Moscow’s Building Boom Could Lead to Housing Bubble
Moscow skyscrapers are popping up faster than ever due to a recent construction boom (Wikimedia Commons).
The Moscow construction industry released a report on February 17 that detailed the alarming effects of Russia’s new federal mortgage subsidization program. The Russian government created this program in June 2020 as part of a COVID-19 economic relief plan. However, economists worry that the program could lead to a housing bubble in Moscow and cause the market to decline.
The concept behind economists’ concern for the new Russian policy is that when governments artificially lower mortgage rates, demand for real estate increases. More people are able to afford real estate, so the value of properties rises. However, since the artificially low interest rates drive the value up, the bubble will eventually “pop.” This can lead to major housing crises and even financial collapse, as it did during the U.S. Great Recession.
According to a construction industry report released on February 17, Moscow’s development companies built more skyscrapers in 2020 than in any other year. The construction includes 860,000 square meters of livable space—about 17,200 apartments. Projects jumped up 24 percent amid the pandemic. Most analysts attribute this spike to the mortgage subsidy program.
The Russian government implemented the mortgage subsidization program in October 2020 to try to reinvigorate its economy. According to the Moscow Times, by pushing low-price mortgages, the Kremlin aimed to increase construction and rates of homeownership. However, critics warn that the scheme will likely create an imbalance: too many apartments and not enough buyers may incentivize bankers to participate in riskier lending practices.
Other areas of the country will likely face similar challenges associated with the mortgage program. Kazan holds the fifth-highest rate of mortgages, and the residents are severely housing-burdened. In other words, a square meter in Kazan is valued at three times that of the average salary.
The Russian government is attempting several large spending programs around the country besides the mortgage program, including an investment program in the Arctic. Currently, the Kremlin is encouraging more banks to join an Arctic commercial lending program. The program offers loans at an interest rate below the market rate.
The Russian government has proposed extending the mortgage program until 2024. However, the Russian Central Bank has warned that cheap mortgages will lead to unpredictable fluctuation in property valuations. The Central Bank will likely push back on the Kremlin’s proposal, according to the Moscow Times.
The mortgage program could present trouble for Moscow’s economy if high-rises flood the market with inexpensive units. Ongoing discussions between the Kremlin and the Central Bank will determine whether the program will continue past the COVID-19 recovery period.