August 15, 2006
Cash still king in Russia’s property boom
By Gleb Bryanski
MOSCOW -- When the real estate agent finally picked up the phone he told exasperated bidder Alexander to decide now or else the $250,000 apartment would sell like a "hot cake."
This is the paradox of the real estate business in oil-rich Russia, where hot money is pushing the price of houses and apartments out of the reach of many buyers just as mortgages become more widely available.
Even middle-class buyers like Alexander, an oil industry executive who did not want his last name published, lose out because they cannot raise enough cash before property prices rise again.
"Mortgage formalities at the bank take up to a week. By then the price will already have gone up," said Alexander, who in the end turned to a wealthy friend for a loan.
Russia's home loans market is still tiny, with about $2.5 billion outstanding, and the future of a new class of financial assets, mortgage-backed securities, hangs on whether banks can cater to people like Alexander.
A recent survey found that many Russians, having seen the price of their dream apartment rise by 10 percent a month this year, have given up hope of getting onto the property ladder and splurged their savings on a car instead.
"In reality only about 150 people out of every 1,000 who come to the bank actually take a loan, the rest drops the idea of buying a home because of high prices," said Vyacheslav Shalamov, deputy head of retail banking at the Bank of Moscow.
Maxim Ivanov, a 33-year-old manager at a Moscow oil trading firm, was surprised at how easy it was to get a mortgage. Although monthly costs take up 35 percent of his income, Ivanov aims to pay back his 15-year loan in 5 years.
"The main requirement of the bank was a legal salary," said Ivanov, who will soon move into his new home in a smart neighborhood on the outskirts of Moscow.
To make a down payment, Ivanov sold the cramped apartment, typical of the faceless blocks dotting Russian cities, that he received in the privatization of state property in the 1990s.
Russia's state mortgage agency, created like Fannie Mae in the United States to finance affordable home loans, estimates that 68 percent of Russians own privatized property that they can use as security.
But most of that property went to older Russians, stuck with miserable pensions and low salaries, while their more market-oriented children have not yet earned enough money to make the first payment.
Chasing younger buyers, who often have a credit history dating back only a few years, Russian banks lower the amount for the down payment -- a risky policy, experts say.
"When an individual invests too little of his own money, he goes into default very easily," said Kosareva. Only 3 to 5 percent of buyers take out mortgages, and borrowing totals 66 billion roubles ($2.5 billion), she estimates.
Risks are multiplied in the Russian economy, where banks awash with money from petrodollars compete aggressively for loan takers, slashing interest rates and squeezing their margins.
Because of abundant liquidity, only a few banks have reduced their risks by issuing mortgage-backed securities, where home loans are bundled and sold to investors.
"Refinancing is only profitable with the securitization of assets of above $100 million. Not many banks have reached that level yet," said Shalamov, whose bank has lent $72 million to home buyers since starting the business last autumn.
A law on securitization was passed in 2003 but has had to be revised to make it more workable. Only this month state-owned Vneshtorgbank, with a housing loan portfolio of $350 million, launched a debut $88 million mortgage-backed bond.
Analysts said the issue showed Russian banks are starting to worry about rising interest rates abroad and the strain on their capital base resulting from rapid lending growth.
Several banks plan mortgage-backed offerings this year and experts say their performance will show how realistic the mortgage agency is in forecasting that 415 billion roubles ($15 billion) in new home loans will be made in 2010.
"We see a lot of interest from both foreign and Russian investors in Russian home loan market exposure, but everything will depend on how investors will value their risks," said Andrey Milyutin, of the International Finance Corporation.