All activity has died in the residential real estate market, apartments in new buildings are mostly unsold, and government officials are quite transparently hinting that it’s time to lower prices per square meter.
Commenting on the situation, the author of the article “The ground is shaking under new buildings” expresses concern that due to such hints from legislators and industry leaders, the bubble in the residential real estate market may burst and prices will sharply go down.
Namely, such an effect is possible: if the market price of an apartment purchased with a mortgage turns out to be lower than the remainder of the debt, then the borrower will be tempted to give the apartment to the bank, and the remainder of the debt will be discharged through the bankruptcy mechanism of an individual. If such a practice becomes widespread, banks will incur large losses, which can lead to bankruptcies already in the financial sector.
Let us disagree with this point of view: in our opinion, in Russian conditions, it is not necessary to expect a significant drop in real estate prices caused by a massive refusal to service mortgage loans. Let’s explain in more detail.
Theoretically, a collapse in prices can occur if a self-expanding spiral is launched, the essence of which is as follows. Falling prices lead to the refusal of some borrowers (namely, those whose market price of real estate has fallen lower than the balance of debt) from servicing mortgage loans, debtors’ apartments are sold at auction and, thereby, provoke additional price reductions, after which a new portion of borrowers finds themselves in a situation where it is profitable for them to stop servicing their own loan and give the apartment to the bank, and so on in a circle.
Something similar happened in the United States in 2007-2008, and this was the beginning of the global financial crisis. But the situation in the United States at that time was radically different from the current Russian one.
For several years before the crisis, American banks were handing out mortgages right and left, not thinking about the risks at all. A mortgage, and without a down payment, could be obtained by people who have neither work nor savings. Such loans were officially called subprime, and they were popularly dubbed ninja loans — from the first letters of the English-language expression no income, no job, no assets.
Moreover, to further stimulate mortgages, American banks then came up with a marketing scheme with a variable interest rate: at the first time of the loan (usually three years), the interest rate was very low, and the monthly payment was purely symbolic, but then the interest rate increased sharply, and with it the monthly payment.
It was precisely such loans that triggered the launch of the price collapse spiral described above: when the deadline for the mass transition to a higher monthly payment came, many ninja borrowers, with all their desire, simply could not overpower it, and banks began to take away their real estate.
The price went down, and since a significant part of the mortgage was issued with a low down payment or without it at all, even a slight decrease in the price created a situation where it became profitable for many to abandon the mortgage by giving the house to the bank. The spiral began to spin.
It is clear that in today’s Russia there is nothing like this anywhere near. The main difference is that our banks have recently almost not issued mortgages with a low down payment. According to state-supported programs, which, after the start of the rate hike cycle in the middle of last year, occupy the lion’s share in the total volume of mortgage loans, the minimum initial payment is from the beginning of 2024. It is 20%, but in practice banks require more.
As for loans with state support issued before 2024, the minimum initial payment for them was at the level of 15%, but it must also be taken into account that in more than a year the borrower managed to pay off some (albeit small) part of the debt.
The down payment requirements described above mean that with prices falling by 15% or even 20%, the market value of real estate for most borrowers will still be higher than the remaining debt, which means it will be more profitable for them to continue paying.
Moreover, even if the market price of the apartment falls slightly lower than the balance of the debt, the borrower, oddly enough, will still be more profitable to continue paying.
The fact is that after refusing to pay and personal bankruptcy, such a borrower will be able to buy another apartment only with full payment, because for him, due to a bad credit history, the mortgage will become virtually inaccessible (or prohibitively expensive, and even after lowering the key rate).
For borrowers on mortgages with state support, this argument is even stronger: after all, many of them after July 1, 2024. they are no longer subject to preferential conditions, so they should especially appreciate their lucky chance!
From all that has been said, it follows that even if real estate prices begin to decline, there will be no avalanche—like collapse – at least until they decrease by 20-25%. Moreover, it should be understood that 20-25% is in rubles, in face value. And taking into account inflation, the depth of decline sufficient to trigger a spiral should be even greater.
And until this critical depth of decline is reached, the process, if it does begin, will go quite slowly, and the authorities will certainly have enough time to come up with measures that will help stop it before it reaches a critical point.
For example, you can launch a program to buy out cheaper apartments from the market into a rental fund, so that you can then rent them out on preferential terms to the most needy. With the help of such a program, we would be able to improve the living conditions of many families, and without any preferential mortgage, for which our budget pays three times.