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. Last Updated: 07/27/2016

Kremlin Mortgage Goal ‘Out Of Reach’

When President Dmitry Medvedev laid out his ideal for mortgage lending last month, with banks “gladly giving out loans at 6 to 7 percent,” he was speaking to a receptive audience: workers at an airplane plant in Ulan-Ude.

Banks could already be providing new mortgages at 14 percent, he said, and the market should recover to precrisis levels in two to three years.

The government has made driving down interest rates a priority to stimulate an economic recovery. The Central Bank has cut its key refinancing rate five times since the start of the year, and the regulator has all but mandated that lenders not offer deposits with interest above 18 percent.

But home loans are — and are likely to remain — well out of most people’s reach for the near future because mortgages have become a low-margin and high-risk business for lenders, analysts said. Continued double-digit inflation and a proposed law on personal bankruptcy are compounding lenders’ reluctance to issue new loans.

The average interest rate for mortgages in rubles is now 19.8 percent, according to a weekly report from the state Agency for Mortgage Lending.

“There are two main reasons interest rates are this high,” said Oleg Repchenko, head of the IRN.ru real estate analysis portal. “First, it is the lack of cheap cash. Second, the risk of bad debt caused by borrowers.”

Before the recession hit last year, banks were offering mortgages at 10 percent to 11 percent because they had access to affordable foreign loans. Now, many mortgage lenders are using money from deposits paying 10 percent to 15 percent and cannot afford to offer credits for less, he said.

“Many Russians proved to be inexperienced borrowers, unable to weigh their solvency,” Repchenko said. “When real estate prices were rising until mid-2008, people would try to buy any property, taking 20- or 30-year mortgages without really understanding how they would be able to pay them off. Especially now, when lots of people are in danger of losing their jobs.”

The Russian Federation of Independent Trade Unions recently forecast that as many as 180,000 people face layoffs this month.

Repchenko said banks were being twice as cautious with their interest rates on fears that real estate prices could sink further and more people might lose their jobs.

Property prices in Moscow have been falling since October, plummeting in July past $4,000 per square meter, a psychologically important mark where prices stabilized in 2007, according to IRN.ru figures. The figure was at $3,867 per square meter, as of Monday

“Mortgages will not be affordable unless the main macroeconomic indicators improve,” Repchenko said, adding that decreasing rates should not be a goal in itself.

The mortgage market is still relatively small compared to those in the West, and presidential aide Arkady Dvorkovich said in July that the volume of mortgages could fall by up to 500 billion rubles ($16 billion) this year.

To have mortgage lending at 6 percent to 7 percent — more or less similar to rates in the West — Russians should have the same living standards, said Leonid Slipchenko, a banking analyst at UralSib. “The country should pull out of the crisis, and fundamental reforms should be implemented,” he said. “This may take years, though”

Some state-owned banks, including Gazprombank, decreased mortgage rates in July by as much as 1 percentage point, which triggered a heated debate among bankers about the disadvantages for private lenders.

“State-owned banks can afford decreasing rates, as they benefit from state subsidies,” Slipchenko said. “Banks are currently renewing competition for markets, including mortgages, but private banks will be left behind because they won’t be able to lower rates and maintain reasonable margins.”

Mortgages are already not a profitable business for private banks, said Ilya Zibarev, head of the mortgage division at Alfa Bank, Russia’s largest nonstate lender. “We’re offering mortgages at 24 percent and see no reason to reduce the interest rates, since it won’t cause an influx of new clients,” he said. “For instance, let’s say we have 20 clients a month — by decreasing the rate 1 percent we’ll have a total of 22 at best.”

He said Medvedev’s target of 6 percent to 7 percent was “unrealistic for now.” “We can’t offer these rates without financial help from the state,” he said. “Banks need to attract short-term money and introduce a well-managed refinancing mechanism.”

The state’s refinancing mechanism is managed by the Agency for Mortgage Lending and was launched in December 2008. The agency refuses to refinance about half of borrowers, according to the Realty-expert.ru analysis portal, and the mechanism has a number of deficiencies. Most notable, the refinancing ends up increasing the overall amount of the debt, leaving the borrowers in worse condition if their solvency does not improve.

Additionally, a long-delayed bill on personal bankruptcy is finally making headway, raising further concerns for mortgage lenders. The Economic Development Ministry is approving the bill with the Justice Ministry and it could be introduced to the State Duma as soon as December. Under the bill, any borrower owing more than 100,000 rubles ($3,180) may file for bankruptcy in an arbitration court, which would guarantee three to five years of payment postponement and protection from having property confiscated. Bankers said the bill would encourage people to borrow even more carelessly, knowing that the state will protect them from creditors.

“People will just hide behind the state’s back, as it will become easier to own property without paying off their loans,” Zibarev said. “This will result in higher interest rates rather than lower ones, so conscientious borrowers will have to pay for the indemnities caused by unfair clients.”

The state should improve credit culture, teaching people to estimate their solvency and pay their debts in time, he said. “Before mortgages gain popularity nationwide, the state should elaborate on how debts must be collected,” he said. “Then, in two or three years, when the number of mortgages has increased to precrisis levels, the system will work properly and allow banks to offer affordable interest rates.”