Zhanna Malis, Managing Partner of the Unified City Service for Assistance to Co-investors of Residential Projects
On February 12 in Tatarstan, Vladimir Putin said that the recent rise in mortgage rates will be short-lived: in the future, macroeconomic indicators should not only level off, but should also begin to decline. How realistic is this statement, and where will mortgage rates be by the end of the year?
– What factors can send mortgage rates down, and how low?
Mortgage rates are determined by several factors. One of the main factors is the Russian Central Bank’s key rate, which has risen by 0.25% to 7.75% since December 17, 2018. On February 8, 2019, the bank decided to keep the key rate unchanged. The key rate fluctuations depend on many factors, including the level of inflation. While the inflation rate goes up, there is no reason for mortgage rates to go down. These concepts are closely interrelated; therefore, it is impossible expect lower mortgage rates in this context, unless we also take into account the general market trends.
So, mortgage rates can decline if the inflation rate decreases and the Central Bank cuts its key rate. These factors significantly affect the mortgage rate, but the market conditions should also be taken into account. When large banks reduce rates, a natural trend would be for other banks to follow the lead and cut their rates as well.
The most optimistic forecasts regarding the mortgage rate stated as early as in 2017 that the rate could settle at the level of 5% in the near future. As you can see, these forecasts have not materialized. The Central Bank’s policy and the general economic situation in the country have not contributed to that either.
– What steps can the government take to reduce the rates? Can it apply a tax maneuver similar to the one it used in the petroleum industry to lower the price of gasoline? And what will happen next?
The government has enough mechanisms to influence mortgage rates. For instance, it can improve mechanisms of financing housing construction and hold social programs. Thus, the Russian Finance Ministry adopted the Main Directions of Budget, Tax and Customs and Tariff Policy for 2019 and the Planned Period of 2020 and 2021, which includes the Housing and Urban Environment national project. One of the project’s goals is to lower the mortgage rate to 8.5% by 2021, and to 7.9% by 2024. However, the implementation of this program also depends on the key interest rate. Minister of Construction Vladimir Yakushev said that the objectives of the Housing and Urban Environment national project related to the mortgage rate will be adjusted depending on the key interest rate.
“We can already say that the national project should be adjusted because the mortgage rate that we were supposed to reach by January 1, 2019 is different that the current one because of the changed key interest rate,” Yakushev said.
In my opinion, in the market economy the government can influence mortgage rates indirectly by holding various projects and national programs. The enforced rate change might result in some banks being not able to stay in the market due to the inflation rate. Therefore, a softer policy is required in this case.
– Can mortgage rates go down because escrow accounts will be introduced starting July 1 and the cost of housing will increase while banks will gain control over the construction?
Given that starting July 1, 2019 all money will be kept on special escrow accounts, banks will be able to lower mortgage rates for the citizens. But it does not mean that the bank will receive less money: all expenses will come upon developers. They will be forced to adapt to the new rules, because they will use not the money that belonged to the co-investors, but the bank’s money. Therefore, developers will have to include these expenses in the agreement with the customer who will cover these expenses eventually.