Russian Real Estate - New Subsidized Mortgage Program

At a meeting yesterday with President Putin, the government announced proposals for Russia's state mortgage support program. We believe these measures and, more importantly, the confirmation of plans to keep Russia's mortgage portfolio growing at a pace similar to last year's should prevent a deep decline in sales volumes and housing prices in the primary segment this year. > Increase in maximum loan size for main program. The maximum loan size was raised from R3 mln for all regions to R12 mln for the Moscow and St Petersburg metropolitan areas and R6 mln for the rest of Russia, while the subsidized interest rate was raised from 7% to 12% (given the key rate hike). These terms will be in place until July 1, 2022, but they might be extended if necessary.> Subsidized interest rates unchanged for other three programs. Rates remain at 6% for the family mortgage program, 2% for the Far East program and 3% for the village program. These programs accounted for around 30% of mortgage-backed loans in 2021 (and we estimate that mortgage-backed deals accounted for around 67% of total transactions in the primary segment). > President Putin supports government proposals. Putin also confirmed that the target for Russia's mortgage loan portfolio this year is for growth at least at the 2021 level. He added that the parameters of the state mortgage support programs should be adjusted if growth is lagging behind the target.> Our view. The increase in the maximum loan size for the Moscow and St Petersburg metropolitan areas (around 40% of the Russian housing market) should allow for the subsidized mortgage program to relaunch in these markets. However, the increase in interest rates could be an issue, as at a 12% rate a typical family with an average level of income in these areas will have to spend around 70% of their income on the mortgage, as housing prices have grown circa 40% since the end of 2019. We see 7-8% as a more comfortable level for home buyers and expect home builders to partially subsidize rates to support sales. > According to CBR, Russia's mortgage loan portfolio grew 27% in 2021. The growth was driven by new loan issuance of 26% in the primary segment and 30% in the secondary segment. To match last year's growth at least in the primary segment, we think the government will likely need to extend the program until the year-end and probably make the terms more comfortable. Without that, we would expect the announced measures to lead to a 15-20% decline in sales in the primary segment in 2022. However, without any support we think sales would plummet 50-60%.