According to Nikolai Trifonov, academician of the International Academy of Engineering, the decline in housing affordability, the changing key rates, and the high value of the country risk premium are characteristic of the Russian real estate market. Learn more in a large expert material.

About the situation on the real estate market in Russia now

The real estate market of Russia began to note the influence of the difficult political situation only from the beginning of 2022. The main financial instrument in this market is a mortgage, and because of the sanctions, the Central Bank of the Russian Federation temporarily raised the key rate to 20%, making it a barrier for loans, including mortgages. In addition, there was a mass departure from the country. All this caused a drop in demand for housing and a slowdown in sales.

The problems of the Russian real estate market were recently discussed at the Sberbank Conference «Time of Change: New Challenges in the Industry and Prospects», as well as at the Petersburg International Economic Forum (SPIEF-2023). I offer a brief overview of the expert presentations.

According to «SberIndex», prices on the primary housing market have increased by 80% in the last three years, on the secondary — by 50%. At the same time, income growth and inflation were significantly lower. This indicates a decrease in housing affordability.

Deputy Construction and Housing Minister Nikita Stasishin said that it is planned to introduce 50 million square meters of housing in 2023. Apparently, with sales down, that’s a lot. «However, the program of preferential mortgage, which has supported the market in recent years, has not yet been completed and only one person takes decisions on it — President Putin».

Alexander Danilov, Director of the Central Bank’s Banking Regulation and Analysis Department, stressed that the market needs stability and the regulator intends to fight the near-zero mortgage rates that spur housing prices. Rising prices in the primary housing market should not be separated from the income of the population. We are in favor of reducing mortgage rates but without manipulation. And the second point: we are not against support programs, but believe that support should be spot, carry a social function like family mortgage, for example.

Deputy chairman of the Sberbank Anatoly Popov, said that the approval rate of mortgages in «Sber» is high, and the number of approved loans is increasing. At the same time, half of mortgage issues were at a rate of 3-5% per annum. As of April, the average mortgage rate was 6%. But the mortgage subsidy program is shrinking. It used to cover 50% of all applications, now it’s only 20%.

The conference participants agree that subsidized mortgages will not be able to support the market for a long time. It’s a temporary tool that needs an alternative.

Finance Minister Anton Siluanov, in his speech at SPIEF-2023, almost said that it is necessary to raise taxes in connection with the growth of public spending (from 2019 to 2022, spending increased 1.1 times).

Elvira Nabiullina, the chairman of the Central Bank, has announced the possibility of new privatization and raising the key rate.

All the above should lead to lower prices in the secondary market of residential real estate in Russia.

Director of the Analysis Department of Sberbank Natalia Zagwetina said that over the past year, the growth rate of prices outside Moscow has far outpaced inflation and reached 21%. «If we take the average for Russia, perhaps we tend to the fact that prices this year are adjusted by 5%, and then will only stabilize». Nevertheless, Natalia Zampirina notes that in some regions real estate prices will fall by more than 5%, in some will not change, and in others will grow due to various factors.

Indicators of the country risk premium for Russia in spring 2023

One indicator of a country’s investment attractiveness is the country risk premium (country risk premium, CRP), usually calculated on the basis of the yield of government securities on the world markets. The Government of the Russian Federation issues a wide range (over a dozen) of long-term government bonds denominated in United States dollars, maturing from August 2023 to June 2047. Despite the sanctions, these «Eurobonds» are quoted on some trading platforms.

Since the purpose of the study is to assess the investment attractiveness of real estate, the longest-lived securities were chosen for the calculations, so that their life span was comparable to the economic life of real estate.

The country risk premium is based on information about the yield of the Russian government bond maturing on June 23, 2047, with a coupon payment of 5.25%. The calculated values of the Russian country risk for the last year are shown in the graph below.

graph of the calculated value of the country risk of Russia

The resulting country risk values are relatively high (in comparison with Turkey, for example, where it is about 5%), but despite the emission late last December, they are quite stable. (I note, however, that the reaction of investors to the June events will not be known until next month.) On June 30, 2023, for Russia:

CRP = 8,27%.

This value of country risk characterizes the probability of real estate value loss (total or partial) as a result of general economic, financial, and socio-political factors present in the country regardless of the real estate.