The government has set a goal to reduce the country's average interest rates on mortgages to 10% to 11% per year. The main condition for achieving the goal is to provide banks with resources with an interest of 6% to 7% per year. For now, Russian banks do not have these resources. Experts believe that the goals that the government is setting can at best be achieved within three or four years.
As unaffordable as ever
The idea that the Russian interest rates on mortgages should be 10% to 11% was first voiced by Russian Prime Minister Vladimir Putin at a session of Vnesheconombank's supervisory board. "In order to make mortgages more affordable to a wider range of people, the average interest rate should be 10% to 11%," Vladimir Putin said and added that it currently was 14.5% per year, which was "too much for our citizens."
It was also announced that an additional 250 billion roubles would be earmarked for supporting mortgages in 2010. Pension savings will be used for developing mortgages for the first time. For example, VEB will allocate 163 billion roubles from pension savings to buy reliable mortgage bonds from banks. The bank will spend an additional 50 billion roubles from its own funds on the bonds and 40 billion roubles will come from the Agency for Housing Mortgage Lending.
It is worth mentioning that the actual cost of a mortgage is higher than that mentioned by Vladimir Putin. The prime minister speaks about the weighted average rate that is calculated by Russia's Central Bank based on data from Sberbank, which is the market's largest player with over a 40% share and provides mortgage loans at 13.5% to 16% per year. Credit broker Kreditmart says that the market's average mortgage interest rate is 17.5%. For example, the DeltaCredit bank provides mortgage loans in roubles at 14.75% to 17% per year, the Nordea bank – at 14% to 17% per year. Meanwhile, the average fixed mortgage interest rate in November was 5.3% per year in the U.S., and 4.97% for a five-year loan in Canada. Weighted rates on mortgages in Europe averaged 4.5% per year.
An unprecedented low
Russian mortgage rates rocketed up in the autumn of 2008 when banks almost stopped providing mortgage loans during the financial crisis. In the last quarter of 2008 and first half of 2009, interest rates were as high as 30% and the initial installments reached 50%, making mortgages unaffordable to those who had considered it before the downturn. Banks had to suspend mortgage loans due to credit resources becoming more expensive and the growing risks of long-term loans that resulted from the inability to refinance them. That's why only seven banks actually provided mortgage loans in the first half of 2009, with the state Sberbank and VTB24 being in the lead. Banks started reducing their exorbitant interest rates on mortgages and resumed providing loans in the second half of 2009.
An interest rate of 10% to 11%, as Prime Minister Vladimir Putin mentioned, is, in fact, unprecedentedly low for the Russian mortgage market that is only a decade old.
Russia's mortgage market evolved from rare loans provided at an interest of 30% per year. Russian banks started developing mortgages five years ago when the government entered the scene with an affordable housing program. That was when the necessity to make mortgages affordable and to cut the rates was first voiced. Banks were doubling their mortgage loans from 2006 to 2008, mortgage loans surged from 60 to 630 billion roubles and the mortgage portfolio totaled 1 trillion roubles. However, mortgage loans were barely affordable even when they were being most frequently provided. The Central Bank reports that the weighted average rate for mortgage loans was 14% in 2006, with its minimum of 13% in 2007 and 12.4% in 2008.
Mid-term perspective
To provide loans at 10% to 11% banks need to have access to long-term credit resources at an interest of no more than 6% to 7%. They have not had such an access so far. The Central Bank has estimated that the weighted average rate for retail deposit, which is the main resource for banks raising funds, was 13% to 14.5% per year with an average deposit term of one and a half years. Besides this, the money can be withdrawn at any moment, which makes it too risky to use the funds for providing mortgage loans. The retail deposit rate will decrease and the term will rise when the country's economy stabilizes and inflation goes down to 5% to 6%. However, the Bank of Russia officially forecast inflation at 9% in 2010.
Another way to raise funds, specifically mortgage securitisation, which means issuing bonds backed by mortgage loans, is not accessible to banks either. "Mortgage securities are too risky and investors will purchase them if the premium is quite large, making the rates barely profitable for banks," analyst for the Uralsib Financial Corporation Stanislav Bozhenko believes. The Central Bank has reported that the banks have issued almost no mortgage bonds at all: there was only one bond issued to the total of 2 billion roubles in 2008 and none in 2009.
To revive the securitisation market the government announced a program last year within which mortgage securities would be underwritten by the country's main refinancing institution – the Agency of Mortgage Lending. Banks are expected to issue mortgage bonds, exchanging them later to receive refinancing from the Central Bank. The Moscow Bank for Reconstruction and Development has been the only one to issue such bonds so far. However, the interest rate will be 12.3% per year, and the bank will have to pay the agency a fee and the Central Bank will include the securities into the collateral list with a discount that has not been identified yet.
Experts believe that a reduction in mortgage interest rates in the short term fully depends on state support. In late 2008, when the government first admitted in public that it was concerned with mortgage loans, measures to support the Russian mortgage market were announced. The measures were mainly aimed at preventing the system from crashing down due to increasing defaults on loans and so could not substantially reduce the rates. However, it would be wrong to say that this state support could essentially change the market. The amount that the government was ready to spend on mortgages did not exceed a quarter of the country's mortgage loans total. So, few banks are likely to start providing mortgages in the short term.
Alfa-Bank's chief economist Natalia Orlova believes that a real reduction of rates is possible within three to four years. "The refinancing rate is in decline, banks are receiving funds from the federal budget and will spend them, among others things, on mortgage loans. Increasing loan numbers will result in the further reduction of rates," Natalia Orlova underscores. "However, an actual reduction is possible in the long term if all the mechanisms run smoothly and interest rates for the resources of principal banking funds go down."
Anna Prokhorova