Russian property firms ride Kremlin-fuelled housing boom
Risks of bust increase after rapid growth spurred by Moscow support for mortgages
For generations of Russians raised on communism, crisis and a succession of currency collapses, owning one’s own home has long been seen as a measure of financial security.
But state initiatives to encourage that aspiration in recent years and fuel a boom in mortgage lending have raised fears that Russia’s housing market could now be a source of — rather than a bulwark against — economic disaster.
Construction cranes and identikit apartment blocks in various stages of development litter Moscow’s suburbs, towering over newly-built metro stations and vast highways and spilling out over the capital’s formal boundaries as its inexorable expansion continues.
Russian banks issued their largest ever monthly amount of mortgages in September and are expected to underwrite a total of Rbs 3.5tn ($46bn) worth in 2020 — a boom that will increase the country’s total amount of outstanding mortgage debt by 50 per cent in just one year.
Underpinning that expansion are government financial measures drawn up to promote the construction sector as a growth engine for the country’s battered economy since 2014. They include subsidised mortgages and family grants, alongside a surge in unsecured lending that has been either overlooked, or blessed, by the authorities.
As mortgage issuances have soared, so too have the fortunes of Russia’s construction firms. Developer Samolet — Russian for aeroplane — was founded just eight years ago but already has built more than 1.5m sq metres of apartment space. It listed late last month with a market value of Rbs57bn ($750m).
PIK Group, Russia’s largest residential developer, has seen its market capitalisation treble over the past four years — against a 65 per cent rise in the benchmark stock index.
PIK’s net debt rose 33 per cent in the first half of this year, almost entirely because of an increase in project finance. Net debt at LSR, the country’s number two developer, went up almost 20 per cent.
In the short-term, both companies and their competitors look set to keep cashing in. Russia’s government — backed by a recent endorsement from president Vladimir Putin — have extended the mortgage subsidy scheme past its planned expiry of November 1 to next July, at the earliest.
The programme provides grants to offset repayments and reduce the effective interest rate to 6.5 per cent. It also cuts the down payment required to 15 per cent. All told, it essentially amounts to a Rbs 2tn ($26bn) injection of taxpayer’s money into the housing market.
But some officials are warning that the market has risen too far, too fast.
Russia’s deputy finance minister Alexei Moiseev earlier this year warned that the subsidies “risk inflating a bubble in this market among people who are not sufficiently solvent to take out a mortgage”. He suggested that 40 per cent of Russians do not have enough income to make repayments.
Russian households are certainly feeling the pinch. Western economic sanctions imposed against Moscow in 2014 following the annexation of Crimea, and strengthened after Russia’s attempted meddling in the 2016 US election, have contributed to stagnant gross domestic product growth since then.
Even before the coronavirus pandemic, real disposable incomes in Russia had fallen for five of the past seven years. Incomes dropped 8 per cent in the second quarter of this year, the largest fall for more than 20 years amid the coronavirus pandemic.
However, since July, when the market emerged from a coronavirus lockdown lull, average Moscow property prices have risen 9.5 per cent, according to data from Cian, a leading online real estate portal. New apartment prices are up 12 per cent.
“Now we do not see the risk of overheating . . . at the moment. But we must be very careful about housing prices,” Elvira Naibullina, head of Russia’s central bank, said last month.
How the Kremlin navigates an end to the program could well determine whether boom turns to bust. Ms Naibullina says the central bank is already assessing what the impact could be on mortgage owners and Russian lenders if prices tumble as soon as the government stops subsidising repayments.
The question for Samolet’s new shareholders and the tens of thousands of new Russian homeowners each month is whether the market keeps on rising when the Kremlin turns off the money tap.