The stimulation of mortgage-backed lending creates more risks

The need to undertake measures of state support in order to stimulate mortgage-backed lending has recently been discussed with increasing frequency.

On the one hand, mortgage-backed lending has becoming increasingly important for the past few years. First, mortgage-based loans account for more than 75% of all long-term loans to individuals fr om credit institutions. Second, by the end of 2014, 26.3% of the total volume of housing purchase/sale transactions were financed through mortgage-based loans. To compare with the pre-crisis 2007, such transactions accounted for by as little as 16%. Furthermore, mortgage-based loans in Russia play most significant role in the primary housing market, wh ere such loans finance more than 40% of the total transaction volume. Third, mortgage loans remain the most popular and booming segment in the retail lending market. With a sweeping weakening of demand for car loans and other consumer loans, the debt owed under mortgage-based loans in 2014 increased 32.2% compared with the last year increase of 23.5%. And, indeed, mortgage lending as well as housing mortgage lending as a whole has a strong multiplier effect on both the construction industry and related sectors.

On the other hand, one should be realize that stimulating mortgage-backed lending may have both positive and adverse effects, as evidenced by the mortgage crisis in the United States. Adverse macroeconomic affects which laid mortgage-backed lending low in the United States, were spreading along the three principal channels: the fall in prices of homes and apartments and other assets, the limited access to loans, the reduction of personal income. As a result, the decline of wellbeing of the population and the depreciation of the collateral provided under previously issued loans have led to deplorable consequences. It is worthwhile noting that the post-crisis "credit boom" was attended by not only steady growth in real disposable money income, but also considerable broadening of the list of credit resources.

The current economic situation in Russian isn't the same at all, and high uncertainty about the length and depth of economic downturn in Russia tends to reinforce not only the current but also long-term risks.

In an effort to artificially make longer-term credit resources available for individuals, one should always remember that credits are intended to increase current and investment costs to be covered by revenues in the future, when it comes, for example, to the purchase of a house/apartment. No one can say for sure that personal income in times of crisis would be able to cover the previously assumed financial commitments.

Additionally, not only can stimulation of mortgage-backed lending reinforce bank risks, but it also can force down consumer demand by increasing the debt burden upon personal income, given the current situation, with the decline in real disposable personal money income, the increased tensions in the Russian labor market. At the same time, given the anticipated mid-term slowdown in the dynamics of consumer prices to 4%, individuals will assume mortgage commitments at above-normal interest rates, even with the state support.
In that context, it is our opinion that stimulation of mortgage-backed lending in Russia isn't the silver bullet able to smooth the adverse macroeconomic trends which have absolutely different causes, and is more likely to create extra risks, given the modern reality.

Anna Kiyutsevskaya, a researcher at the Gaidar Institute