After the Central Bank cut its rate to 4.5%, the media erupted in a series of forecasts predicting a quick revival of the market and an increase in housing construction. Indeed, a lower key rate is a good thing and 4.5% is a record low for Russia. However, expectations of a sure-to-happen miracle still seem a bit far-fetched.
After a few weeks, the tone of forecasts for the housing market began to change. Vice-President of the Russian Guild of Realtors Konstantin Aprelev explained in an interview with the Komsomolskaya Pravda radio that purchase patterns depend on family incomes, not the size of available loans. Earlier, the author of this article said that cheap loans alone (say, the preferential 6.5% mortgages) cannot compensate for people’s uncertainty of the future, not after they saw the spring collapse of the markets and the devaluation of the ruble, followed by the coronavirus pandemic, all in 2020. There is one more factor – the declining nominal and real incomes. In this situation, people would hardly be inclined to make major purchases right now.
True, unemployment in Russia has not surged to the West European or North American levels. The number of unemployed hardly exceeds 10% – new jobs are becoming available now that the self-isolation orders have been lifted and many people have been able to keep their old jobs due to government support. But their earnings are indeed shrinking, most likely as a consequence of the most recent wave of a bigger global crisis – the third one since 2008.
Another aspect worth noting is that during the spring months of self-isolation, society adopted the protestant model of market behavior that is, having too much debt and borrowing easily is bad and flaunty consumption is even worse. The right thing to do is to have at least some savings. The United States that have preached the exact opposite approach for decades showed protests of post-industrial unemployed people for the rest of the world to see. People were left without savings, with large debts and a habit of not having any cash reserves.
During the summer, this reluctant ‘protestantism’ in Russia resulted in cautiousness. People realized that mortgages are getting cheaper but they are worried. They are not confident in their future income. They are not ready to borrow and spend as they did before. Some people are expecting another wave of the crisis.
Therefore, reducing the key rate is not enough, which is admitted even by those who cannot be suspected of bias and who only pursue market interests.
Russians need higher income and steady earnings, which cannot be expected from temporary jobs provided under the government program. The government allocated RUR 4 bln ($69 mio) for these jobs, which is not bad. But we need something else. Russia needs to create a new class of apartment buyers – people with sufficient income included in a special program. Naturally, it is only up to the government to achieve this.
A country is not a company. Its economic goal is not to make profit and constantly hold neoliberal optimization while destroying its own social and regulatory systems. It is supposed to pull the Russian economy out of the crisis. And if the salaries of regional state paid workers are increased, including those of doctors, kindergarten, college and university staff, it will make a revolution on the market, not in Moscow, but in the rest of Russia.
There are some 2 mio school and kindergarten teachers. Another 250K people work in the additional training system. Together with college and university lecturers, plus healthcare system workers it will be no less than 5 mio people, that is, 5 mio households. How many of them live in the regions and have housing that does not require improvement? How many of them will decide to decline the improvement program if they receive square meters as part of the payment, or are able to apply for beneficial mortgage loans? Will the housing market benefit from these 2-3 mio of new buyers? What if they are the driver of growth the economy needs so much now?
When the engine of the economy stops, it needs to be restarted. This is one of the state’s crucial functions. Yet, it should be specified that a foreign country can also act as a driver.
In 2008-2009, we saw only the beginning of the era of a great recession. Efforts to eliminate signs of crisis and resume the growth were successful largely due to actions taken by the Federal Reserve System, which provided plenty of money to financial markets. The end of the second wave of the global crisis in 2013-2016 resulted from the recovery of imports of commodities and other products to China, which led to its exports increasing as well. Now all these mechanisms have been exhausted; they cannot produce the effects of efficiency and reliability anymore. Russia’s economy needs to be restarted independently, with the country’s own efforts. This is why the issue of a new class of customers in the housing market is essential.
It is necessary to create a new class of apartment and house buyers. A growth in construction will lead to increasing production, employment and salaries, and will eventually result in an economic boom as well as greater budget revenues, which will inevitably cover expenses on supporting this group of customers.
By Vasily Koltashov, Head of the Center for Political Economy Research, New Society Institute