Azernews.Az

By Bloomberg

Russia is rolling out subsidies to resuscitate its mortgage market after a rise in interest rates in the wake of the oil crash caused lending to plunge.

With Russia on the brink of recession, the government plans to provide 20 billion rubles ($330 million) for home loans to help spur the economy. The program, which begins this month, gives mortgages to buyers of new homes in Moscow, St. Petersburg and other regions at a subsidized interest rate of 13 percent, according to Minister of Finance Anton Siluanov.

The funding comes after months of economic and political turmoil led to a boom and bust in the market. The U.S. and European Union sanctions against the country after Vladimir Putin’s annexation of the Crimea, coupled with the plunge in oil prices, caused the ruble to drop 43 percent against the dollar in the second half of last year.

Initially, Russians rushed to buy property to shield their wealth from the slumping currency, giving a boost to mortgage lenders. The credit surge came to a halt after the central bank hiked its key interest rate to 17 percent from 10.5 percent on Dec. 17 to defend the currency. Demand for mortgages has dropped by about 50 percent this year.

“We are close to a credit crunch as retail lending is very subdued,” said Dmitry Poliakov, a fixed-income analyst at OAO Sberbank’s investment banking unit. “It’s good to keep the ball rolling, but the amount of the subsidy program is not huge and banks still have to use tighter criteria.”

30% Growth

Russia’s mortgage market was thriving in 2013 and 2014, with lending volume expanding 30 percent each year. In 2014, the number of new loans exceeded 1 million for the first time.

PIK Group, one of Russia’s largest property developers, saw demand in December for its housing soar to a six-year high -- even as prices surged by as much as 12 percent, according to Natalya Mikhna, the head of communications.

Some Russian homebuyers were protecting their savings from depreciation. Others, concerned that lending would dry up, moved quickly last year to get a mortgage, Mikhna said.

After the central bank raised rates almost seven percentage points in December, state-controlled lenders OAO Sberbank and VTB Group increased the cost of borrowing by a smaller margin. They are providing loans at 14.5 percent to 16 percent. Some privately-owned banks charge more than 20 percent even after the central bank cut the key rate to 15 percent on January 30.

Rate Cut

On Friday, policy makers eased the rate to 14 percent to help stimulate retail and corporate lending.

“We welcome the decision of the central bank, but this reduction isn’t sufficient to revive lending”, Herbert Moos, deputy chief executive officer of VTB, said during a conference call.

High rates and falling wages have discouraged Russians from taking mortgages this year.

“After excessive demand at the end of last year, the supply of free money to invest in real estate has almost been exhausted,” Oleg Repchenko, head of real estate consultancy IRN.RU, said in an e-mail. “Most people now wouldn’t take out a loan due to a lack of confidence about their own financial stability.”

Demand for loans has plunged by half in the first two months of 2015 compared with the beginning of 2014, according to Pavel Timoshenko, head of the mortgage department at construction company FSK Leader, which builds residential property near Moscow.

“Our apartment sales declined by about a third in January and February,” Timoshenko said. “Up to 60 percent of our sales were supported by mortgages in 2014, and this year the share of mortgage deals fell to 35 percent.”

Recession Forecast

The housing slowdown is helping push Russia into a recession, its first since 2009. The economy may contract 3 percent this year, according to a government forecast in February.

To support developers, the government program will compensate banks for the difference between the market rate for mortgages and the 13 percent charge that borrowers will pay, according to the Ministry of Finance. The maximum loan amount will be 8 million rubles in Moscow and St. Petersburg and 3 million rubles in other regions. A borrower will have to make a down payment of at least 20 percent to get a subsidized loan.

The average mortgage issued last year was 1.7 million rubles at a rate of 12.5 percent, according to central bank data.

Sberbank, VTB

“Twenty billion rubles of subsidies is better than nothing,” Timoshenko of FSK Leader said. “With each passing day it becomes increasingly difficult to carry out sales plans”.

About 15 lenders qualify for the program, which requires that they are able to provide at least half a billion rubles of mortgages each month. Two privately-owned banks started accepting applications for the subsidized 13 percent mortgages in early March. The government expects 400 billion rubles of mortgages to be provided with the help of subsidies.

Sberbank and VTB, which dominate the mortgage market, have access to the cheapest ruble funding. By the end of last year, Sberbank estimated its share exceeded 50 percent. VTB controlled 21 percent, according to Andrey Osipov, head of mortgage lending at VTB 24, the bank’s retail unit.

“Without government support the market would shrink 66 percent this year,” Osipov said. “Nobody wants a mortgage at a 16 to 18 percent rate.”

Ukraine Cease-Fire

Osipov said he hoped VTB 24 will be able to provide 100 billion rubles of subsidized mortgages this year.

The subsidies will support about a third of the sales by developers, Mikhna of PIK Group said. Last year 36 percent of residential property sales at her company were made with the help of mortgages.

“Lending conditions look interesting for buyers of inexpensive and small apartments, and for those who build them,” said AFK Sistema Chief Economist Evgeny Nadorshin. “The program won’t save the construction sector from falling this year but will reduce its depth.”

A cease-fire in Ukraine starting last month and oil prices rising since the end of January have helped the ruble rebound 11 percent from its low on Jan. 30.

“This year we expect more demand in the primary market, and that will definitely support not only the mortgage market, but the construction sector as well,” Natalia Alymova, head of retail products at Sberbank, said by e-mail.