ECONOMY
The Underwater Part of Russia’s Mortgage Iceberg
November 4, 2024
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Vladislav Inozemtsev
Center for Analysis and Strategies in Europe -
Borukh Taskin
Independent financial analyst
Economists Vladislav Inozemtsev and Borukh Taskin look at ballooning fiscal spending on subsidized mortgages and possible government measures to solve the problem.
The original text in Russian was published in the Moscow Times and is being republished here with the authors’ permission.
A new bill is being considered by the Duma that would allow the government to increase spending in the current year by up to RUB 1.5 trillion without amending the budget law.
You might think that all these funds will be spent on the war – but it turns out that most of them are to compensate banks for losses on subsidized mortgages. The numbers are not trivial: Finance Minister Anton Siluanov has said that overall more than RUB1.0 trillion will go toward mortgages (he later clarified: RUB 1.1 trillion), including almost RUB 500 billion out of the RUB 1.5 trillion planned budget increase.
The Accounts Chamber estimated in September (i.e. before the increase) that the government would have to spend RUB 540 billion on subsidized mortgages in 2024, up from the initial RUB 230 billion envisaged in the budget.
You might think that all these funds will be spent on the war – but it turns out that most of them are to compensate banks for losses on subsidized mortgages. The numbers are not trivial: Finance Minister Anton Siluanov has said that overall more than RUB1.0 trillion will go toward mortgages (he later clarified: RUB 1.1 trillion), including almost RUB 500 billion out of the RUB 1.5 trillion planned budget increase.
The Accounts Chamber estimated in September (i.e. before the increase) that the government would have to spend RUB 540 billion on subsidized mortgages in 2024, up from the initial RUB 230 billion envisaged in the budget.
“In other words, in 2024, fiscal expenditures on mortgage subsidies are to be double the planned amount! This increase is much bigger than that in military appropriations.”
New residential buildings in Voronezh. Source: VK
It is also shocking when compared to the RUB 113.7 billion total spent on subsidized mortgages in 2023 – a tenth of this year’s amount.
How the problem started
The reason is clear: almost no one in Russia can afford an unsubsidized mortgage. To prevent the construction industry from stagnating, the authorities introduced so-called family and preferential mortgage programs in 2020: part of the principal (the maximum size of the mortgage was set at RUB 8 million for Moscow and St Petersburg and RUB 3 million for the rest of the country) was to be paid back at interest rates of 6% (for family mortgages) and 8% (for preferential).
A gesture of unprecedented generosity on the part of the authorities! Especially considering that the Central Bank’s key rate was 4.5% at the time. The programs steadily gained momentum. By the end of 2021, the total amount of subsidized loans had reached just over RUB 2 trillion. Meanwhile, prices for new housing had begun to rise, heated up by rising demand. Things then started to snowball.
After the start of the special military operation in Ukraine, interest rates rose, and the maximum size of the mortgage under the programs was also increased (to RUB6 million for the country, excluding Moscow, St Petersburg and their surrounding Moscow and Leningrad regions, where it was raised to RUB 12 million). The Central Bank hiked its key rate (to as high as 20% at one point), while the authorities constantly added to people’s uncertainty by talking about an imminent halt to the programs. Nevertheless, they were extended multiple times. By the summer of 2022, the Central Bank had lowered the key rate back to 9.5%. Alarm bells started to sound.
Banks issued RUB 4.90 trillion in mortgages in 2022, RUB 7.85 trillion in 2023 and RUB 2.8 trillion in the first six months of 2024, while the share of subsidized mortgages rose from 48% to 61% and then to a whopping 82% in those periods, respectively (in 2021, the figure was only 29%).
Currently, Russian banks have a mortgage loan portfolio of almost RUB 20 trillion, which is now driven largely by the ability (and desire) of the Kremlin to continue subsidizing interest rates and introducing new subsidized mortgage programs. As for the latter, we expect the state to help make a “new middle class” out of the Russians who chose to fight(and possibly die) in Ukraine so as to improve their families’ housing conditions (we have written about this “trade” before).
There is much to subsidize: whereas a little over a year ago the key rate was 12% and the differential between it and the preferential loan rate was four percentage points, since last week it has widened to 13 percentage points.
How the problem started
The reason is clear: almost no one in Russia can afford an unsubsidized mortgage. To prevent the construction industry from stagnating, the authorities introduced so-called family and preferential mortgage programs in 2020: part of the principal (the maximum size of the mortgage was set at RUB 8 million for Moscow and St Petersburg and RUB 3 million for the rest of the country) was to be paid back at interest rates of 6% (for family mortgages) and 8% (for preferential).
A gesture of unprecedented generosity on the part of the authorities! Especially considering that the Central Bank’s key rate was 4.5% at the time. The programs steadily gained momentum. By the end of 2021, the total amount of subsidized loans had reached just over RUB 2 trillion. Meanwhile, prices for new housing had begun to rise, heated up by rising demand. Things then started to snowball.
After the start of the special military operation in Ukraine, interest rates rose, and the maximum size of the mortgage under the programs was also increased (to RUB6 million for the country, excluding Moscow, St Petersburg and their surrounding Moscow and Leningrad regions, where it was raised to RUB 12 million). The Central Bank hiked its key rate (to as high as 20% at one point), while the authorities constantly added to people’s uncertainty by talking about an imminent halt to the programs. Nevertheless, they were extended multiple times. By the summer of 2022, the Central Bank had lowered the key rate back to 9.5%. Alarm bells started to sound.
Banks issued RUB 4.90 trillion in mortgages in 2022, RUB 7.85 trillion in 2023 and RUB 2.8 trillion in the first six months of 2024, while the share of subsidized mortgages rose from 48% to 61% and then to a whopping 82% in those periods, respectively (in 2021, the figure was only 29%).
Currently, Russian banks have a mortgage loan portfolio of almost RUB 20 trillion, which is now driven largely by the ability (and desire) of the Kremlin to continue subsidizing interest rates and introducing new subsidized mortgage programs. As for the latter, we expect the state to help make a “new middle class” out of the Russians who chose to fight(and possibly die) in Ukraine so as to improve their families’ housing conditions (we have written about this “trade” before).
There is much to subsidize: whereas a little over a year ago the key rate was 12% and the differential between it and the preferential loan rate was four percentage points, since last week it has widened to 13 percentage points.
“The Central Bank, likely knowing full well where the key rate was headed, with increasing persistence called for a halt to the issuance of subsidized mortgages starting at the end of 2023.”
A looming mortgage crisis
The Central Bank got what it wanted, but the problem has not gone away. The tip of the iceberg has stopped growing, but its underwater part is still expanding proportionally to key rate hikes.
If we assume that half of all mortgage loans are subsidized and the average key rate is about 20% in 2025, then fiscal spending to service these loans will approach RUB1.4 trillion. And what will happen if the key rate is hiked further – which seems likely – is scary to even think about.
Recall that in the three-year budget for 2024-26, RUB 102.5 billion was allocated for subsidies in 2025 and only RUB 53.4 billion in 2026. A fourteen fold shortfall between planned and actual spending is extraordinary even for Russia.
The subsidized mortgage programs have been discussed and criticized many times: they have led to a 70% jump in the prices of new housing; opened an unprecedented gap between the primary and secondary markets; generated a supply glut after they were ended on July 1; and indirectly pushed up residential rent prices as millions of Russians have had to say goodbye to their dreams of owning their own home.
There are other dangerous consequences: developers, faced with a 40-50% decline in sales of new housing and having neither the ability nor the desire to slash prices, are now trying to attract buyers with deferred payments that are extremely low for the first few years before soaring later. This strategy makes sense: mortgage arrears in Russia are minimal, and builders reasonably believe that buyers will have nowhere to go if they buy an apartment and move into it (the current unsubsidized mortgage rates, averaging 25.4%, leave them no choice).
To put it very simply, banks’ mortgage loan portfolio has exploded over the past three years. Russian banks are expected to report a profit of RUB 3.6-3.8 trillion in 2024 – at least a quarter of which is provided by payments from the budget.
The Central Bank got what it wanted, but the problem has not gone away. The tip of the iceberg has stopped growing, but its underwater part is still expanding proportionally to key rate hikes.
If we assume that half of all mortgage loans are subsidized and the average key rate is about 20% in 2025, then fiscal spending to service these loans will approach RUB1.4 trillion. And what will happen if the key rate is hiked further – which seems likely – is scary to even think about.
Recall that in the three-year budget for 2024-26, RUB 102.5 billion was allocated for subsidies in 2025 and only RUB 53.4 billion in 2026. A fourteen fold shortfall between planned and actual spending is extraordinary even for Russia.
The subsidized mortgage programs have been discussed and criticized many times: they have led to a 70% jump in the prices of new housing; opened an unprecedented gap between the primary and secondary markets; generated a supply glut after they were ended on July 1; and indirectly pushed up residential rent prices as millions of Russians have had to say goodbye to their dreams of owning their own home.
There are other dangerous consequences: developers, faced with a 40-50% decline in sales of new housing and having neither the ability nor the desire to slash prices, are now trying to attract buyers with deferred payments that are extremely low for the first few years before soaring later. This strategy makes sense: mortgage arrears in Russia are minimal, and builders reasonably believe that buyers will have nowhere to go if they buy an apartment and move into it (the current unsubsidized mortgage rates, averaging 25.4%, leave them no choice).
To put it very simply, banks’ mortgage loan portfolio has exploded over the past three years. Russian banks are expected to report a profit of RUB 3.6-3.8 trillion in 2024 – at least a quarter of which is provided by payments from the budget.
“Should they stop for some reason, borrowers would have no chance of repaying their debt themselves, and the country would be plunged into a banking crisis.”
A 2024 ad for "the cheapest new residential buildings in Moscow," with prices starting at RUB 6.9 million. Source: VK
But as we have mentioned above, a second wave of borrowing at artificially low rates is set to start now – this time through informal lending with low down payments and deferred repayment – suspiciously similar to the “business” that triggered the US mortgage crisis in 2008. Only builders will be unable to package and resell these loans. On the other hand, they cannot do without them, as in large cities, where a significant portion of the new housing stock is located, it will not be sold for at least 3-6 years at current sales rates.
Between a rock and a hard place
Do the Russian authorities understand what they have got themselves into?
We do not have an answer to this question, but an awareness of the problem is probably beginning to dawn on them: after all, it has got much worse just in the last 12 months or so, and the too-good-to-be-true rhetoric of Central Bank Deputy Chairman Alexei Zabotkin’s about in-line inflation and imminent key rate cuts lulled the government into a false sense of security for quite a long time.
The coming year will be critical: if economic conditions for lowering rates do not emerge by mid-2025, the budget will have unexpected – and not trivial – expenditures. Meanwhile, new revenues that would significantly offset the above mentioned RUB 1.5 trillion do not look forthcoming.
In the coming months, builders may well arrange sales of housing with deferred repayment worth RUB 1.0-1.5 trillion to stave off bankruptcy. If that continues for a few years, the entire mortgage “house of cards” will collapse.
In other words, this summer the Central Bank eliminated only part of the problem. Now, both the budget deficit and the stability of the banking system depend on coordination between the Central Bank and the Ministry of Finance. If interest rates hold steady or decline even slightly, in 2025-27 Russia will see the largest redistribution in favor of citizens, comparable to or even exceeding the payments to Ukraine war veterans and their families.
Between a rock and a hard place
Do the Russian authorities understand what they have got themselves into?
We do not have an answer to this question, but an awareness of the problem is probably beginning to dawn on them: after all, it has got much worse just in the last 12 months or so, and the too-good-to-be-true rhetoric of Central Bank Deputy Chairman Alexei Zabotkin’s about in-line inflation and imminent key rate cuts lulled the government into a false sense of security for quite a long time.
The coming year will be critical: if economic conditions for lowering rates do not emerge by mid-2025, the budget will have unexpected – and not trivial – expenditures. Meanwhile, new revenues that would significantly offset the above mentioned RUB 1.5 trillion do not look forthcoming.
In the coming months, builders may well arrange sales of housing with deferred repayment worth RUB 1.0-1.5 trillion to stave off bankruptcy. If that continues for a few years, the entire mortgage “house of cards” will collapse.
In other words, this summer the Central Bank eliminated only part of the problem. Now, both the budget deficit and the stability of the banking system depend on coordination between the Central Bank and the Ministry of Finance. If interest rates hold steady or decline even slightly, in 2025-27 Russia will see the largest redistribution in favor of citizens, comparable to or even exceeding the payments to Ukraine war veterans and their families.
“A radical way to get around this problem would be for the government to refuse to fulfill its obligations to banks and revise their terms. Such a step, however, is laden with risks.”
The nearly 2.9 million subsidized mortgage holders (5-6 million people counting their family members), who are generally in their prime and live in big cities, would pose an immediate threat to the regime, making the Kremlin unlikely to decide on this.
A softer response would be, for example, for bank deposits to be frozen and interest accruing to them to be capitalized. Thus, banks would not have to set aside (so much) reserves for mortgages, which would bolster their balance sheets and hide imbalances. Meanwhile, all Russian depositors would be forced to share with the state the already-unbearable burden of mortgage subsidies and responsibility for the continuation of the war.
This is a much more realistic prospect, as it fits the Kremlin’s mythology about stimulating economic growth by ramping up spending on the war effort – all means are good, including freezing deposits (no one even remembers that the pension contributions allocated for investment were long ago frozen, so what’s the problem?).
We do not think for a second that that the current quagmire will make the authorities take real measures to bring downinflation (e.g., fixing tariffs of natural monopolies, cracking down on cartels and boosting competition) and thus interest rates – there are too many conflicts of interest.
A softer response would be, for example, for bank deposits to be frozen and interest accruing to them to be capitalized. Thus, banks would not have to set aside (so much) reserves for mortgages, which would bolster their balance sheets and hide imbalances. Meanwhile, all Russian depositors would be forced to share with the state the already-unbearable burden of mortgage subsidies and responsibility for the continuation of the war.
This is a much more realistic prospect, as it fits the Kremlin’s mythology about stimulating economic growth by ramping up spending on the war effort – all means are good, including freezing deposits (no one even remembers that the pension contributions allocated for investment were long ago frozen, so what’s the problem?).
We do not think for a second that that the current quagmire will make the authorities take real measures to bring downinflation (e.g., fixing tariffs of natural monopolies, cracking down on cartels and boosting competition) and thus interest rates – there are too many conflicts of interest.
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