Lenders and developers waiting for mortgages to return
In 2009, mortgage lending slumped to 152.5 billion rubles but with some signs of a bottoming out late in the year and further signs of some life at the start of 2010. For 1Q 2010 mortgage lending totaled 60.8 billion roubles compared with 56 billion roubles lent in the first six months of 2009. Irina Veliyeva, the head of the credit institution ratings at Expert Ratings agency says a range of factors came together to help shape the rebound, with despite bad loans continuing to grow.
“Despite the ongoing growth of overdue indebtedness, January-February of 2010 saw the share of bad loans across the mortgage market decrease from 5%-8% to 2%-3%. There are several factors that indicate the beginning of a “thaw”. They include a mass return of old active players, considerable expansion of the range of goods, including rarer market products, such as loans with floating and combined interest rates.”
The mortgage lending market hasn’t been as badly hit as initial forecasts suggested it would by the problem of bad debts according to Andrey Yazykov, CEO at the Agency for Restructuring Home Mortgage Loans. Speaking at the Expert Rating Agency Mortgage recovery conference with a range of industry participants Yazykov said the market is recovering, and recovering from a better position than had been expected. He said that the limited financial awareness of many Russian consumers, combined with a traditional wariness about lending, has meant bad losses were much less of an issue than originally tipped and that the Agency has been able to work with lenders and mortgagees to support the market without breaking it.
“Today Russia’s economy is following an optimistic scenario and shows far better results than some experts had forecast. As of today there are about 40 thousand restructured loans in Russia, and we work with 6.5 thousand of them. We try to stimulate Russian banks to develop their own restructuring programmes and now almost all of them do have those, most of which are a perfected copy of ours. This way we implemented our task – we supported the market from the bottom, created competition and didn’t break the market.”
Turning the corner
But industry players say mortgage lending remains low despite better credit terms from banks and consumer demand and the easing inflation rate enabling the Central Bank of Russia to embark on a spate of refinancing rate cuts – bringing it to a long term low of 7.75%. The government has attempted to stimulate lending through the allocation of 250 billion roubles to cut interest rates on mortgages to 10-11% and make mortgages available for 60% of Russians by 2030. Marina Melkonian, Director of Private and Corporate Credit at Penny Lane Realty, says that too has helped to make mortgages more attractive for potential mortgagees.
“Governmental actions let banks attract funds at more favorable prices, and thus cut credit rates for households and commercial organizations, which we were observing throughout the whole 1Q 2010.”
Melkonian says, rates remain high, despite dropping 1.5-2% in 1Q 2010. The average rate for a rouble denominated mortgage in the new construction market is 15-16% and 12-14% in the secondary market, with dollar denominated mortgages at 12.5%-13% and 9-13% respectively. She is expecting them to drop.
“Of course, the rates are still too high, 2-3% higher than pre-crisis indicators. But I am sure that if there are not any cataclysms on the currency market, then in 2011 the mortgage rates should become lower than the pre-crisis ones.”
Market concentration limits lowering rates
Other market analysts say that the high concentration in the mortgage lending sector inhibits rates from dropping further, with state owned Sberbank and VTB controlling the lions share of mortgage lending in Russia. Grigory Kulikov, head of Board of Directors at MIEL holding, says more competition is essential.
“The situation when just two Russian banks – Sberbank and VTB – hold around 80% of the mortgage market, is entirely negative. The absence of competition hinders the development of mortgage lending in this country.”
Andrey Krysin, President of the European Trust Bank, head of Committee for mortgage lending at the Association of Russian Banks, says that a more liquid market could drive rates lower but that currently the government ownership of the biggest mortgage lenders works against mortgage rates falling as much as they could.
“This is the investor who has to decide the mortgage rate, not the Government. A highly competitive liquid market is necessary to make it go down. It took Canada, for example, about 25 years to make the mortgage rate go down from 18% to the average of 4%. So, Russian market also just needs time.”
Natalia Karaseva, CEO of retail crediting management at Sberbank, says that the domination of the mortgage market by Russia’s number one lender reflects the fact that it continued to make mortgages available throughout the downturn while other lenders pulled out of the market.
“We just kept on crediting when almost all other banks left the market. In 1H 2009 we gave out 7 thousand credits a month and increased the number to almost 12.5 thousand in 2H 2009, while others gave about 5 to 6 per month on average. Also, the interest rates of 20-25% that all other banks offered during crisis were unbearable. So, all this reconfigured the market, with our credit portfolio even growing in 2009 and Sberbank covering about 70% of the whole market last year.”
Karaseva adds that it is product innovation and improved service by Sberbank which is underpinning interest in mortgages and the rebound in demand.
“We proved to offer the best terms during crisis times, as our products became more available, transparent and today we’re constantly working on its quality. We’ve recently lowered our rates and abolished all commission payments, making the full cost of credit equal its interest rate. Also, the initial installment is now back to the average 20%, which is quite low for the market. And we don’t require compulsory life insurance. As for quality, we’re currently opening specialized mortgage centres in Russia’s regions and already have 14 in Moscow, which will provide better services to our clients.”
More products but consumers still wary
Despite the high concentration in the market Marina Melkonian believes that the increasing range of products being made available to potential clients – including more credit institutions offering mortgages for new apartments at the construction stage – is starting to drive up interest in mortgages, with the number of applications to Russian banks going up 30% in half a year. But that just 10% of those applications become actual mortgages reflects a continuing degree of nervousness about the economic outlook
“This is due to the fact that the current financial position of the core consumer of credit products – the middle class – has still not reached levels of the past years. People show their interest in credit programmes, but still are not ready to take up a mortgage due to their own instability, sharp fluctuations on the currency market and also expectations of better terms in the near future. Today borrowers with a high income level are the main consumers of credit products. Our data shows that 60% of mortgages are for the out-of-town housing market, with the average loan being at $1-$3 million.”
Enough housing to go around?
Lenders say that the other key part of the equation in bringing mortgagees back to the market is the actual price of housing, with Andrey Shyolkovy, CEO in project financing at the Agency for Home Mortgage Lending, saying availability is as big a factor as ability to access financing and that it is here that Moscow, in particular, faces problems.
“One can’t talk about availability of mortgages separately from availability of supply in the market. There isn’t enough housing in supply – that’s the problem.”
Nikolay Chitov, President of City Mortgage Bank, believes it will remain a problem into the foreseeable future despite mortgage rates dropping markedly over the last year.
“The mortgage rates are unprecedentally low now, with the housing prices remaining high. Low supply is to blame, but, I think, that if the problem properly addressed, it could be solved in about 5 years. ”
Developers say that during the global financial crisis and ensuing economic downturn, developers had to concentrate effort and funds on completing existing projects, and shelving projects on the board or in the early stages. This, they say, will have an impact on new housing volumes coming into the market over the short to medium term, but that the worst is past, with volumes increasing from March 2010.
They also note that one impact of the crisis is that banks – who in some cases have become shareholders or major debt holders of developing companies – have become more aware of the need to support liquid demand for new construction. This has seen a range of programmes introduced by major lenders to support new construction demand and access.
The road ahead
The road ahead for the mortgage market is expected to see continued growth, but slower than many in the industry hope for. Marina Melkonian, Director of Private and Corporate Credit at Penny Lane Realty, says the company is expecting borrowers to slowly return to the market with a full recovery some time away. She believes that banks will continue to be careful making new mortgages available and that rates can fall further, but that government support measures are likely to see a bigger impact in the secondary housing market rather than the new construction end of the market.
“There is every reason to believe that mortgage rates for credit on the secondary real estate market will reach the level promised by the government by the end of the year. However, this does not apply to mortgages on new buildings. Even with the reduction of the interest rate by the end of the year on housing that is under construction by 1.5-2%, it will still stay quite high – 13.5-14%. For banks, as before, this is the riskiest segment because the situation of many developers does not inspire confidence.”
Natalia Karaseva from Sberbank is more optimistic, noting that pent up demand is likely to see more people applying for mortgages.
“We’ve already lowered our rates to pre crisis levels, as the situation is certainly stabilizing. Already now people are coming back to banks, which, we expect, will be soon coupled by the recovery of deferred demand accumulated during 2009. People always needed and still need housing. So, we are optimistic about 2010 and mortgage lending will be our focus during the year.”
loans given in 2009, mln of RUR
loans given in 2008, mln of RUR
Change (year on year), %
Moscow Mortgage Agency
Zhilfinance Bank (Bank for Housing Financing)
Top 10 Russian Mortgage Lenders 2008 – 2009
Courtesy of Expert RA data