‘The market is taking a break for 4-5 months’: a high key rate to ‘freeze’ secondary housing market

Russian economy is overheated as never before

Last Friday, the Board of Directors of the Bank of Russia decided to raise the key rate by 200 bps at once, to 18% per annum. Inflation has accelerated and is significantly higher than the April forecast of the Bank of Russia. The growth of domestic demand continues to significantly outpace the possibilities of expanding the supply of goods and services. In order for inflation to begin to decline again, additional tightening of monetary policy is required, and for inflation to return to the target, significantly tougher monetary conditions are required than previously expected, the Bank of Russia explained.

The seasonally adjusted core inflation rate in the second quarter of 2024 increased to an average of 9.2% year-on-year after 6.8% in the previous quarter. Annual inflation increased from 8.6% in June to 9%, as estimated on July 22. This growth reflects, among other things, the indexation of utility tariffs from July 1. Inflation expectations of the population and financial market participants continued to grow. The price expectations of enterprises as a whole did not change, but remained high, the Bank of Russia said in a statement.

Operational indicators in the second quarter of 2024 indicate that the Russian economy continues to grow at a rapid pace. Consumer activity remains high against the background of significant growth in household incomes and confident consumer sentiments. The shortage of labour resources continues to grow. Under these conditions, the growth of domestic demand does not lead to a commensurate expansion of the supply of goods and services, but rather increases the costs of companies to a greater extent and, as a result, increases inflationary pressure.

Mortgage demand began to decline in July

First of all, the increase in the key rate will hit lending and make market mortgages even less affordable for citizens. If at a key rate of 16% on a regular market mortgage, bank rates started from 18% per annum and sometimes exceeded 20%, then at a key rate of 18% the minimum mortgage rates will be at least 20%, and many banks will raise rates to 22-23%.

A similar situation already existed at the end of February 2022, when the regulator at an unscheduled meeting raised the key rate from 9.5% per annum to a record 20% in the history of the market. This led to an increase in mortgage rates to 22-25% per annum, market mortgages became unaffordable to most potential borrowers, and the issuance of loans practically stopped.

Meanwhile, demand for mortgages has already significantly decreased after the curtailment of non-targeted preferential programmes, said head of the Bank of Russia Elvira Nabiullina at a press conference following a meeting of the board of directors.

In June, there was a surge in demand for housing loans, but these data are not indicative, the head of the Central Bank stressed. She explained that there was a peak in applications in June, as many borrowers sought to get the last chance before the end of the massive preferential mortgage. In July, the demand for mortgage loans decreased significantly. In the first two weeks of July, the market paused, as the terms of the updated family mortgage were not approved.

According to Nabiullina, both excessive mortgage issuance rates in June and low lending rates in July are not indicative. More accurate conclusions about the dynamics of the mortgage market can be made after the exhaustion of temporary effects — by the end of the third quarter.

The head of the Central Bank of Russia recalled that the Central Bank keeps the mortgage growth forecast for 2024 at the level of 7-12%. The banks' mortgage portfolio will continue to grow, but at a more moderate and balanced pace. This will help to avoid overheating in the housing market.

Prices for secondary housing began to stagnate already at the beginning of 2024

In the first half of 2024, the average cost of 1 square metre in supply on the secondary market on average for the considered locations in Russia increased by only 3.7%, according to CIAN.Analysts. For six months, this is a very modest increase. Prices have hardly changed in the last three months. The monthly increase was 0.2-0.5%, whereas in the first quarter of this year it was 0.7-1.2%, and in the second half of 2023 — 1-1.9%.

There are prerequisites in the market for a downward correction in prices: a reduction in demand relative to the second half of 2023 and protectively high mortgage rates, CIAN analysts believe.

However, so far sellers have taken a wait-and-see position and are not ready to significantly reduce prices. In addition, the market has already adapted to the new reality: the number of transactions increased from February to April.

The minimum growth rates were recorded in St. Petersburg (+0.2%), Moscow (+0.4%), Vladivostok (+0.4%) and the Leningrad Oblast (+0.5%). In fact, prices in these locations have not changed in the first half of 2024. In the last two or three months, there has been a reversal of the trend towards a reduction in average prices in St. Petersburg, Moscow Oblast and Leningrad Oblast. The decrease is minimal, so far the price increase in the first months of the year has not been compensated.

The maximum growth was recorded in Naberezhnye Chelny (+9.2%), Krasnoyarsk (+8%), Makhachkala (+7.9%), Barnaul (+7.5%). In Kazan, prices for the secondary market for six months, according to CIAN.Analysts, have increased by 3.6%.

Top 10 cities with the most expensive apartments on the secondary market in the first half of 2024

According to CIAN.Analysts

The dependence of the secondary market on mortgages is not as high as the market of new buildings: many people buy here for ready cash, there are many alternative deals, experts say.

That is why the tightening of credit conditions in the first half of 2024 did not lead to a sharper drop in demand. In addition, part of the demand from the new construction market came to the secondary market, where credit conditions also deteriorated. Secondary housing market is still winning due to the lower price level.

There will be a correction of 10% of market prices

The high key rate, according to him, is due to that there is a lot of money in Russia today. “Therefore, the real estate market will not reset. There is a lot of money, and people will still buy real estate," he believes. “In July, the share of sales of secondary housing has already increased from 40% to 55%, and new buildings have decreased.”

The average square metre in Kazan today, according to his estimates, is 200 thousand, Moscow has already broken the price of 350 thousand. “And I think Kazan still has room to grow," Marat Gallyamov believes. “Kazan is a favourable region, people come here from other cities of Russia. The market is very fueled by new residents. And where there is demand, the price will at least stand, and at most, it will always grow.”

Gallyamov believes that if an owner of an apartment is in no hurry to sell, it is better to wait a few months and not sell the property until next year, until market mortgage rates decrease. “If the owner has a good (market) price now, then they will buy an apartment from him either for cash or with a mortgage at 20% in the hope that the rate will decrease and the loan will eventually be refinanced," he argues. “There will never be a 20-30% drop in prices. There is a lot of money, and people have a huge need for housing.”

“When each of us has two or three apartments, then the need will decrease and collapse may occur. This is impossible now, so there will be an average correction of up to 10% of market prices, and not from those prices that a person made up in his own mind and wrote in an ad," says Gallyamov. "10% is the maximum bargain price. And next year, in the second and third quarters, we forecast a growth again.”

“There will be no pessimistic forecasts. The market just takes a break for four to five months," Marat Gallyamov sums up.

“Those who have already got into an expensive mortgage will have to buy up all the validol in pharmacies”

Anastasia Gizatova, the head of Schastliviy Dom real estate agency, recalled that mortgage rates on the secondary market were prohibitive back in late 2023 — early 2024. “Even then, it was impractical to buy real estate at such rates," she said. “Moreover, those who did get into a mortgage at the end of 2023 now see their real estate getting cheaper and have to pay an expensive mortgage because there is no chance to refinance it, as they were promised.”

Also, according to Anastasia, one should not discount people who have placed funds on deposits — there are a lot of them: “The number of depositors is growing, and sooner or later this money will also end up on the real estate market.”

“Locally, a decrease is possible based on the seller's life scenario. Someone is moving to another region, someone is building a house, and it is vital for them to get money here and now. There is such a group, but it is small so that it has an impact on the market as a whole," the expert says.

According to her, no changes in the market are expected after the key rate increase:

“But those who got mortgages and loans with the hope of their further refinancing will have to buy up all the validol in pharmacies.”