Doubling your mortgage

Mortgage development is constrained by explosive growth in housing prices and currency risks

The Russian ruble is strengthening - this is the main trend of recent months. The change in the policy of the Central Bank, which no longer restrained the strengthening of the national currency, put Russians in an unusual situation. The dollar, which for the last decade and a half seemed to be the most reliable means of savings, has become less stable than the Russian ruble.

This new reality could not but affect the developing mortgage market. For mortgages, currency risks are especially sensitive - the amounts are large, the loan terms are long, and even the exchange transaction with the down payment is important. Even such a small thing as the size of a safe deposit box plays a role: cash rubles, although they are “harder,” still require more space than dollars.

Trust is in the ruble, benefit is in the dollar

From the point of view of bankers, the new ratio of the ruble and the dollar already has two opposite consequences: Russians have become more confident in taking ruble loans, although at the same time, dollar mortgages turned out to be more profitable for the borrower.

“At the moment, due to the low exchange rate of the US dollar to the ruble, dollar loans are more profitable than loans denominated in other currencies,” says Maria Serova, head of the department for the development of credit products and partnership programs of the mortgage lending department of Vneshtorgbank Retail Services.

The strengthening of the ruble influenced the choice of loan currency by borrowers, says Dmitry Yaremenko, head of the retail lending department of the City Client Bank: “It is much more profitable for people to take out loans in a falling currency, because then buying this currency to repay the loan will be cheaper, for example, it will be possible to The same amount of rubles will buy more dollars.”

And Margarita Kondidi, deputy director of the retail business department of Promsvyazbank, notes: “Due to the depreciation of the dollar against the ruble, many clients began to apply for foreign currency loans in the hope of a long-term strengthening of the ruble’s position.” Ms. Condidi believes that if the dollar continues to lose ground, banks will have to create more favorable conditions for loans in rubles.

However, the majority of bankers surveyed say that clients have already made a choice in favor of ruble mortgages. “Banks for the most part, maintaining a balance between foreign currency liabilities and assets, do not make sudden movements, but offer, as before, loans in dollars, euros, rubles,” says Alexander Fatkin, deputy chairman of the board of IBO Orgbank. — More interesting is the fact that it was during this period that in our Orgbank the volume of mortgage loans issued in rubles increased sharply. Perhaps the dollar's fluctuations reminded borrowers of how the dollar rose sharply in 1995 and 1998 and smoothly in other years. And people played it safe by taking out loans for ten years.”

“This trend indicates the stabilization of the country’s economy as a whole, which has a positive effect on the purchasing power of the population. Mortgages are long-term obligations that not everyone is ready to make yet. The strengthening of the national currency gives confidence in the future, and therefore, the demand for mortgage programs is growing,” says Vitaly Koekin, deputy head of the direct investment department of the Moscow Capital CB.

Director of the Mortgage Lending Center at BINbank Dmitry Galkin is confident that the strengthening of the ruble will lead to an increase in ruble loans in banks’ portfolios. “Having a wide network of branches, BINbank is convinced from its own experience of the stable popularity of ruble products in the regions and the growing demand for rubles in the capital district. Borrowers—buyers of apartments—are interested in stability, so they don’t want to bear the currency risk (receive salaries in rubles and pay the loan in dollars), he says.

Nevertheless, Gulnara Gainullina, chief mortgage lending specialist at Uralsib Bank, emphasizes that for banks the risk of a decline in the ruble is still more likely and significant than the risk of a decline in the dollar. He believes that if the downward trend in the dollar exchange rate continues, the number of people willing to take out a mortgage loan in dollars will likely increase, and this will be more typical for capitals and largest cities, where traditionally foreign currency loans have occupied a significant part of the mortgage portfolio of banks. Whereas for the regions, the depreciation of the dollar is unlikely to significantly increase the number of foreign currency mortgage loans in banks’ portfolios.

Anna Kaminskaya, head of the retail business department at Sobinbank, notes that a ruble transaction increases the price of the mortgage product for the client. Among the additional expenses that the borrower has in connection with the situation on the foreign exchange market, she names currency exchange, as well as the cost of renting a safe deposit box: “Since the amount of funds in rubles is greater than in foreign currency, the client has to withdraw more money from the safe deposit box. size, naturally, and the rent for such a cell is higher than for a small one.”

Bankers admit that rates on ruble mortgage loans will decrease, but it is obvious that such a decrease will not be very significant for the client. “The strengthening of the ruble currency, and therefore the reduction of the inflation component, is a positive argument for revising current interest rates on ruble loans downward,” says Gulnara Gainullina from Uralsib Bank. And Ms. Kaminskaya from Sobinbank believes that a slight fluctuation in rates can only occur in the event of prolonged instability in the foreign exchange market. “On the other hand, high competition among banks - players in this market can keep rates at the current level, despite fluctuations in the foreign exchange market,” she adds. Pavel Ilyin, head of the mortgage lending department of the Moscow Credit Bank, believes that a further fall in the dollar could lead to rates on foreign currency and ruble loans being set at the same level: “The difference in interest rates between these loans today in some banks is only 1%.” .

“The strengthening of the ruble is a good factor for the annual reduction in interest rates on loans in rubles declared by AHML,” believes Olga Tokarenko, the leader of the mortgage lending project at Gazenergoprombank. Currently, the rate at which AHML refinances mortgage loans is 12%. Recently, the head of the agency, Alexander Semenyaka, announced that the economic situation may allow the rate to be reduced to 11% by the end of the year. And although inflation this year is still lower than in 2005, the May data is not very encouraging. As you know, as of May 15, prices increased by 5.6%.

Pavel Ilyin from the Moscow Credit Bank notes another, clearly negative for those wishing to take out a mortgage, consequence of the growth of the ruble exchange rate. “Instability in the foreign exchange market primarily affected the rise in real estate prices. People began to lose confidence in foreign currencies, primarily US dollars, and look for another way to save money, which is now real estate, which caused a sharp jump in housing prices, says the banker. “Those who want to purchase housing on credit and have received approval from the bank often do not take out a loan because they cannot find suitable housing or cannot keep up with rising prices.”

Board member of the City Mortgage Bank Igor Zhigunov summarizes the consequences of the current macroeconomic situation: “The impact is manifested in the form of an increase in the average loan amount (in Moscow from 55-60 thousand dollars at the end of 2005 to 90-100 thousand dollars in the first quarter of 2006), a reduction in housing supply and greater difficulty for the borrower to quickly find an apartment at an affordable price.”

Is doubling the maximum possible?

The rise in real estate prices, no matter what caused it, unexpectedly disrupted the banks' plans to develop the mortgage business. Although the state has planned a tripling of the volume of mortgage loans issued for this year in the national project “Affordable Housing”, the majority of bankers surveyed say that the pace is declining, and a doubling of volumes is cited as the most likely result.

“Housing prices are rising at a rapid pace. The growth is so rapid that many deals fall through at the initial stage, and the deposits made are returned to the buyers. The current situation has a negative impact on the mortgage market,” says Maria Serova from Vneshtorgbank Retail Services. As for VTB itself, Ms. Serova says, although the growth rate of the mortgage business corresponds to the bank’s expectations, the share of concluded transactions from the volume of positive decisions has decreased significantly. The positions gained in the market allow VTB to strengthen its advantage “We, as a bank, without false modesty, being one of the leaders in the mortgage market, have the opportunity to use all possible tools to compensate for negative market trends. In particular, not long ago we reduced the down payment on loans to 5%, and what is important is that this measure does not imply any tightening in other product parameters practiced by other banks,” says Maria Serova.

Anna Kaminskaya from Sobinbank confirms that the growth rate of mortgage volumes has decreased, but this concerns mainly Moscow: “Of course, the shortage in the housing market has had an adverse effect on sales of this product, and, as a result, sales volumes are not growing at the same rate as in last year, but this is a predicted slowdown in growth, and we were prepared for it. However, in the regions the statistics are completely different, and sales figures there are high.”

The explosive growth in prices for real estate in the capital has become a serious obstacle to the development of mortgages.

“The category of clients that last year could take out a mortgage loan with a minimum amount (15%) of funds available today no longer makes payments,” says Ms. Kaminskaya. -- It should also be noted that the supply on the real estate market has sharply decreased and sometimes our client, having received approval for a loan, cannot find an apartment and, accordingly, take advantage of the loan. And if the client does find an apartment, then its price may already be higher than it was at the time the application was submitted and the loan was approved.” Anna Kaminskaya believes that large Russian cities are already close in the nature of their problems to Moscow.

Board member of the City Mortgage Bank Igor Zhigunov expects a doubling of the mortgage market by the end of this year. “In our bank, the volume of mortgage transactions currently exceeds $120 million (at the beginning of 2005 it was just under $50 million). In general, the forecast for market dynamics, I think, will be about 90-100% growth.”

How Alexey Aksenov, head of the department of retail products and services of the International Moscow Bank, evaluates the success of his own mortgage program. “Last year we issued $43.2 million in mortgages,” he says. -- For the first quarter of 2006, this figure amounted to $14.4 million. Over the entire period of the mortgage program (since 2004), we issued loans worth $75.1 million. In 2006, we plan to double the issuance of mortgage loans compared to 2005 indicator, i.e. to reach the volume of issued loans up to 80-100 million dollars. For IMB, mortgage is one of the priority areas in the development of the retail lending program.”

Deputy Chairman of the Board of IBO "Orgbank" Alexander Fatkin states that the volume of loans issued by the bank exceeds expectations. “In our opinion, this is dictated by the sharp increase in housing prices and, accordingly, the demand fueled by this growth, that is, the desire to purchase housing at not entirely exorbitant prices,” he believes.

Olga Tokarenko from Gazenergoprombank says that the dynamics of the mortgage business correspond to expectations: in the first five months of the year, the volume of mortgage loans issued by Gazenergoprombank branches more than doubled.

Uralsib Bank, which to date has issued more than 10 thousand loans totaling $162.3 million, in February proposed a new program to improve housing conditions when purchasing finished housing using collateral of one’s own home without a down payment or with a down payment from 10% of the cost of purchased housing. “This program provides the opportunity to purchase a new apartment at today’s prices, and, in accordance with the terms of the program, to sell your own apartment, if necessary, in 6-12 months at housing prices that have increased during this period,” explains Gulnara Gainullina.

Primary - not for a mortgage?..

Deputy Director of the Retail Business Department of Promsvyazbank Margarita Kondidi believes that in the market as a whole, the volume of mortgage lending this year does not live up to expectations. She cites the influence of the law on shared construction that came into force last year as one of the main reasons. Lending housing on the primary market in the capital in connection with the adoption of this law, she notes, has become very difficult: “It is very difficult to find a developer who would not have problems with the timely execution of all permitting documentation, not to mention the state registration of investment agreements.” In the secondary market, according to Ms. Condidi, the problem is of a different nature: “Demand far exceeds supply, which has led to a significant increase in prices, while many citizens who want to sell an apartment are now waiting for several months, hoping to sell it in 10- -15% more expensive. As a result, apartments are sold on the market at unreasonably high prices, or multi-level alternatives, which cannot always be financed.”

The demand for primary housing is so great, and the supply is so small, that mortgage options in this market are seriously limited. Moreover, the law on shared construction has seriously complicated the business of developers. In any case, this applies to the capital and large cities. Almost all bankers agree on this.

“The number of people wishing to purchase apartments in buildings under construction is approximately 50-60% of all those planning to purchase housing,” says Pavel Ilyin from the Moscow Credit Bank. -- However, this demand remains unsatisfied due to the fact that construction companies, trying to circumvent Federal Law No. 214 (“On participation in shared construction of apartment buildings and other real estate and on amendments to certain legislative acts”), use for the sale of buildings under construction apartment schemes in which banks refuse to participate when lending to borrowers. It is worth noting that these schemes are most common in the Moscow region. Developers in other regions are more “transparent”, which allows them to provide loans to clients to purchase apartments from these companies.”

“The supply in the construction market does not keep pace with demand, and there are no offers of properties under construction suitable for mortgage lending yet. All properties are “sold” according to schemes that do not allow the bank to issue a good loan,” confirms Dmitry Yaremenko from the City Client CB.

In the primary market of St. Petersburg, only about 40 (!) properties fall under one mortgage program or another, says Vyacheslav Semenenko, vice president of the St. Petersburg Real Estate Corporation. “In the case of all other houses (and there are about 10 times more of them), the consumer cannot get a mortgage loan. In terms of the number of transactions, mortgage lending currently affects no more than 4% of buyers. There are cities and regions in which the picture looks better - for example, Tomsk, Omsk, Buryatia. But there are also cities in which, one might say, there are no mortgages at all - neither on the primary nor on the secondary market. Meanwhile, the primary market has great unrealized potential and is very attractive to a large number of potential borrowers. The demand for “primary mortgage” is much greater than the supply provided by banks and various mortgage operators. As a result, many potential borrowers are forced to look for housing on the secondary market, which is inferior in consumer qualities to the primary market. Firstly, on the finished housing market there are much fewer apartments for direct sale than on the primary market, which limits the choice of buyers. Secondly, 80% of home buyers, according to surveys, would prefer to live in a new, newly built house, and it is the primary market that is more promising in terms of purchasing such housing. Thirdly, the primary market traditionally attracts buyers with lower prices per square meter (objects of similar quality and location are compared). In the future, the active development of mortgage lending will only fuel effective demand. However, if supply does not increase in parallel with this process, housing prices will grow at an exorbitant pace,” says Mr. Semenenko.

Meanwhile, problems characteristic of Moscow and St. Petersburg are gradually becoming relevant for other regions. The liveliest example is the Moscow region. “There are too few vacant lands left within Moscow, so the primary housing market is flowing into the region. In recent years, a construction boom has been observed here, while the demand for mortgage programs has already exceeded the proposal. In other regions, this direction is actively developing, more and more Moscow and Western banks enter regional markets, and often with mortgage loans, ”says Vitaly Koekin from KB Moscow Capital. And Olga Tokarenko from Gazenergoprombank notes that the structure of demand in the regions changes in accordance with the capital's trends: “In most regions, the main demand falls on the secondary housing market. At the same time, in cities where housing construction is actively conducted, in such as Belgorod, Ryazan, solvent demand moves to the primary market. ”