Russia is winding down a costly program of mortgage subsidies that’s fueled a property boom in the face of the Covid-19 pandemic and the war in Ukraine.
The program provided mortgages at 8% interest even as the Bank of Russia has hiked the base rate to twice that level to battle accelerating inflation. It prompted criticism from Governor Elvira Nabiullina about the distorting effect of the subsidies for newly built properties that drove up prices, enriched developers and brought housing affordability to multi-year lows.
With state support ending for most eligible groups the real estate market that’s been one of the key drivers of Russia’s wartime economy faces months of uncertainty. Banks offer unsubsidized mortgages at 17%-20% interest, more than doubling the monthly payments compared to the state program and making them too costly for most Russians.
More than 75% of new mortgages were issued under the subsidy program in recent months, according to the central bank. Alongside surging military spending, the construction boom has helped Russia’s economy to keep growing despite unprecedented sanctions imposed over President Vladimir Putin’s February 2022 invasion of Ukraine.
Government data show the volume of construction increased by 16% in the past two years and the amount of new housing in 2023 was the highest since 1990. Housing purchases amounted to 11% of gross domestic product last year or 18 trillion rubles.
Property prices in Moscow rose an average of 15% in June compared to a year earlier, to 366,400 rubles per square meter, according to data by Cian PLC, an online property platform. That puts the average price of a 60 square-meter apartment in the Russian capital at almost 22 million rubles.
Prices of homes in Russia’s largest cities nearly tripled between 2020 and 2023, according to the Moscow-based Institute for Urban Economics research.
The subsidy program was introduced in 2020 to support the market as Russia locked down in response to the Covid-19 pandemic. It stimulated developers to accelerate construction projects, attracting buyers with low monthly loan payments.
Russia’s Finance Ministry has spent close to half a trillion rubles since then to subsidize mortgages. It estimated in January that the government would have to spend another 1 trillion rubles to continue the program through 2026
With the program coming to an end, the Bank of Russia expects a decline in demand for new property and a slowdown in mortgage portfolio growth to 7%-12% this year from 30% in 2023.
The government had previously moved to restrict access to 8% mortgages by raising the minimum deposit to 30% from 20% in December and limiting the maximum loan to 6 million rubles, down from 12 million in Moscow and St. Petersburg.
Current borrowers will keep their subsidy. A special program targeting families with at least two children will continue until 2030 after Putin called for it to be prolonged, while another for IT specialists will stop at the end of this year.
