Russians Pay What It Takes to Turn Rubles Into Homes
Denis Ichetkin's decision to get a mortgage for a one-bedroom apartment on the outskirts of Moscow in late January couldn't have been better timed, he said.
The 30-year-old journalist and his wife Veronika secured a 15-year loan from VTB Group with a 12% interest rate before Russia's March incursion into Ukraine's Crimean peninsula. Since then, the central bank has raised its key interest rate by 2 percentage points to arrest the ruble's slide, spurring economists to predict that home-loan costs, already triple the European average, will rise further.
"I couldn't be happier that we got our loan before Crimea," Ichetkin said. "We got a better rate than if we had applied now or a month ago."
The ruble's 16-month slide has driven a jump in mortgage lending as Russians buy homes with mortgages in an effort to protect their dwindling savings. Mortgage lending this year may reach a record of between 1.5 trillion rubles ($43 billion) and 1.8 trillion rubles, according to the forecast by the Agency for Housing Mortgage Lending.
Russia's $2 trillion economy, which is suffering a slump in investment and slowing wage growth, has probably already sunk into a recession, the International Monetary Fund said April 30. President Vladimir Putin's standoff with the U.S. and Europe over Ukraine, including sanctions against Russian officials and executives following the takeover of the Crimea, has been an additional drag on growth.
As investors have fled Russia, the national currency plunged to a record low of 36.6 rubles per dollar on March 13, losing 6.6% since the beginning of the year. Russians have had their savings wiped out during past crises, such as the 1998 default when the ruble fell as much as 27% in a day. They are now seeking a haven in property bought with mortgages, said Sofia Lebedeva, head of new-home sales at Miel, a Moscow-based chain of real estate brokers.
"People who had cash and got their incomes in rubles applied for mortgages to invest in an asset which is most reliable at times of volatility," Lebedeva said. "The weakening of the ruble spurred demand."
The number of housing sales that Miel negotiated jumped 30% in the first three months of the year compared with the first quarter of 2013, Lebedeva said. Housing prices increased 7.2% last year, just 0.7 percentage point over inflation, according to the mortgage agency, while the ruble sank 7% against the dollar.
Russia, the world's biggest energy exporter, has been building a mortgage industry since the fall of the Soviet Union in 1991 to meet the demands of its more than 143 million citizens.
The Agency for Housing Mortgage Lending was set up under the government of former President Boris Yeltsin in 1997 to make housing more accessible. The government gave most of the state-owned apartments to their residents. A mortgage law that came into force the following year allowed Russians to raise funds to buy new homes for themselves or to finance purchases for children.
Most Russians have since become owners of their apartments. About 85% of the country's 62 million registered flats were in private hands by the end of 2012, the most recent data available at the Mortgage Agency.
Today, the government is trying to increase mortgage lending to 7.2% of economic output by 2015 from 3.2% in 2012, according to a strategy program adopted by the mortgage agency in 2010. Outstanding home loans accounted for about 21% of GDP in Poland last year, according to the banking regulator KNF's data.
Putin took steps to widen the availability of Russian home loans by signing a decree in 2012 to cap mortgage rates at 2.2 percentage points above inflation by 2018. The average weighted interest rate on Russia home loans was 12.2% in the first quarter, down almost 2 percentage points from the same period in 2010, according to central bank data.
Following the central bank's interest rate increase to 7.5%, the mortgage rate can go up another 150 basis points this year, said Natalia Orlova, chief economist at Alfa Bank in Moscow. Banks will be hesitant to slow the momentum in mortgage lending by passing on the full cost of interest-rate increases to consumers, she said.
Lenders "want to switch from riskier consumer loans to mortgages," Orlova said. "The market is becoming more mature and mortgages are beginning to play a normal role, that of a mechanism to improve one's quality of life."
One in four apartments purchased in Russia last year was financed using a mortgage, up from 12% in 2009, data from the mortgage agency show. The number of home loans more than doubled to 824,792 in the six years through 2013, the agency said. This number is expected to grow to 921,000 in 2017 and exceed 1 million in 2020.
The growth in mortgages has helped boost housing- construction volumes to a post-Soviet record of 69.4 million square meters, spread over 912,100 homes, last year, according to the mortgage agency.
Miel works with about 60 banks in Russia to find financing for homebuyers, who can put down deposits of as little as 10 percent of the purchase price. Most of the buyers are 45 or younger and seeking to buy one- or two-bedroom apartments outside the city center, Lebedeva said. The majority of prospective homeowners take mortgages of 1.5 million rubles to 4.5 million rubles in Moscow and its region, she said.
In March, as Putin moved to annex Crimea, mortgage lending in Russia jumped 37% from the same period a year earlier, the fastest pace in seven months, according to the central bank. At OAO Sberbank, which controls more than 50% of the mortgage market in Russia, loans issued in February and March soared 87% from the prior year to 131 billion rubles.
The most-popular mortgage issued by Sberbank this year was for 1.5 million rubles for 14 years, with the borrower providing a 30% downpayment, according to the lender's press service.
Ichetkin, the journalist, said he expects his 60-square-meter (650 square foot) apartment on the fourth floor of a 17-story building in South Butovo, 30 kilometers (20 miles) from the center of Moscow, to be ready by December. He and Veronika scraped together enough cash for a 20% downpayment on the 6.2-million-ruble ($180,000) property.
"We have rented and lived with my wife's parents before," Ichetkin said. "This flat will give me the quality of life a man should have. Getting a mortgage was the only way to get our own home."