Bubble Trouble

In the 2000s property markets grew at astonishing speeds all around the planet. Yet, what was happening in Russia looked crazy even among this universal madness. If in the UK house prices nearly doubled during the last ten years, in Russia they tripled in just five years from 2003 to 2008. Overall, during the decade real estate prices here grew by 500%.

There are a number of factors that added to this distortion of our sense of normality: the vast inflow of oil money, the increase in wages and the lack of housing – per capita housing space in Russia is only 24.5 square meters which is 10% less than in neighbouring and much poorer Ukraine, one and a half times less than in Germany and almost three times less than in the U.S.

However, the most important component is the availability of credit. Until the early 2000s, the mortgage market did not exist. Property was bought on what people managed to save under the mattresses. The influx of capital from banks into the real estate market, apparently, was and remains the single most important factor for property prices.

Research conducted by National Agency for Financial Studies in the cities with population over 500,000 people shows that the potential for mortgage lending is far from exhaustion. According to NAFS, banks have just touched the surface of a huge pool of potential borrowers.

Less than 2% of Russians are ready to borrow at existing terms. For most the existing rates are unacceptable. This is not surprising, since the rates, by European standards, are simply rapacious, ranging from 12% to 15%.

If the rates go down to some decency and common sense, the mortgage lending will surge and Russia’s property market will explode again.