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. Last Updated: 07/27/2016

Low Salaries Endanger Housing Goal

MTAn apartment block being built in Kuzminki. Russians need an additional 1.7 billion square meters of housing space.
As the country continues to bask in the flow of petrodollars, low salaries could yet derail one of President Vladimir Putin's national projects to provide widespread affordable housing.

Fifty-one percent of Russians said they urgently needed to upgrade their accommodation, according to a Public Opinion Foundation poll released in August. Meanwhile, Russians currently require an additional 1.7 billion square meters of housing space, an increase of 46.1 percent, according to the web site for the country's four national projects.

The state-run Federal Mortgage Lending Agency, set up in 1997, is charged with providing affordable housing for low-income citizens by maintaining liquidity and refinancing mortgages. But ten years after its inception, the agency appears to be struggling to make an impact.

The agency has refinanced or underwritten 158,690 mortgage loans, at the cost of 70 billion rubles ($2.8 billion), Alexander Semenyak, the agency's general director, said Wednesday on the occasion of its tenth anniversary.

Semenyak said the agency, which controls 10 percent of the country's mortgage refinancing market, planned to refinance 41,000 mortgage loans in 2007, far short of the target of 300,000 envisioned by the affordable housing project. Buoyed by its refinancing program, close to 500 banks and financial institutions are currently participating in the mortgage lending market, Semenyak said.

While the figures are impressive, analysts said most low-income earners failed to benefit from the program, particularly those living far away from the country's centers of commerce.

"The overwhelming majority eke out a living far away from Moscow and St. Petersburg and the oil and metal producing enclaves," said Vladimir Tikhomirov, chief economist at UralSib. "Well-paid jobs are scarce, income is miserably low, and most simply cannot dream of taking out a mortgage."

Volga Federal District presidential envoy Alexander Konovalov agreed, adding that while the cost of apartments in many regions is tolerable, wages are so low that people cannot afford the expense of a mortgage.

To make apartments affordable, Konovalov said the government should consider building residential estates to supplement efforts by private developers.

"The project relies too much on the pool of residential buildings and apartments put up through individual efforts," Konovalov said. "Government-built low-cost apartments will ease supply and drive down prices."

But UralSib's Tikhomirov said that rather than intervening, the government should make the "mortgage market more competitive and rid it of corruption."

"Government should consider helping develop private construction companies rather than funding or creating state companies to build real estates," Tikhomirov said.

Nadezhda Spiridonova, an official with Moscow city's reconstruction and development department, said the state's involvement in building residential housing estates would stimulate economic growth, create employment and make apartments affordable.

Moscow Investment Construction Company, which is majority-owned by the city government, is an example of the kind of firm that has successfully adopted the Soviet city-planning method to boost economies in cities like Tambov, Ryazan and Nizhny-Novgorod, Spiridonova said.

"Before, Moscow used to throw money at them, without understanding the real estate needs of these cities," Spiridonova said. "Now the company only builds residential spaces tailored to the needs of a particular town."

Spiridonova said direct state involvement also meant creating more jobs with a multiplier effect of raising general level of income.

Another drawback in the implementation of the national affordable housing project is the limited variety in the type of apartments on offer.

Konovalov said there was no variety in the market and that buyers are often offered the same type of expensive apartments built with well-heeled clients in mind. Most apartments currently on offer do not meet the needs of the average Russian, he said.

"Many in the regions need small, compact and modest apartments, but the market is full of big apartments designed for the rich," Konovalov said.

The impact of the U.S. subprime mortgage crisis could also spell bad news for the affordable housing initiative, analysts said.

"Before the crisis, the mortgage lending was the fastest-growing bank retail offering," said Olga Naidenova, banking analyst for Alfa Bank. "The main problem is the subprime crisis will slow down the mortgage loan market by shrinking liquidity and making it difficult for banks to redeem mortgage assets."

The Federal Mortgage Lending Agency said it had been experiencing some delinquencies, though on a modest scale.

In the first half of this year, delinquent mortgage loans rose to 2.5 percent, or 1.3 billion rubles, from 0.75 percent, 261 million rubles, in January.

"This is by no means a crisis in the housing mortgage market," Semenyak said. "The volume of the defaults is too miniscule to threaten the mortgage program."

Accounting for only 10 percent of the mortgage market, the Federal Mortgage Lending Agency cannot influence the interest rate for mortgage loans or make apartments affordable for majority of Russians, analysts said.

"Making housing affordable is not what an agency or even banks can handle," said Maxim Osadchy, senior analyst for Antanta Capital investment company. "The government must bring down bureaucratic barriers and stimulate competition that will put pressure on high apartment prices."