Market-based mortgages, the minimum rates for which can exceed 20% per annum, will still remain inaccessible to most Russians
At the next meeting on Friday, the central bank increased the key rate by 2 percentage points at once, to 18% per annum. Today’s increase was the first in 2024. The last time the Central Bank raised its key rate by 1 percentage point at once, from 15% to 16% per annum, in December last year. After that, the rate remained unchanged.
We are working with experts to figure out how a sharp increase in the key rate will affect the housing market and what consequences it will lead to in the mortgage market.
Market-based mortgages will become even more unaffordable
Experts believe that after the Central Bank’s decision, market mortgage rates will naturally rise, which will make such mortgage lending even less affordable for citizens. If, with a key rate of 16% on a regular market mortgage, bank rates started at 18% per annum, and sometimes exceeded 20%, then with a key rate of 18%, minimum mortgage rates will be at least 20%, and many banks will raise rates to 22-23% per annum, experts interviewed by the editorial board of RBC-Real estate”.
Real interest rates on market mortgage programs before the Central Bank meeting were at about 20%, which made loans practically inaccessible to customers who do not meet the criteria of the remaining preferential programs. Further rate increases will put additional pressure on demand, however, in the current conditions, many borrowers have taken a wait-and-see position, since the cost of loans is almost prohibitive, says Ksenia Yakushkina, Director of Banking Ratings at Expert RA.
Head of the analytical center “Real Estate Market Indicators IRN.RU “Oleg Repchenko believes that despite the increase in the key rate to 18% and interest rates on loans to 20-22%, nothing will fundamentally change in the housing market. The rates were both prohibitive for most borrowers, and they remained, Repchenko confirms the words of colleagues.
Rustam Azizov, Director of Mortgage Sales and Implementation of financial Instruments at A101 Group, holds the same point of view. According to him, mortgage rates will rise to a prohibitive 22-23% in the near future, developers will be able to subsidize them up to 15% at most. However, our practice shows that buyers, in principle, are not psychologically ready for rates above 13%, the expert adds.
Photo: Mikhail Tereshchenko / TASS
Denis Vasiliev, head of the Novoslobodskoye office of Inkom-Real Estate, also says that nothing will change fundamentally in the market. According to the expert, there is no difference whether to take a mortgage at 18% or 20% per annum, in both cases the market mortgage is very high, most potential borrowers simply will not be able to afford it.
With such a key rate, mortgages will be issued mainly by those borrowers who need 2-3 million rubles. And they will repay such loans at a faster pace so as not to overpay interest. There will be some borrowers who need to be re-credited only for six months or a year, Oleg Repchenko adds. According to the expert, a significant part of potential borrowers will expect a decrease in both key and mortgage interest. “But these are still dreams,” he sums up.
Irina Dobrokhotova, the founder of the Best-Novostroy company, notes that the interest rate on the excess limit on a preferential family mortgage will also increase. This means that if the buyer purchases an apartment, the loan amount for which exceeds the loan amount provided for by the preferential mortgage program, he will borrow the rest of the amount at a market rate that will increase.
Previous sharp increases in the key
Over the past 29 months, the Central Bank has already sharply raised the key rate three times. The first time this happened was at the end of February 2022, when the regulator at an unscheduled meeting raised the key rate from 9.5% per annum to a record 20% in the history of the market. This led to an increase in mortgage rates to 22-25% per annum, market mortgages became inaccessible to most potential borrowers and the issuance of loans practically stopped. The second sharp increase occurred in mid—August 2023, when the key rate increased by 3.5 percentage points – from 8.5% to 12%. The third increase took place at the end of last October, when the rate was increased by 2 percentage points — from 13% to 15%.
Demand for housing will subside
The experts interviewed by RBC-Real Estate came to the general opinion that in the near future the demand for housing will decrease, and it is premature to make any predictions about the possibility of its growth.
Demand in the housing market has subsided and will decrease in the near future, Oleg Repchenko predicts. According to the expert, this is happening not only because of the increase in the key rate, but also because of the completion of the preferential mortgage program with state support. In recent years, high demand in the market has been maintained precisely due to this program, and after its completion, many are not yet ready to buy their own homes due to high rates and overpayments on mortgages, says Repchenko.
Due to the low availability of mortgages, it is impossible to exclude a decrease in demand for housing by about 50%, Rustam Azizov believes. After all, a high key rate jeopardizes the emergence of new targeted programs with government support, the expert explains. “The gap between the rates on preferential mortgage programs and the key one will significantly increase — with a family mortgage, this gap now amounts to 12 percentage points, however, for the state, even before the key rate increase, such significant subsidies turned into serious budget expenditures. In the current situation, targeted preferential programs can be expected to worsen conditions,” Azizov believes.
Photo: Orlov Alexsandr / Shutterstock / FOTODOM
From the point of view of maintaining demand, the market of new buildings has at least some support in the form of preferential subsidized government programs; programs with a subsidized rate from the developer, installments, discounts from the developer and more are also available, says Irina Dobrokhotova. In the secondary market, no type of benefits is valid, the only way to reduce the price is to bargain, but it has no direct relation to the mortgage. And if we consider mortgages as the main factor of changes in real demand, the increase in the key rate will have a greater impact on the secondary market, the expert adds.
There is a gradual decrease in demand in the market, buyers are switching from the market of new buildings to secondary housing. “In conditions when the rates on the primary and secondary markets are almost equal, customers try to buy ready—made housing, because in this case they can not spend additional funds on repairs and rental housing until the new building is put into operation,” says Ksenia Yakushkina. According to the expert, the price is 1 sq. m. m in new buildings is on average almost 1.5 times higher than in the secondary market, which also explains the interest of customers in purchasing ready-made housing.
Prices will also start to decline
In the current conditions, housing prices will begin to decline. But it is wrong to expect that the decline in the average cost both in the new building market and in the secondary market will begin very soon, experts say. In the coming months, prices will be more or less stable, and the decline will begin a little later, experts interviewed by the editorial board of RBC-Real Estate predict.
Photo: Jose HERNANDEZ Camera 51 / Shutterstock / FOTODOM
Oleg Repchenko notes that high mortgage rates are putting pressure on prices, but a lack of supply is holding them back from falling. This is especially true for the secondary market, where the number of apartments on display is increasing very slowly. “This is due to the fact that sellers are withdrawing apartments from sale due to low demand and refocusing on the rental market. The secondary market will exist with low demand, but with active bidding for a specific buyer,” the expert says.
In the market of new buildings, during the period of preferential mortgages and record sales, developers have accumulated airbags, so they may not sharply lower prices for primary housing yet. While maintaining the status quo in the market, the official price reduction will begin towards the end of the year, but already now some sales will be carried out with the help of promotions, individual discounts and special offers in the style of “get more footage for less money” or “a storage room or a parking space as a gift,” predicts Oleg Repchenko.
Denis Vasiliev also says that new buildings are already being traded with individual discounts of 15-20%. But globally, it is very difficult for developers to reduce the cost due to the rise in the cost of construction and the tightening of project financing conditions, the expert adds. And in the secondary market, the decline in prices, according to Vasiliev, will continue until the mortgage reaches at least the level of 12-13% per annum or until apartment prices drop to a level comfortable for the buyer.
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