|Piia Helsite, Olga Mashkina and Riitta Kosonen
THE EMERGING MORTGAGE MARKET IN RUSSIA.
AN OVERVIEW WITH LOCAL AND FOREIGN PERSPECTIVES
Helsinki School of Ecomomics
Development of the mortgage market in Russia began in the end of 1990s after the main law On Mortgages was adopted. Mortgage lending is currently one of the fastest developing sectors of retail banking in Russia and more and more financial institutions, both local and international, are entering this sector. Also President Putin and the Russian Government are trying to support the growth of mortgage lending by declaring mortgage development as a key element in completing the Affordable Housing Federal Program aimed at increasing the Russians' living standards.
So far, Russian mortgage market has shown considerably slower development in comparison to mortgage markets in Latin America and the former Soviet block countries. In Latin America mortgages comprise 4-10% of GDP, and in Central Eastern Europe 9-16% of GDP, while the figure is only 1% in Russia. However, it seems that the Russian mortgage market is following the tendencies of development in Latin America and the CEE. The state support played a vital role in these countries and it resulted in high growth rates of mortgage volumes.
In Russian case the mortgage market development was slowed down by the financial crisis of 1998 when people lost trust in banks. It also resulted in a considerable decrease in the real population income as well as in the housing construction. Therefore, even though the mortgage legislation was adopted in 1998, the actual development of the market started only after 2001 when the macroeconomic situation began to improve. It increased the need to create new mechanisms for housing financing. In 2004, several amendments to the legal framework were adopted, which spurred the mortgage market into rapid development. As a result, the growth rates witnessed in 2005 and 2006 were extremely high.
In 2006, the volume of mortgages amounted to 5.5 bln USD, which was almost two times higher when compared to the previous year. The prices for housing reached an unprecedented growth rate during spring-summer 2006. From the second half of 2005 until August 2006 the price of a square meter of real estate in Moscow grew by more than 90%. Growth rates in the regions remain lower but are still very high ranging between 40-60%. At the same time, the interest rates on the mortgages were constantly going down.
Price growth dynamics was significantly affected by speculative demand. As the prices grew up, apartments became more attractive as an investment object. According to some estimates about 80% of transactions on the market are speculative transactions.
In September-October 2006 the market stagnated. The number of mortgages issued in all banks decreased to the level of the same period in 2005. At first, the real estate price growth facilitated the mortgage market because it became impossible to purchase a real estate without a mortgage. However, at some point the price growth outran the possibilities of mortgage issuance. Overall, in 2006 the volume of the market increased, while the number of mortgages issued was actually less than in the previous year.
The perspectives for mortgage markets growth still remain positive. With the high oil prices and GDP growth the real incomes of the population are growing. Experts agree that mortgages will become common in Russia by 2008 and the number of consumers that can afford a home is forecasted to be at the level of 15% of Russian families. In addition, 70% of the population is estimated to be looking for improvement in their living conditions. Some analysts assume that the market has potential to increase to about 3% of GDP by 2010 (The New Russia: Perspectives and Opportunities, 2006). The volume of mortgages is expected to continue to grow also because of increased trust in banks among people. More people are bringing money to banks, while the number of people who can pay for real estate by bringing a suitcase of money is decreasing.
Mortgage legislation has been under continuous development since 1998. The New housing code (2005) and amendments to Tax code, Investment code, On the organization of insurance business, On Credit Histories (2005), On State Registration of Real Estate Rights and Transactions as well as the latest amendments to the law On mortgage backed securities (2006) set up the legal framework for mortgage market operations. A considerable improvement was the adoption of the bank's right to sell a collateralized home in case of default, procedures for pledging an apartment and obtaining a court decision for realization thereof. Government and market players believe that the regulatory background is functioning relatively well. The massive mortgage-campaigns of Raiffeisenbank, IMB and other Russian banks indicate that they believe the risks are manageable. However, problems still remain in proper implementation of the laws due to lack of experience. So far, there have been only a few court decisions.
Competition in the mortgage market is tightening: currently altogether 400 banks offer competitive mortgage programs. However, the market is very concentrated. There are five banks controlling the market: Sberbank, VTB 24, DeltaCredit, City Mortgage Bank, and Raiffeisenbank. Sberbank is still an ultimate leader comprising 34% of the total market. Consolidation of the banking sector is expected to continue also in the future, which increases the barriers of entry for foreign banks via greenfield investment. The marketing campaigns of the mortgage programs show everywhere and include newspapers, flyers, banners, street banners, TV and radio advertisements (including the latest CIT finance campaign-completion where the winner gets 500 000 RUR towards the down payment on the mortgage loan).
Because of the increased competition the terms and conditions of the mortgage lending have changed significantly. In 2006, the requirements for obtaining a mortgage were softened, which increased the number of people applying for a mortgage loan. However, because of the increased demand and price growth for real estate, the sellers often refused to deal with clients with mortgage certificates, as these transactions required more processing time. As a result, the banks have shortened the length of time required to get the approval for a mortgage loan, and now the majority of the banks offer an express mortgage (from 24 hours to 3 days).
Due to the considerable housing price increase, several banks began to offer mortgage loans without the initial down payment. The move was intended to spur the demand for mortgages across the younger part of the market.
The interest rates have also decreased from 14% to less than 10%. In January 2007, the Central Bank decreased the refinancing interest rate to 10.5% RUR. This resulted in further decrease in the mortgage interest rates.
Mortgage transaction in Russia involves many hidden costs, such as fees for mortgage accounts, or a fee for safe deposit of the money as majority of transactions still use cash. So, real interest rates end up to be several percentage points higher then the advertised rates.
Income verification continues to be a major problem as many Russians have grey salaries. Now many banks, however, have their own system of income verification and some even allow counting the incomes of relatives for mortgage application.
Also, the type of real estate that can be an object for mortgage has expanded: now it includes land, cottages, unfinished housing, and already owned apartments. Banks began to work with developers for issuing mortgages for unfinished construction. The mortgage of elite suburb housing is also growing - every 5th such transaction is conducted using a mortgage loan. The share of mortgages of already owned real estate is currently some 20% in Russia. This is still a relatively low figure compared to the Western countries, where about 50% of the real estate is mortgaged.
Mortgage markets in Europe and America focus on refinancing existing mortgages, while in Russia refinancing of the loans is not so widespread yet. This is due to the small size of the market (currently mortgages comprise only 6% of all real estate transactions and less than 1% of GDP). Therefore, the majority of mortgage transactions are first timers.
Development of the Russian mortgage market has not been homogeneous throughout the regions. The mortgages have been concentrated mostly in Moscow and St. Petersburg. It can be due to the fact that the incomes are higher as well as the real estate price growth has been huge in the two main cities. Due to the price growth, purchasing of an apartment has become a profitable investment, which many people are eager to exploit. As the Moscow and St. Petersburg markets are becoming saturated, the future of the mortgage markets is in the regions. However, regional differences complicate the expansion. For example, different regions have different requirements for state registration. A lot depends also on the regional administration and the presence and participation of the industrial sector in the development of local housing conditions.
Another difference between Moscow and the regional mortgage markets is the currency of the mortgage. In Moscow, mortgages in foreign currency are still in high demand, while in the regions preference is given to the ruble ones. According to an analytic report made by the Association of the Regional Banks together with a consulting group BFI Consulting, the share of the mortgages in the bank balances in regional banks was 23%, which is almost two times more than in Moscow banks. Although 2/3 of total national mortgage loans are concentrated in Moscow, mortgages play a very important role for regional banks (BFI 2006). This is also highlighted by the fact that in regions such as Tyumen, Khanti-Mansiisk and Jamal-Nenetsk 25% of transactions in the housing market are conducted using mortgages. In Moscow, the respective figure is 7%. (Indicators of mortgage market 2006). This illustrates the wider scope and product portfolio of the Moscow banks compared to smaller regional banks.
There is a substantial variation in the housing prices in the regions of Russia: the price per square meter in 2004 varied from 42,132 RUR (about $1,462) in Moscow to 4,626 RUR (about $160) in Magadan. Between 2000 and 2004, the price per square meter of existing residences in Russia increased by 172 per cent; regionally the price increase varied from 445 per cent in the Republic of Mordovia to 58 per cent in Perm; the increase of 173 per cent in Moscow was close to the country average.
Despite these regional differences mortgage market in Russia becomes more standardized. The Agency for Home Mortgage Lending is aiming to create a unified system by introducing common federal standards and requirements as well as a unified information system for all its partner banks.
A critical element in the further development of the mortgage market is the banks' access to financial resources. Mortgage securitization and refinancing the mortgage pools are ways to attract necessary financial resources. The special law on mortgage backed securities was adopted already in 2005, but become more operational only in July 2006. Vneshtorgbank was the first Russian bank to carry out an international securitization of mortgage portfolios and issued Eurobonds in 2006. Their example was soon followed by the City Mortgage Bank and also other large banks are preparing for securitization. The Agency for Home Mortgage Lending (AHML) has also issued ruble mortgage backed securities. Instead of securitization, the smaller banks can increase their assets by refinancing the mortgage pools with the Agency for Home Mortgage Lending, which is the leader on the market for refinancing the mortgage loans.
Even though foreign banks have been active players on the Russian mortgage markets, the Nordic banks position is very different. Nordic banks seem to consider the Russian mortgage market still relatively risky and are in most cases planning to wait for 1-2 years for the markets to develop (with the exception of Nordea). At this point, the majority of the Nordic banks are concentrating on Nordic and large Russian corporate clients. Retail banking, auto loans, mortgages, and consumption credits follow later. The main risk perceived by the Nordic banks in the mortgage market is the difficulty to get risk ratings for customers (regarding the salary, price and history of the apartment).
Also, Nordic banks believe that there is a growing risk of default mortgages, and the process of recovering assets is complicated. For example, all of the Nordic bankers interviewed for this study believe that making a defaulted borrower vacate the pledged apartment is very complicated. Based on the interviews with Russian banks, this is a somewhat old-dated view as the legislation has been amended in the banks' favor in the case of borrower default.
There seem to be also other differences in the views of the perspectives and risks of the Russian mortgage market between the Russian and Nordic banks based on the interviews.
One of the main differences includes the perceived level of competition on the mortgage markets. Nordic banks consider the competition to be at a relatively low level, while the Russian banks note that competition has become fiercer during the past two years. Also, perceptions of the risks differ significantly. The Russians perceive mortgage market risk as very low and report hardly any loan defaults. At the same time, the Nordic banks think that there are many risks involved, which is why they prefer to wait for a further development of the market before entering it. Moreover, there seems to be a lack of updated information on the Nordic banks' side about the recent developments in the mortgage issuance conditions. On the other hand, both parties agree that the legislative framework and in particular the implementation of the laws still need further development in order to reach the European level. Nordic banks further point out that the foreign banks' activities are monitored extremely closely by the Central Bank and other authorities, which is seen to complicate their operations.
It seems that the majority of the Nordic banks are not actively expanding on the Russian mortgage market, even though all of them recognize it as a very perspective market. However, while some of the Nordic banks have representative offices or obtained banking licenses (OKO), others (like Nordea and ZAO Danske bank) got involved in the Russian market by purchasing Russian banks, and have thus been more actively involved also in the mortgage market. One of the possible and perspective niches for a foreign bank (Nordic) is purchasing a bank with developed regional network and focusing on the mortgages on the primary markets and working together with Finnish/ trusted Russian construction companies that build finished apartments. This segment is just developing and has much more potential than the secondary mortgage market.
Helsinki School of Economics
tel. +358 9 4313 8579
fax. +358 9 431 8305
Compiler Trade Web Site: Tutkimuksia
Helsinki School of Economics/index
Studies on emerging markets /Index
Tutkimuksia / Hakemisto