Prime mortgages are no longer available. At least temporarily. Most banks have suspended accepting applications for all types of prime mortgage loans. What is happening? When will distributions resume? And how will all this affect property prices?
NO LAW AND NO MONEY
Let me remind you that the most widespread state-supported preferential mortgage program ceased to operate on July 1. Its great advantage was that there were no special requirements for borrowers. There were only restrictions on amounts. Household mortgages are still valid for IT specialists as well. But only nominally.
The family mortgage was officially extended until 2030 in February. But the nuances have not yet been determined. Most likely, the previous rate of 6% per annum will remain only for families with two children under 6 years old. And the rate for families with children over 6 years old will be increased to 12%. This was proposed by the Ministry of Finance, but so far there are no legislative solutions. Therefore, most banks have suspended accepting applications or are accepting them, but with one caveat: they say that we will give a final decision only when the parameters of the program are clear.
The second type of preferential mortgage, which is theoretically still available, is the IT mortgage. It nominally expires at the end of the year. The rate is even lower – 5% per annum. But there are other nuances here. The initially allocated limits have expired. Most banks have stopped accepting applications from potential borrowers. There are rumors that the government does not want to simply add money. And they also want to reconsider the conditions. For example, leave the benefit for all regions except Moscow and St. Petersburg. But no decision has been made yet.
THE MARKET PRICE IS KILLER
As for the market interest rate, it currently ranges from 17 to 21% per annum. In general, it is prohibitive for most potential borrowers. In fact, under these conditions, only those who lack a small amount to buy an apartment (a maximum of a couple of million rubles) take money. Buying real estate at such a rate with a minimum down payment (20%) is devastating for the family budget (see calculation).
NAKED CALCULUS
How much will an apartment cost on credit at the market rate?
Let’s say the cost of housing is 10 million rubles.
From them:
Down payment – 2 million rubles
Mortgage – 8 million rubles
Rate – 18% per year
Duration – 30 years
The monthly payment will be 120 thousand rubles.
The total cost of the apartment is 45 million 400 thousand rubles.
According to Ipotek.ru.
WHAT WILL HAPPEN TO DEMAND AND PRICES?
The cancellation of the largest preferential programme and the tightening of conditions for the other two programmes should lead to a decrease in demand for new buildings. At least twice. Over the past six months, developers have sharply raised prices, stimulating a rush among potential buyers. And so demand for future periods has dried up. According to experts, developers will now have to make concessions to customers.
It is true that they are unlikely to massively reduce prices. There are several options here: more discounts and various promotions, as well as subsidized mortgages. We have already gone through the second option. Banks and developers actively pushed similar proposals in 2022. There was even something called “zero mortgage”. But this scheme had one important nuance: the difference was built into the price of apartments. For example, they sold apartments 20-25% more expensive, but set a very low mortgage rate for the client. Experts consider this practice questionable. The Central Bank also actively opposed it.
– These plans are detrimental both to the buyer and to the market as a whole. They may solve the problem at the moment, but the buyer receives an apartment at an inflated price that cannot be resold without losses on the secondary market, says Oleg Repchenko, director of the Real Estate Market Indicators analytical center.
Moreover, banks and developers no longer offer such freebies. Over time, a zero-cost mortgage becomes unprofitable for them, because borrowers quickly realized that it is better to take out a loan for the maximum period and not rush to repay it early. Currently, subsidies are offered only for short periods. And then the rate becomes the market rate.
“After a few years, the borrower will have to pay the full rate on the mortgage, but it is not a fact that his income will increase proportionally and he will be able to bear the greater financial burden,” warns Oleg Repchenko.
TWO DISADVANTAGES OF PREFERENTIAL MORTGAGES
Preferential programs in the real estate market have become the main driver of the entire new construction market. The industry received significant support. According to the Ministry of Finance, banks have granted almost one and a half million preferential mortgage loans over the past four years. Developers, however much they complain about rising costs, are making huge profits.
At the same time, prime mortgages had two huge disadvantages. First, a sharp rise in prices. Low mortgage rates have led to increased demand. But the proposal did not follow suit. As a result, prices across the country roughly doubled. They wanted to increase the affordability of housing, but it did not work. The second disadvantage is high budgetary expenditures. A prime rate does not appear like that. The difference between market and prime rates is covered by… the Ministry of Finance. It takes money from the budget, but it is not rubber. Moreover, now – after the key rate of the Central Bank has risen to 16% per annum – this difference has become simply gigantic. If a year ago we were talking about adding 4-5% per annum, now we need to add 12-13% per annum. And you have to pay this money over the entire term of the mortgage loan. Therefore, they decided to gradually remove developers from this prime rate.
The cancellation of the largest preferential program and the tightening of conditions for the other two programs should lead to a decrease in demand for new buildings. Photo: Eric Romanenko/TASS
WILL HIGH SCHOOL NOTICE?
And finally, another important side effect of prime mortgages is the difference between the cost of housing on the primary and secondary markets. It used to be like this. A finished apartment has always cost more than a new building. And it was logical. I bought it here, made some minor repairs and you can live there. Or at least come right away. But you have to wait several years for a new building, then make repairs from scratch and for several more years listen to everyone around you continue to drill from morning to night. Thus, the primary home was sold at a discount compared to the finished home. Prime mortgages completely turned this logic upside down. Especially since mortgage rates on the market have risen sharply.
Buying new buildings has become much more profitable. And at first, primary began to cost on average more than secondary. And now the price difference has become completely paradoxical. According to Rosstat data for the first quarter of this year, new buildings were one and a half times (50%) more expensive than second-hand apartments. And closer to summer, in the wake of enthusiasm for the abolition of preferential programs, this gap increased to 60%. And all because of the sharp rise in prices for new construction. The cost of apartments on the secondary market did not try to increase until 2023, when the key interest rate remained at 7.5% per annum for a long time. And now prices on the secondary market have returned to the summer of 2022. And they are unlikely to increase in the coming months.
At the next meeting of the Central Bank’s Board of Directors, which will be held in July, a decision may be made to raise the key interest rate to 17-18%. This will further worsen the situation on the real estate market. This means that the probability of prices falling even further will increase. At least there is no reason for prices to rise in the near future.
It is true that, against the backdrop of very high prices for new buildings and the cancellation of preferential programs, the secondary market may come to life a little. At least some clients will consider buying old housing. Although, with deposit rates of 17%-18% per annum, investing free money in real estate now only makes sense if you have nowhere to live. And even then, in this case it is easier to rent. And wait until the rates come down.
