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. Last Updated: 07/27/2016

Inflation Hindering Mortgage Process

Russian banks are trying to establish their first home mortgage loans, but a U. S. financial adviser maintains little can be done unless inflation is held to 125 percent a year or less.


The St. Petersburg Mortgage Bank has already begun making explicit oneyear loans backed by building assets. Sberbank, the quasi-state savings bank system, a commercial bank called MosBusinessbank and a group to be named the Shared Equity Mortgage Bank, are all considering plans for mortgage lending in Moscow.


But Raymond Struyk, a consultant to the banks and the Moscow government from the U. S. AID program, says that unless inflation stabilizes, under 5 to 7 percent a month, the banks will have to be extraordinarily cautious.


"They are going to get involved no matter what, but it will only be for a tiny slice of the market, the very rich who are the best credit risks. At the moment, the general situation is too volatile", he said.


The losers from the absence of a mortgage market are the Russian housing construction industry and Russian citizens with their huge, pent-up demand for housing.


Housing construction has fallen to about 40 percent of its 1989 level, but market demand for housing is smothered, because the only way to buy is for cash. For example, says Struyk, Moscow city authorities built 3 million square meters of housing this year but actually sold 365, 000.


About 20, 000 dwellings will be sold on the secondary market this year, a tiny number for a city with 3 million housing units. The main buyers are not individuals but enterprises looking for a hedge against inflation. Firms also invest in homes as part of a salary package for their employees, partly to avoiding payroll taxes.


Many Russians would prefer to buy newly built dwellings rather than privatize their current flats, Struyk says, partly because rents and renovation costs for state flats are expected to rise.


Surprisingly, raising capital for mortgage loans is unlikely to be a problem because commercial banks, insurance companies and government pension funds are awash with money and looking for safe investments.


One delicate problem is the lack of any procedure for evicting defaulters.


Struyk says India and Latin America offer examples of mortgage markets which operate successfully without evictions. But the problem of volatile inflation remains. Economist Sergei Panteleyev says it is examining inflation indexing as one answer.


Another variant would involve tying repayments to a percentage of the borrower's income, with the hope that as the borrower's income increased, he would eventually pay out the loan.