The Bank of Russia will increase premiums on mortgage risk ratios as early as May 1, 2023. The regulator will also set a premium for loans secured by residential real estate. How this decision will affect the mortgage market in Russia and whether the situation will affect developers and banks – in the material of Izvestia.
Chasing a plan
The decision was caused by the deterioration of lending standards by banks. Thus, in the 4th quarter of 2022, 44% of loans were approved for borrowers with a debt burden ratio (LBR) of over 80%. PTI is the share of funds with which the borrower is forced to repay loans to the total amount of income.
According to the Central Bank, the increase in real estate prices was caused, in particular, by joint programs of developers and banks in the primary housing market. Thus, the gap between the cost of primary and secondary housing is about 30%.
Photo: RIA Novosti / Ilya Pitalev
The tightening of the requirements of the Central Bank for the issuance of mortgage loans is a natural decision, said Yulia Makarenko, deputy director of the Banking Development Institute.
– Control is necessary. Banks are doing worse and worse with the task of self-assessment. Credit institutions are striving to close the year and report to management with the best numbers, and the last opportunity to catch up and overtake plans is the last two months of the year. But this is a double-edged sword. In the race for performance, closed applications and annual bonuses, personal and per department, banks are shifting risk into the future, she notes.
More loyal requirements of banks are explained by the limited capacity of the market: over the past three years, there has been a consumer boom in housing in Russia due to the preferential mortgage program. According to the financier, issuing a mortgage loan to an already indebted person is at least unreasonable.
Photo: RIA Novosti / Kirill Kallinikov
– A debt load of over 80% means that every eight rubles out of ten earned go to pay off debts in various banking and other credit organizations. And the number of such approved applications is growing over time – from 36% to 44% within two quarters. The debt load indicator is an alarm for the scoring system of a bank or an employee who accepts an application at the office. Borrowers are the most dangerous category of clients. If something goes wrong (even a short illness), the payer will not fulfill its obligations, there will be a delay. It is not a fact that if there is a certain amount, the client will pay for the mortgage loan, the analyst continues.
Another consequence of such a policy of banks is the growth of interest rates for other borrowers. Thus, credit institutions shift the risks of non-payments to bona fide customers.
Photo: RIA Novosti / Maxim Bogodvid
– With the tightening of requirements, the share of dangerous borrowers should decrease. I believe that the service of other customers will become more predictable. Perhaps a slight decrease in mortgage rates will follow. This will also have a positive effect on developers: there will be fewer apartments in limbo, including those under arrest,” sums up Yulia Makarenko.
Overheating and cooling
The Central Bank of the Russian Federation has repeatedly stressed that it will not allow the residential real estate market to overheat due to the mechanisms of mortgages from developers, recalls Artem Tuzov, director of the corporate finance department at IVA Partners Investment Company.
— From January 1, 2023, restrictions were introduced on mortgages from developers, providing for a serious increase in the provision for such mortgage programs. Citizens who wanted to “jump on the last wagon” of such mortgages created an increased demand for mortgage programs in December, including those approved for mortgages that will be valid until the end of March, the specialist notes.
Photo: RIA Novosti / Maxim Bogodvid
As a result, the residential real estate market temporarily warmed up even more, and now the Central Bank of the Russian Federation is taking measures to cool it down. According to Tuzov, these are temporary measures, and they will be adjusted along with the situation on the market. Mortgages in 2023 will be issued mainly on classical terms, which will reduce the demand of borrowers, as well as industry risks for both banks and developers, the source predicts.
Analyst FG “Finam” Natalia Pyreva explains the situation on the market with a natural decline. The volume of mortgage issuance at the end of 2022 decreased by 15.5% by 2021, to 4.8 trillion rubles. At the same time, in quantitative terms, the indicator fell by 31% by 2021.
Photo: RIA Novosti / Pavel Lisitsyn
— The downward trend in the issuance of mortgages was formed already last year, and at the moment there are no tangible drivers for the growth in the popularity of mortgage programs. At the same time, the risks associated with the mortgage bubble are increasing, so the innovation of the Central Bank of the Russian Federation is more than justified, she notes.
The expert notes an indisputable decrease in demand for mortgage products and, as a result, a negative impact on their profits. But this is an expected consequence of the rush price increase and the boom in demand for real estate in recent years, the Izvestia interlocutor concludes.
Not a panacea
The regulation measures announced by the Central Bank are aimed at reducing risks for all market participants, without exception, Tatiana Shkolnaya, deputy director of the Institute of Tax Management and Real Estate Economics at the National Research University Higher School of Economics, believes.
Photo: RIA Novosti / Alexander Kryazhev
— The growth rate of the mortgage portfolio will noticeably slow down compared to the previous year. Depending on the state of the economy and market conditions, the Central Bank may tighten or soften macroprudential policy. Given the current far from rosy indicators, one should not expect excessive softness from the financial regulator during 2023. One way or another, by the current moment the market is already highly unbalanced, the approach to the use of mortgage instruments needs to be revised and adjusted,” the economist adds.
According to the analyst, mortgages are not a panacea, but only one of the important tools for market development. The main question should be addressed to the Ministry of Construction: what is the regulator of the construction industry doing and going to do to increase supply in the housing market, develop fair competition among developers and improve the quality of residential construction products in the broadest sense of the term, Tatyana Shkolnaya notes.
Miracles of Marketing
Adjusting the conditions for issuing a mortgage is a measure based on a reliable assessment of the riskiness of certain mortgage transactions, says Kirill Sivolapov, Senior Lecturer at the Department of Investment and Construction Business and Real Estate Management, Faculty of Market Technologies, IOM RANEPA.
“Today, the share of loans with a minimum down payment and a high income burden has increased: people pay more than 60–80% of their current income to repay a loan. Since the market dipped a little in terms of the number of transactions, developers began to actively look for their own development options. Some in the first year of the mortgage compensate the bank for the rate due to, among other things, the initial overpricing of housing, he adds.
Photo: TASS / Dmitry Feoktistov
The gap between the primary and secondary market has become very large. This leads to the fact that the borrower takes an apartment on a mortgage at an inflated price and cannot then sell it at the same price in the secondary market. Consequently, the amount received from the resale may not be enough to repay the loan, which increases the risks for banks as well. The expert is convinced that the measures taken will slow down the growth of mortgages in the country, but first of all, this will affect high-risk transactions.
How significant this slowdown will be is still difficult to say. The Association of Banks of Russia at one time proposed introducing a minimum threshold for mortgage rates. Probably, this measure would also help to reduce the number of advertising “miracles” with a reduced rate on mortgage loans, sums up Kirill Sivolapov.
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