Alexei Nikolskyi/RIA Novosti/Kremlin
- Russia faces a debt-fueled housing bubble as a result of a government-subsidized mortgage boom.
- The country's central bank warned the program could undermine its rate hikes and fuel inflation.
- The Russia-Ukraine war has fed the bubble through easy credit, death payouts, and Western sanctions.
Russia's efforts to gee up its war-beaten population and shore up its sanction-hit economy have created a potentially dangerous housing bubble, The Wall Street Journal reported on Thursday.
Mortgage volumes ballooned by over 70% this year to a record high of nearly $70 billion, Russian central bank figures show. A new apartment now costs 40% more than one being resold, up from 10% before the pandemic, WSJ said. Roughly half of new mortgage holders are spending at least 80% of their income covering debts, which is nearly double the proportion two years ago, one economist told the newspaper.
Those striking statistics are at least partly a product of Russian President Vladimir Putin rolling out discounted mortgages during the pandemic to shore up the Russian economy. The government pays banks the difference between the market rate for a mortgage and the discounted rate it offers citizens.
Ahead of the presidential election next year, Putin has said he'll extend the mortgage program through 2024. The government expects the cost of the program to rise by nearly four-fold next year to the ruble equivalent of $5 billion, WSJ said, citing Russian newspaper Vedomosti.
Russia's central bank has urged the government to rein in the subsidies, as they're undermining its fight against inflation, which accelerated to 7.5% on an annualized basis in November. The bank, which has already more than doubled its key interest rate to 16% since June, warned that subsidizing home purchases could fuel price growth, preventing it from cutting rates anytime soon. A critical way in which higher rates combat inflation is by raising mortgage costs, leaving households with less money to spend on other things.
Yet if the government pulls back from subsidizing mortgages and offering other aid, indebted homeowners could find themselves no longer able to cover their housing costs, while also being unable to sell their properties without losing money. They might have no choice but to default, lumping Russian banks with a raft of bad loans, WSJ said. Russian authorities have already raised the minimum down payment for the cheap loans from 20% to as high as 30% in a bid to cool demand for them.
Russia's war with Ukraine appears to have inflated the housing bubble further, WSJ said. Russian banks have loosened their lending requirements to stimulate growth. Dead and injured soldiers' families have received windfalls that they've promptly plowed into new homes. Also, Western sanctions have hit stocks and restricted foreign transfers, leaving housing as one of the few investment options available for wealthy Russians.
A debt-fueled surge in home prices may seem surprising in a country that's actively waging war and has been slapped with sanctions. But the Russian economy has proven surprisingly resilient thanks to robust oil revenues, military spending, and government-spending programs like cut-price mortgages. Indeed, GDP is slated to grow 3.5% this year, after dropping 2.1% last year.