Alexander Vasilyev, a 34-year-old engineer at a Moscow construction firm, says the 12 percent rate on the 15-year mortgage he took to buy his first apartment last December is “totally crazy.” President Vladimir Putin agrees.
Putin, 60, signed a decree last year to cap rates at 2.2 percentage points above inflation by 2018 and predicted loan costs will drop to 6.5 percent in a few years. While the decree has so far had little effect -- inflation slowed to 6.5 percent in July while the average home-loan rate rose to 12.7 percent this year from 12.3 percent in 2012 -- the trend may reverse as lenders sell more mortgage securities, according to Absolut Bank, which forecast a drop of 1 percentage point.
The lender, owned by the pension fund of OAO Russian Railways, sold its first mortgage-backed securities in March to finance 12.3 billion rubles ($371 million) of home loans. Amendments to a law governing bonds backed by mortgages, enacted in January, improved investor confidence by making it harder for issuers to self-liquidate and default on securities, Moody’s Investors Service said in July 23 note, adding it may upgrade some of the notes.
“The mortgage market is in a rally,” Dmitry Ivanov, who helps oversee $2.6 billion as head of institutional portfolios management at Uralsib Asset Management, said by phone from Moscow on Aug. 13. “This product will become more and more accessible. More banks will seek funding through mortgage-backed securities, competition will increase.”
The size of Russia’s mortgage market pales in comparison with peers, amounting 3.2 percent of gross domestic product in January, according to the mortgage lending agency. In Poland, outstanding home loans comprise 21 percent of GDP, the banking regulator KNF’s data show, with the ratio soaring to more than 100 percent in the Netherlands, according to its central bank. Russia, the world’s biggest energy-exporting nation, is striving to spur mortgage lending to 7.2 percent of economic output by 2015, according to a 2030 strategy program adopted three years ago.
As part of the push, the government is urging banks to sell mortgage-backed securities, known as MBS, which were introduced in Russia in 2006. The proportion of mortgage loans funded by the debt is set to grow to 8.2 percent this year from 6.6 percent in 2012, according to Elena Muzykina, deputy securitization chief for the state-run Agency for Housing Mortgage Lending. This may rise to 24.3 percent by 2018 under an optimistic scenario, she said.
Domestic issuance of the securities almost doubled last year, with 11 deals valued at 68.4 billion rubles taking place. So far this year, eight transactions totaling 42.6 billion rubles were registered, said Andrey Suchkov, head of securitization at VTB Capital, which organized five of the deals, including Absolut Bank’s.
Russia’s lenders, including the nation’s biggest banks OAO Sberbank and VTB Group, took cues from the growing demand to increase their mortgage portfolios by 34 percent last year to 2 trillion rubles, according to central bank data.
The surge in mortgage offerings is making it easier for people like Vasilyev and his wife Oksana to secure financing for their first family home. The couple negotiated a 3 million-ruble loan from Sberbank, covering half the cost of a two-bedroom flat that’s due for completion in 2015. One in every four Russians view mortgages as a means of improving living conditions, according to a poll published by the lending agency this month.
We turned to a bank “because other options to get a lot of money for housing don’t exist, at least for now,” he said.
Facing interest rates of more than four times the euro-region average of 3.45 percent, Vasilyev cut costs by choosing an off-plan property situated about 50 minutes by car outside of Moscow. Prices there range from around 60,000 rubles per square meter ($168 per square foot), about half the cost of a property on the outskirts of the capital, he said by phone. Brazil’s average home prices reached $268 per square foot in July, according to an index compiled by economics research institute FIPE and real-estate website Zap Imoveis. Homes in the best parts of central London sell for about 2,000 pounds ($3,118), CBRE Group Inc said in a June report.
Vasilyev doubts mortgage rates will fall to the government’s target of 6 percent anytime soon. To achieve that rate, inflation would need to ease to 3 percent, which is unlikely before 2016, Economy Minister Alexei Ulyukaev said Aug. 13. Russia’s central bank wants to cap consumer-price increases at 4.5 percent next year, down from between 5 percent and 6 percent this year. The regulator kept the main refinancing rate unchanged at 8.25 percent this month.
The Agency for Housing Mortgage Lending runs a 40 billion ruble-a-year program to purchase residential MBS. It also buys securities on the spot market from issuers like Absolut, Muzykina said. The agency and ZAO VTB24, the retail arm of Russia’s second-biggest bank, sold 63 percent of all MBS last year. After a lull in the first half, nine issuers sold a combined 68 billion rubles of the securities, a 47 percent jump from the 2011 total.
The mortgage lending agency was set up in 1997, a year before the Russian parliament adopted a mortgage law to make properties more accessible to citizens living in government-sponsored flats before the Soviet Union fell apart in 1991. Most Russians have since managed to privatize ownership of their flats, with 85 percent of the country’s 62 million registered flats coming under private hands as of last year, up from 67 percent in 2001, according to the body’s data.
One in every five apartments purchased in Russia last year was financed using a mortgage, up from 18 percent in 2011, the agency’s data show. While smaller banks are eager to take a chance on MBS, Russia’s biggest lender, Sberbank, is waiting to see how the industry pans out before selling the debt.
“The market of mortgage-backed securities could be interesting to Sberbank as a way to attract cheaper resources or as an instrument of selling risky assets,” Sberbank’s press-service said in an e-mailed response to questions. “At present, we don’t see this becoming a cheaper way of financing compared with standard unsecured debt. Considerable issuance costs limit the attractiveness of the instrument.”
For MBS to take off, non-government pension funds will also need to widen their participation, according to Artyom Konstandyan, chief executive officer of OAO Promsvyazbank, a privately owned commercial bank which sold 3.1 billion rubles of MBS in June at a coupon of 8.5 percent. The bank, which has a 5.6 billion-ruble mortgage portfolio, may issue more of the debt as it’s “one of the optimal sources of funding mortgage lending,” Konstandyan said.
The appeal of MBS is picking up after January’s legal amendments introduced rules that make it tougher for an issuer to liquidate when they face an increase of non-performing loans, thereby reducing the risk of the issuer defaulting.
The changes will help bring Russia’s MBS legislation closer to more developed markets, Olga Gekht, senior credit officer at Moody’s in London, said by phone. Moody’s will review between five and seven Russian residential MBS tranches for a possible upgrade by one or two levels this fall, she said.
“We’re actively working with private investors and expect the share will grow,” VTB Capital’s Suchkov said by phone. “It is small so far as the instrument is still new, we have to educate the investors.”
New issuers are coming to the market, as are a more diverse range of investors, said Suchkov, who was responsible for the first Russian mortgage securitization transaction in 2006.
A pickup in the country’s construction industry will also support the MBS development. A record 66 million square meters of housing was built in Russia last year, up from 58 million in 2010, according to the state statistics body, an annual figure that Putin seeks to raise to 90 million by 2015. The government’s 2030 housing strategy is under review to reflect the new targets, Muzykina said.
The average cost of new flats in the capital rose 6 percent to 229,136 rubles per square meter this year, according data from Moscow-based Miel real-estate agency. In St. Petersburg, located about 700 kilometers northwest of Moscow, the average price of properties on the secondary market climbed 0.6 percent to 95,800 rubles per square meter, according to Real Estate Bulletin, a property-industry newswire based in the city.
Pressure on mortgage rates will begin to subside as banks move toward relying more on MBS to boost home lending, according to Sergei Mikhailov, head of investment and trade at Absolut Bank.
“If a bank understands how it can refinance a loan it will automatically affect the residential mortgage rates, by at least one percent after refinancing of major part of portfolio,” Mikhailov said by phone from Moscow. “It makes an ideal model for issuing new loans and refinancing existing ones.”