Russia is scrambling to end property boom as economy overheats

• Russia is shutting down a mortgage subsidy program that fueled a property boom.
• It’s a sign Russia is trying to cool off its real estate sector, as well as its overheating economy.
• Russia’s economy has been heating up for a while, bucking dire predictions about the effect of sanctions. 

Russia is shuttering a major housing subsidy program as policymakers try to contain a property boom that has helped overheat the economy in recent years, Bloomberg reported Tuesday.

Russia’s government has spent around half a trillion rubles since 2020 to fund a program offering mortgages at rates as low as 8%. That’s much lower than the market rate for mortgages in Russia, with banks offering mortgages at rates ranging between 17% and 20%, according to government data cited by Bloomberg.

But that program has ushered a wave of Russians into the nation’s real estate market, which has sent property prices soaring. That poses a threat to Russia’s economy, which experts have warned is becoming overheated as the costs of its war take a toll.

Residential property prices in Russia rose to a fresh record in 2023, according to data from the Bank for International Settlements. Home prices nearly tripled from 2020 to 2023 alone, data from the Russian-based research firm Urban Economics shows, attesting to the inflationary pressures of the subsidy program.

Rising property prices are largely attributed to increased housing demand over the past few years. Home purchases ballooned to 18 trillion rubles last year, amounting to around 11% of Russia’s GDP, Kremlin data shows. Meanwhile, around 75% of mortgages in the nation last year were subsidized by the program.

Most people eligible for a subsidized mortgage won’t be able to get one starting this week, Bloomberg reported.

Since its beginning in 2020, the program has received criticism from top policymakers. According to estimates the Bank of Russia made at the start of the year, keeping the program running through 2026 would have cost Russia another 1 trillion rubles, or $11.3 billion.

The Bank of Russia also reported “signs of overheating” in the mortgage lending market late last year.

“The larger the volume of subsidized loans, the higher interest rates need to be for all borrowers to prevent high price growth,” the central bank’s governor, Elvira Nabiullina, added in June.

Bucking most predictions, Russia’s economy has been running too hot for most of the war, according to Aleksei Kiselev, a Russian economist and a research associate at the Florence School of Banking and Finance.

Inflation is up, wages are rising, and GDP is steadily rising, even as the country deals with stiff sanctions from the West.

“Economic crises occur for various reasons, including financial bubbles that grow until they burst,” Kiselev said in a recent commentary on the Carnegie Endowment website.

“At some point, the imbalances will rise to the surface and force the state to retreat from its commitments to its people. It does not really matter whether this takes the form of confiscations, the removal of massive subsidies, price increases, or an indefinite freeze on deposits and pensions,” he later added.

Russian inflation clocked in at 8.61% in June, well above the Bank of Russia’s 4% price target. According to a recent Reuters poll, analysts are expect inflation to remain well above target all year, which could prompt central bankers to raise rates to 18% in July.