Consumer credit and mortgages, which grew fast during the pandemic, remain among the pillars of Russia’s economic growth. In 2Q20 the government offered subsidies for mortgages so that households were able to borrow at a fixed rate (6.5%), implying that banks provided mortgage loans below the market rate and could claim subsidies from the government. The program looked very attractive given that inflation in Russia was also high.
The government initially planned to scrap the subsidized mortgage program on July 1, 2021. As suddenly putting the brakes on a highly popular program could have a very negative impact on the economy, the authorities decided to extend it until July 1, 2022. The subsidized mortgage interest rate was increased up to 7%, which looks attractive amid inflation above 8%. The government also modified some other conditions of the program, offering even lower rates is some regions and rural areas.
Russia’s household GDP ratio does not look high by international standards and it will keep rising going forward, but Russia’s high cost of borrowing make a difference. In order to reduce inflation, bring interest rates down and mitigate the risk of destabilization of the consumer market, the government needs to seriously decrease its excessive budgetary stimulus, which has turned inflationary.
* Outstanding mortgages grew by 21.8% in 2020 as a whole, while total household indebtedness (including mortgages, consumer credit, and credit cards debt) to banks increased by 13.2%. In recent years and in early 2020, mortgages accounted for around 40% of the total household debt. By the end of 2020, this share increased to 43.3% and rose to over 44% in 2021.
* The growth of the total household debt will moderate mostly due to a faster moderation of consumer debt, which is more sensitive to key rate hikes. Consumer lending rates will appear in 4Q21 to be higher than previously, which will further moderate consumer credit growth, while the growth of mortgages may be more stable.
* In 4Q21 and in 2022 one should expect a continuous deceleration of the growth of retail sales and household consumption in general.
* The policy of subsidizing mortgages resulted in the fact that the costs of borrowing for the government became, on average, comparable with costs of servicing mortgages, and these arrangements do not look sustainable in the long run.
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