Valentina Ivanovna, how did the abolition of preferential mortgages affect the market for new construction?
Valentina Kalinina: We are in a new reality. Yes, the family mortgage rate has remained at six percent, provided that the family has at least one child under the age of six. Preferential loans for IT specialists are expected to remain. But the eight percent programs for the primary market, which have been in effect since 2020, no longer exist.
We have previously worked with household mortgages, but they accounted for only 30-35 percent of the total volume. And mortgage loans for new buildings in the mass demand segment reached 95 percent of transactions in certain periods. Since the end of 2023, their conditions have become stricter, the down payment has increased, artificial increases in urgent demand have arisen, but people continue to use this instrument.
It is clear that these are difficult times for the construction industry. The abolition of preferential mortgages will have a negative impact on the market for new buildings, create difficulties in the sale of apartments and affect the financial stability of companies. The situation is aggravated by the high key interest rate, which is currently 18 percent. Banks add their own floating rate to it, and as a result, developers receive loans at 19-22 percent. In our opinion, the market may experience a failure already in July-August, which is natural after a significant change in the conditions for buying housing.
Can we say that preferential mortgage loans were the main driver of the development of construction? Is there an equivalent alternative?
Valentina Kalinina: Of course, preferential mortgages were a great help for both builders and the population. Thanks to this, the industry grew, paid taxes and attracted labor resources. Preferential programs have made the purchase of an apartment affordable for many Russians and increased the demand for housing. This has led to increased competition between construction companies and an improvement in the quality characteristics of residential complexes.
There are alternatives, but they cannot completely replace prime mortgages. For example, we offer clients installment plans. But the developer can only provide this for the duration of the construction of the facility, which is two and a half to three years. People take out mortgages for 20-30 years.
Moreover, installment plans are not considered a very good scenario for the developer himself. We work with escrow accounts, and when paying in installments, they fill up very slowly. This is not beneficial either for the developer, as the percentage of loan servicing is growing and is already high, or for the bank, as the filling of escrow accounts is very slow.
In your opinion, how will developers behave in the new conditions? How promising are the collaborations with banks?
Valentina Kalinina: Of course, developers are not sitting on their hands, but are looking for a way out of the situation. In particular, buyers are now offered installment plans with a 10 percent down payment and convenient interim payments. The share of such transactions in the first half of the year was 14 percent. It can be assumed that the developer’s installment plans will be in even greater demand.
Up to 35 percent of the cost is the cost of construction and installation work.
But we should not forget about the slow filling of escrow accounts. Therefore, together with banks, we are considering options for other programs that will be useful to customers. Several special mortgage offers from leading banks have already been launched. They are also interested in fulfilling the sales plans of the projects whose construction they finance. Therefore, credit institutions, together with developers, are creating special programs for such objects.
One of the reasons for the abolition of prime mortgages was the rise in prices for new homes. Now some experts predict a sharp decline. Could this really happen? What is the cost of construction today?
Valentina Kalinina: Up to 35 percent of the cost is the cost of construction and installation work. It also includes the cost of land (15 percent), design work, survey and connection to utility networks (up to 10 percent) and construction of social facilities according to standard (14 percent). Interest on bank loans (another 14 percent), advertising, marketing costs and additional social charges must also be taken into account.
When you look at all these components, it is not clear why the price of a new building could fall. Labour costs are rising, building materials have risen in price by 10-12 percent in the second quarter of 2024. The share of bank interest will also rise along with the rise in key, credit and mortgage rates. As a result, the total cost of construction per square metre will increase. Unfortunately, the measures to reduce inflation taken by the Central Bank may have the opposite effect.
Tell us how developers are solving the staffing problem. How has the departure of foreign workers affected the industry? Who is working in construction today?
Valentina Kalinina: The main backbone of the industry is made up of foreign workers. The problem is that Russians do not want to work in construction. These are harsh conditions and hard physical work. We tried to attract our employees during the pandemic, when the borders were closed. But not a single citizen of the Russian Federation responded to our advertisements.
Of course, the industry is experiencing a shortage of personnel, not only workers, but also engineers. The conditions for entry and registration of immigrants are becoming more and more stringent. We comply with all requirements, help them in difficult life situations and are aware of the level of remuneration. As you know, due to the dollar exchange rate, foreign workers today want to earn much more than before.
To replace foreigners from neighbouring countries, we are considering attracting staff from Vietnam, India and North Korea. But these are visa-required countries, so labour costs using these channels will rise even further, which will affect the cost of housing.
Construction of social facilities and government orders: are there any changes in this area?
Valentina Kalinina: So far, everything remains the same. The developer is obliged to provide his residential complex with places in kindergartens and schools in accordance with the regulations. Then the social facilities are transferred to the city free of charge. There are no longer situations when an entire block was being built, but the children had nowhere to study because the city did not have time to build a school. But for the developers, this, of course, puts an additional burden.
Nothing has changed in government contract work either, except for the problems faced by other segments.
In the current situation, how are things going with the launch of new projects?
Valentina Kalinina: In unstable times, developers are cautious and prefer to minimize their risks. In general, the dynamics of opening new facilities in St. Petersburg has noticeably slowed down compared to previous years. According to the St. Petersburg Real Estate Consulting Center, only 0.9 million square meters of housing were launched on the city market in the first half of 2024.
We are currently planning to open two facilities for the new year. We need to continue working and maintaining the team.
Can we consider that the construction sector is in the so-called perfect storm, in which all unfavorable factors converge?
Valentina Kalinina: In any case, I don’t remember any situation where problems arose in all areas at once, although I have been working in the sector for a long time. Yes, there were crises, but they were overcome much more easily. If nothing changes, the situation will become critical. I think that bankruptcies of construction companies are possible.
What needs to change to prevent this from happening?
Valentina Kalinina: Mortgages are the most important tool for the real estate market and, in particular, for new construction. At a high key rate, a mortgage without subsidies is prohibitively expensive and in low demand. In our opinion, the base interest rate, interest on project financing and interest on mortgage loans should be reasonable so that the general public can afford to improve their living conditions and buy apartments in new, comfortable residential complexes. Otherwise, the market will face serious problems, the consequences of which will negatively affect the construction industry and, as a result, the country’s economy.
