Why Russians race to secure mortgages?

Russians are racing to take out mortgages on concern that borrowing costs will rise further after the ruble’s weakness prompted the central bank to increase interest rates.

The number of people applying for mortgages at Bank VTB 24, a retail unit of state-controlled VTB Group (VTBR), almost tripled in the first two weeks of December compared with the November average, according to Andrey Osipov, head of the Moscow-based bank’s home-loan department. The bank is lending as much as 2.5 billion rubles ($46 million) each day, he said.

The ruble’s rout, sparked by falling oil prices and sanctions imposed on businesses including OAO Sberbank (SBER), prompted Russians to began buying luxury goods from Porsche sports cars to Tiffany rings to preserve the value of their savings. The real estate market is also getting a boost even as mortgages become more expensive.

“The rate increase hasn’t yet hurt demand,” Osipov said. “Buyers are as active as ever, despite the fact that property developers have begun to raise prices.”

Demand for homes in the second third of December “was the highest in the last six years, even as prices rose” by 5 percent to 12 percent, said Natalia Mikhna, spokeswoman for developer PIK Group. “Even those who were planning to save more for the installment payment and take a mortgage in 2015 applied.”

Rates Skyrocket

The central bank increased the benchmark interest rate by 6.5 percentage points to 17 percent on Dec. 16, the biggest single move since 1998. Instead of lifting the ruble, this caused the currency to lose as much as 19 percent on the day of the announcement before policy makers introduced a measures to curb banks’ need for dollars to support their liquidity.

The ruble pared some of its losses this week, rising for three straight days on speculation Prime Minister Dmitry Medvedevordered companies to sell foreign exchange generated from exports, while tax payments lifted demand for the currency.

Russian lenders started to borrow money from the central bank after they were barred from international markets on sanctions imposed by the U.S. and Europe over the Ukraine conflict. As a result, the increase in the key rate — which determines their borrowing costs — led to higher mortgages rates.

VTB 24 last week raised its mortgage rates by three percentage points to as high as 16 percent. Sberbank, Russia’s largest mortgage provider, increased its rate by 2 percentage points to as high as 16 percent.

Ruble Mortgages

The average rate under ruble-denominated mortgages in Russiabefore the central bank’s December rate decision was 12.32 percent, according to the the central bank data. This was allowing the mortgage market to show annual growth of about 30 percent in the recent years, according to Osipov from VTB 24.

For Natalia Dronina, a 47-year-old teacher, the interest-rate increase couldn’t have come at a worse time. In November, Dronina decided to buy an apartment in Shchyolkovo, a town near Moscow, and got approval for a mortgage with a maximum rate of 13.75 percent from Sberbank. This week she was told that she’d have to pay 15.75 percent.

“I am completely shocked,” Dronina said in an interview at Sberbank’s central Moscow mortgage office. “At the moment it’s not possible even to celebrate New Year,” she said.

Putin Cautions

President Vladimir Putin, confronting Russia’s deepest financial crisis in 16 years, said in his annual press conference on Dec. 18 that banks shouldn’t raise mortgage rates too hastily because of the potential impact on the real estate market.

Russia will probably enter a recession next year and there won’t be any growth for four consecutive quarters, according to a Bloomberg survey of economists.

The ruble has depreciated about 40 percent against the dollar this year and volatility has soared to the highest since Russia defaulted on local-currency debt 16 years ago.

Russia gets about half of its budget revenue from oil and gas. Brent crude declined about 44 percent this year with the slump accelerated after the Organization of Petroleum Exporting Countries held its output target last month.

Danger Zone

Natalia Orlova, Alfa Bank’s chief economist, said another small increase in borrowing costs could put the housing market out of reach for people like Dronina.

“If average mortgage rates rise to about 17 percent, the market will be probably come to a standstill because those rates won’t be affordable,” she said.

Dronina said she will likely proceed with her purchase of the apartment, which may cost as much as 3 million rubles.

“I will probably take Sberbank’s offer, despite the rate increase, because I don’t really have much choice,” she said. Source: Bloomberg