Russia’s Collapsing Housing Market

The Russian housing market is not a subject one would associate with The Wavell Room. However, it has become a factor over-hanging the imponderable question how Putin’s foolish ‘special military operation’ may end. The often repeated refrain that ‘sanctions are not working’ does not reflect everyday reality for Russians. Housing is now in crisis in Russia. Putin’s fresh six-year term could not have got off to a worse start, setting aside the terrorist attack on the Crocus City Hall. This article explains why and how this may undermine regime legitimacy in the eyes of ordinary Russians.

The primary and secondary market

Russia has a two-tier housing market.  The primary market refers to in-build and new-build homes (i.e. first time occupancy). The secondary market refers to sales of existing stock. Primary housing currently overwhelmingly dominates the market for the reasons explained below. The price gap between primary and secondary housing also continues to grow according to a review of financial market risks by the Central Bank. The gap is now 44% (i.e. new-builds on average cost almost 1.5 more than existing stock).

Preferential and ordinary mortgages

There are basically two types of mortgages in Russia: preferential mortgages and ordinary mortgages. Preferential mortgages were introduced in the spring of 2020 as a measure to stimulate the housing market and construction, negatively affected by the Covid-19 pandemic. They have far exceeded their original intention and are now significantly distorting the housing market. At the end of 2023, the volume of mortgage loans on preferential programmes reached about 90%.  The Russian government and State Duma recognise that something must be done but there are no easy answers.  The general consensus is that preferential mortgages must be reduced to roughly a third of the overall market but such a reduction is now fraught with risks.

A preferential loan: A preferential mortgage is one in which the majority of the interest is paid to banks by the state, not by the borrower-citizen. As a result, a prospective home buyer can take out a loan for around 6%, rather than 16-20% the current rate for ordinary mortgages.  Preferential mortgages only apply to in-build or new-build homes as their original intention was to create incentives to developers to build more homes by stimulating demand. The State Duma is currently studying increasing the citizen share of the loan repayment from 6% to 12%, because preferential mortgages are creating an unsustainable debt burden for the state. Adoption will be unpopular and push preferential loans out of reach for millions.

Who qualifies: Preferential mortgages are only available for certain categories of citizens: families with children under six years of age, IT workers, defence workers, and certain Far Eastern, Arctic and rural regions. Individuals displaced from the occupied territories in Ukraine may also qualify for preferential terms but their experiences are a horror story of Russian bureaucracy and false promises deserving a separate article (many in Kherson region, for example, were duped into withdrawing with the Russian army, on the false promise they would receive a ‘free flat’ in Russia, and now find themselves homeless, jobless and practically stateless.)

Family preferential mortgages: Family preferential mortgages are available to families with one child born between 2018-2023; two or more minor children; or a disabled child born before 2023.  Following Putin’s policy to support families, family mortgages have been extended until 2030.  However, there are many catches.  The borrower must offer a down payment of 20.1% -30.1% of the cost of the property. This puts family mortgages beyond the reach of the poor, the very social group that needs help.  In a region such as Moscow, there is a 12 million rouble limit on family mortgages (roughly £100,000).  This will only buy you small one-bedroom apartment, hardly a family home. Even if your application succeeds, you then have to wait for the apartment block to be completed.  This can be subject to delays and builders’ disputes. Lastly, one third of Russians who apply for preferential mortgages do not succeed in securing approval anyway, mostly because they are not credit-worthy.

IT preferential mortgages: In July 2022 the Russian government introduced the IT preferential mortgage in a bid to stem the flight of IT workers. Since the scheme was started there have been 167,000 applications and 51,100 mortgage loans issued with a value of 447 billion roubles. Prime Minister Mishustin recently increased the cap by 200 billion roubles – from 500 billion to 700 billion roubles. It is hoped as many as 15,000 additional IT workers will benefit.

These incentives have not persuaded Russia’s tech workers to stay. In 2022, following the invasion and subsequent partial mobilisation, the government admitted that as many as 100,000 IT specialists had left the country, a likely understatement.  Today, it is estimated several hundred thousand IT-shniki may be working in exile (between January and March 2024 alone, immigration consultancy Garant recorded a 233% increase in EU residency applications by Russian IT workers). France has been especially successful in attracting Russian IT talent (from an intelligence perspective, these individuals can be a gold mine). In 2023, the EU as a whole recorded over 500,000 applications for Schengen visas from Russians, the majority granted.

Mortgage refusals: Every second potential mortgage borrower in Russia is now receiving a refusal from the bank according to data from the National Bureau of Credit Histories (NBKI).  By the summer, independent analysis suggests four in five mortgage applications may be refused.  For those who did secure a mortgage, in the fourth quarter of last year, almost every second borrower (45%) received a mortgage with the prospect that they would have to spend more than 80% of income on payments. Outside the housing market, two out of three consumer loan applications are now being rejected by banks, fearing debt burdens that cannot be repaid.

The root cause is the Central Bank key interest rate set at 16% since last autumn to defend the rouble and bear down on inflation, which has driven up consumer loan interest rates across the Russian economy. The popular newspaper Moskovskij Komsomolets recently ran a story with the sensationalist headline ‘A high key rate threatens the Russian economy with collapse’. But the numbers are indeed worrying. Today, every third Russian citizen has overdue debt on at least one loan. By the end of 2023, 350,800 individuals, including entrepreneurs, had been declared bankrupt by the courts, a 26% increase on the previous year Out-of-court bankruptcies in Russia have grown five-fold in the first quarter of 2024, half of these pensioners.

The rental market

The rental market is a comparable disaster.  In 2023, rents for a one-bedroom apartment increased by an average 31%. The principal drivers for the spike in rents were the difficulty in securing mortgage loans (the secondary market) and high demand for housing under construction (the primary market).

Some of the biggest rent increases have been recorded in Putin heartlands where blue collar workers most place their trust in Moscow: Krasnoyarsk (+47.9%), Chelyabinsk (+46.3%), and Volgograd (+38.9%).  At the end of February, Putin chaired a meeting on investments in the defence and metallurgical hub of Chelyabinsk.  Would you be so impressed if you were a worker at one of the grim, Soviet-era plants in the area, facing an almost doubling of your rent for an equally grim, Soviet-era, one-bedroom flat?  Would you be happy if you were a Muscovite with a young family, today facing a 49% increase in rents for two-bedroom flats?

Everything is going according to plan

Russia is a country where the average citizen still carries the cultural expectation that he or she is owed a job, home, health care and pension by the state.  Older Russians remember the Brezhnev years – today viewed as ‘stagnant’ – but, it should be recalled, the period when the Soviet state built 165 million free homes for its citizens. Life may have been boring, but it was also secure. Everything, in those days, went according to the plan.

Today this is not so.  Putin likes to boast inflated macro-economic indices that ‘prove’ Russia has overcome Western sanctions.  His prime minister recently delivered a long monologue to the State Duma asserting the same (some deputies left before the end). The problem is: you can’t eat GDP for supper. What does any of this mean to one in two Russians that now finds no bank will give them a mortgage and that their rent has doubled? And knowing that your president is spending 30% of the federal budget on a ‘special military operation’.