The Bank of Russia decided to raise the key rate to 9.5%. Alexander Tsyganov, Head of the Department of Housing Mortgage Lending and Financial Instruments of the Real Estate Market at the Financial University under the Government of the Russian Federation, told how the mortgage market in Russia will react to such actions and why banks will have to increase interest rates on housing loans. The increase in the key rate in 2021 began from 4.25% and gradually increased to 9.5% by February 2022. The next decision to increase the Bank of Russia took at a meeting on February 11. It is obvious that inflation will not stop, and the Bank of Russia will be forced to raise the rate. An alternative option is being implemented in Turkey, where the key rate is lowered despite inflation and the depreciation of the lira against the US dollar, which amounted to almost 150% in 2021.
Therefore, there is reason to prepare for an increase in lending rates, including on mortgages.
It is known that the operating expenses of the bank and the rate of return have historically developed in mortgage lending at the level of 3-4%. In January-February 2022, at a key rate of 8.5%, the weighted average rate on ordinary mortgage loans without subsidies and other benefits, according to DOM.RF, was 10-11%, which is less than in the above rule. This is partly a manifestation of inertia, but in many respects it is an understanding of the importance of keeping the rate within 10%, which is important for the consumer.
It is nothing that so many efforts were made to achieve a single-digit mortgage rate in the second half of the last decade, and this paid off - by the beginning of the 2020s, mortgages became the most popular and affordable way to improve housing conditions, more than 10 million loans were issued over the decade. This means that approximately one in five families has taken advantage of a mortgage, and many are thinking about new housing and are considering such an opportunity for themselves in the future.
A mortgage from a fairy tale about a wonderful overseas life, on the one hand, and the specter of financial bondage, on the other, has become a fairly familiar financial instrument in Russia that can be calculated, the possibility of using it taking into account the possibilities of the family budget, potential and real overpayments, which are estimated taking into account rental rates and opportunities subsequent sale of the apartment. In 2021, a mortgage loan was available to about half of the population of our country, but given the growth in rates, the number of potential borrowers with positive prospects for loan approval will decrease.
Banks will not be able to hold back the growth of mortgage rates for a long time. Therefore, with an increase in the key rate to 9.5% or more, we can expect a rapid increase in mortgage rates to 12-13% and a gradual pull up to 13.5-14%.
With a key rate of 12%, which already appears in some forecasts, mortgage loans may rise in price up to 15-16%.
In this case, the demand for subsidized family and subsidized mortgage programs will remain high, and conventional programs will temporarily lose popularity. Historical experience shows that the growth of rates to the level of 14-15% in 2009 against the backdrop of the financial crisis led to a 2.7-fold reduction in the mortgage market from 349 thousand in 2008 to 130 thousand in 2009, but then the market quickly recovered.
If in the future there will be an increase in the income of citizens and wages will grow at a faster rate than inflation, then it is quite possible to expect a recovery in demand for mortgages that have risen in price. If salaries grow by 15-20% a year, then moderate double-digit mortgage rates can become quite lifting, and potential demand for housing will make borrowers interested in mortgage programs and make them attractive.
It is already clear that there will be a decrease in the volume of the mortgage lending market in 2022, but still not on the scale of 2008-2009. Potential borrowers in 2022 will take into account the possibility of obtaining a preferential mortgage loan under the subsidized programs that continue this year, as well as the prospects for refinancing the loan, which can be immediately stipulated in the loan agreement. Nevertheless, it is critically important for Russia to enable the majority of citizens to realize their dream of owning an apartment, which will be more difficult to do with higher mortgage rates.
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