The Russian economy is under increasing strain as the war against Ukraine continues to shape its financial realities, particularly within the housing market. A combination of soaring interest rates and curtailment of state subsidies has left the dreams of homeownership slipping away for many Russians.
Once thriving, the mortgage market has largely stagnated, with rates now nearing an astonishing 29 percent, as the Russian central bank aggressively raised rates to combat inflation exacerbated by extensive military spending. Mikhail Matovnikov, head of the analytical department at Sberbank, remarked, "It has never been so bad from the point of view of what a normal person can afford to buy, taking int account the mortgage and all subsidies." He emphasized, "Affordability hit absolute rock bottom."
Renter constraints are at play, with mortgages plummeting 40 percent last year, continuing the trend for this year as fewer Russians can navigate the unforgiving rates. The financial strain is impacting attitudes toward government spending on the war. A significant policy change is underway as government support for first-time home buyers is being withheld, sending ripples through the housing market.
Analysts point to the extended duration of the conflict as compounding issues within the Russian economy. There was widespread expectation three years ago of imminent economic collapse fronted by Western sanctions, but these prognostications have largely failed to materialize. The reality, as observed, is more nuanced, with the economy having initially shrunk before adapting to new parameters, albeit under considerable strain.
Despite challenges, home builders appeared to be thriving during 2023, as interest free loans granted at subsidized rates contributed to high home demand. The government implemented some programs aimed at mitigating market instability during the COVID-19 pandemic, allowing individuals to buy homes at significantly reduced interest rates. Data shows this had driven prices of new homes to spike dramatically, where new builds were appreciating almost twice as fast as existing homes, creating distorted dynamics based on artificial demand.
Yet as the subsidized loans tightened, so did buyers’ opportunities. An immediate downturn followed, with combined anecdotal reports and statistical data indicating around a 50 percent drop in sales around Moscow within just one month. Olga, a realtor from Voronezh, explained the now-frantic behavior of cash buyers who are negotiating fiercely with sellers needing to offload properties quickly.
With predictions indicating continued economic stress—some citing potential declines of 20 percent this year—government officials are concerned about maintaining public support, especially as economic hardships become more pronounced. Deputy Prime Minister Marat Khusnullin addressed concerns about rising discontent, insisting on measures aimed at holding up developers under financial duress, advocating for prudent fiscal measures as economic pressures grow.
Employing measures such as personal discounts or installment plans, developers seem unwilling to alleviate market pressures by lowering overall prices. The focus remains on stabilizing the market, but many see this as futile without addressing prohibitive borrowing costs, which may soon break the 30 percent threshold as monetary policy tightens. Analysts, including Liam Peach of Capital Economics, comment, "Inflation is out of control and we think the bias will remain toward monetary tightening," indicating prevailing fears surrounding future economic policy.
The impact of the war against Ukraine on Russia’s economy looms large. Casualties increase, and economic hardship intensifies, raising questions about the state apparatus’s sturdiness amid these challenges. The declining aspirations for homeownership reflect broader sentiments among the public feeling the squeeze of economic attrition.
What remains to be seen, as the conflict continues, is how public sentiment will evolve and how President Vladimir Putin's administration navigates these turbulent waters, especially as policy decisions have tangible effects on people's quality of life. Amidst rising economic discontent and frequent inflation, the cost of living pressures will continue to test the stability of the Russian economy.