central Bank has an array of other regulations that can also be relaxed. What will the result be? Inflation will go up. At some point, it could rise closer to 20%, maybe 30%. We are talking about food inflation first of all.
Food inflation is already over 20%.
[In the above scenario] officials overseeing social policy will sooner or later lobby for price controls. As soon as this happens, at least for several product groups, it will mean that Russia has taken the road on which the Soviet Union broke down. We can go down this road fast, because the USSR made everything itself. Yet now the degree of dependence on the Chinese is such that 96% of machine tools come from China.
In this scenario, what will happen to the real estate sector?
For real estate, this is great. Yes, inflation, but [sales] prices will rise. All the problems of developers will dissolve in the inflation, as will those of mortgage borrowers.
And at the same time, as I gather, people will start buying real estate faster.
That’s right, because the foreign-exchange market is also likely to blow up in this scenario. It is still alive in Russia today. However, when I asked the same friend of mine in the government, he is certain no confiscation of currencies and bank deposits is planned.
Because there is a clear understanding that such a prodrazverstka (confiscation) is ineffective on a time horizon longer than a few months. His certainty is based not on what officials think about the good of the people, but on the fact that they see it as simply irrational.
But in that case, why would people buy real estate, when they could just buy currency and wait?
It’s a matter of volume. Even if it is an apartment in Moscow, that’s a lot of money – where can you keep that much currency? So if a scenario of high inflation plays out, to look back at the 1990s again, real estate was one of the few assets that helped.
This was explicitly confirmed to me by a person who, so to speak, takes part in decision-making. There was pressure from the highest level, i.e., from “Him,” you get it? At this point, my source does not understand whether this is a one-off or the new reality. I think the answer will be clear after the February rate decision of the Central Bank. If this is the new reality, we cannot imagine what shocks lie ahead.
Now, the top man in Russia is turning into a total strategist. He just ignores all his advisers. Sooner or later, a total strategist begins to make fatal mistakes.
If the independence of the Central Bank has really been destroyed, it will be forced to soften monetary policy. That is broader than lowering the key rate; the Central Bank has an array of other regulations that can also be relaxed. What will the result be? Inflation will go up. At some point, it could rise closer to 20%, maybe 30%. We are talking about food inflation first of all.
Food inflation is already over 20%.
[In the above scenario] officials overseeing social policy will sooner or later lobby for price controls. As soon as this happens, at least for several product groups, it will mean that Russia has taken the road on which the Soviet Union broke down. We can go down this road fast, because the USSR made everything itself. Yet now the degree of dependence on the Chinese is such that 96% of machine tools come from China.
In this scenario, what will happen to the real estate sector?
For real estate, this is great. Yes, inflation, but [sales] prices will rise. All the problems of developers will dissolve in the inflation, as will those of mortgage borrowers.
And at the same time, as I gather, people will start buying real estate faster.
That’s right, because the foreign-exchange market is also likely to blow up in this scenario. It is still alive in Russia today. However, when I asked the same friend of mine in the government, he is certain no confiscation of currencies and bank deposits is planned.
Because there is a clear understanding that such a prodrazverstka (confiscation) is ineffective on a time horizon longer than a few months. His certainty is based not on what officials think about the good of the people, but on the fact that they see it as simply irrational.
But in that case, why would people buy real estate, when they could just buy currency and wait?
It’s a matter of volume. Even if it is an apartment in Moscow, that’s a lot of money – where can you keep that much currency? So if a scenario of high inflation plays out, to look back at the 1990s again, real estate was one of the few assets that helped.
“For the real estate market, high inflation would be a lifesaver. At the very least, it would push all the problems off to the distant future, which generally suits everyone.”
Average price of housing in Moscow, RUB/square meter, from January 2023 to January 2025. IRN.ru
In other words, after the February decision of the Central Bank, we will know whether the real estate market will collapse or bounce back on hyperinflation?
No, the real estate market is slow. For that reason, I think that even if [the decision] marks a turning point, it will take some time. First off, all indicators, including inflation, are measured with statistical error. In addition, inflation has random fluctuations. To make the diagnosis that the Central Bank has been broken, inflation needs to go down by many more percentage points than [what might be caused by statistical error and] random fluctuations.
I think that three months is probably the minimum amount of time that needs to pass for us to know something for sure. Another thing is that real estate is inertial. The website IRN.ru has a chart of dollar real estate prices going back to 1991. It shows that inertia means a year or two. Things will get worse now because of indebtedness, but I think even doomed developers will manage to grit their teeth and hold out for a year.
No, the real estate market is slow. For that reason, I think that even if [the decision] marks a turning point, it will take some time. First off, all indicators, including inflation, are measured with statistical error. In addition, inflation has random fluctuations. To make the diagnosis that the Central Bank has been broken, inflation needs to go down by many more percentage points than [what might be caused by statistical error and] random fluctuations.
I think that three months is probably the minimum amount of time that needs to pass for us to know something for sure. Another thing is that real estate is inertial. The website IRN.ru has a chart of dollar real estate prices going back to 1991. It shows that inertia means a year or two. Things will get worse now because of indebtedness, but I think even doomed developers will manage to grit their teeth and hold out for a year.
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