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02 AUG 2024 / GLOBAL ECONOMY
Ever heard the phrase, "What goes up must come down"? It’s as true for housing markets as it is for gravity. And right now, all eyes are on Russia as its housing market, once buoyed by aggressive mortgage subsidies and geopolitical maneuvers, is nearing the end of its high-flying days. This story's got a mix of economic strategies, political moves, and the looming question: What happens when the bubble bursts?
Imagine this: it’s the early 2000s in Russia, and the idea of taking out a mortgage is as popular as wearing a winter coat in Miami. Decades of Soviet propaganda left people thinking of credit as a ball and chain— “debt slavery” they called it. Fast forward to 2003, when President Vladimir Putin starts pushing mortgages as a fix for Russia’s housing crisis. His initial pitches landed about as well as a lead balloon. But persistence pays off, and eventually, Russians started warming up to the idea of buying homes on credit. The same can be understood from the numbers below: 
The real Breakthrough came in recent years, especially during the COVID-19 pandemic. The Russian government saw an opportunity to kickstart the economy by pumping money into the housing market. They rolled out a state subsidy program offering sweet mortgage deals—think interest rates around 6%, with the government picking up the rest of the tab. Who could resist?
By 2020, with the world grappling with the pandemic, Russia ramped up these subsidies. Families, IT workers, even folks moving to the chilly expanses of the Arctic and Siberia were getting in on the action. The housing market was hotter than a jalapeño pepper. 🌶️
The plot thickens with the onset of the Ukraine war. As Russia’s economy pivoted to a war footing, mortgage values soared. In 2023, banks were doling out mortgages like candy—7.7 trillion rubles worth, compared to 4.3 trillion in 2020. The housing market was booming, and property prices were climbing faster than you could say "borscht." 🥣
But all good things must come to an end. The Russian government’s mortgage subsidies have racked up a hefty bill—nearly half a trillion rubles. With the Central Bank of Russia (CBR) jacking up interest rates to combat inflation (we’re talking 18% here, folks), the gap between subsidized mortgage rates and market rates widened like a chasm.
In December, the Kremlin decided it was time to rein in spending. They upped the minimum down payment from 20% to 30% and pulled the plug on their most popular subsidy scheme. Analysts are now predicting a 50% drop in new mortgages in the latter half of the year. Yikes!
The end of subsidies spells trouble for Russia’s economy. The government’s budget has taken a beating from these programs, and with rising interest rates, keeping them afloat would be like trying to keep a sinking ship above water. Based on the figures below from Russia’s central bank targets and its year-over-year inflation, it is hard to predict anything 
Elvira Nabiullina, head of the CBR, has been sounding the alarm about these subsidies overheating the market and fueling inflation. She’s likened the housing bubble to a ticking time bomb, particularly in cities like Moscow and St. Petersburg, where prices have reached stratospheric levels. 💣
So, what happens now? Well, we’re not looking at a full-on crash, but more of a cooling-off period. The housing market might stagnate or slow down, rather than implode. Russia’s war economy has kept wages high, which might help prop up the market a bit. But for many Russians, owning a home just got a whole lot harder.
The construction industry, which has been on a building spree, will feel the squeeze. Developers who were riding the wave of demand will see a sharp drop in sales, which will ripple through the economy, affecting everything from raw materials to labor markets.
Banks, too, will have to tighten their belts. They’ve been enjoying record profits from the mortgage boom, but with new loans drying up, they’ll face tougher times ahead. Higher default risks and a less forgiving lending environment are on the horizon.
As the dust settles, Russia’s housing market is in for a period of adjustment. Government support is winding down, and the construction industry and banks will need to adapt. Many Russians will find the dream of homeownership slipping further out of reach.
What does this mean for the global economy? While Russia grapples with these changes, the ripple effects will be watched closely. Investors and policymakers worldwide will be keeping a keen eye on how this unfolds, as it could offer insights into the dynamics of housing markets under stress.
So, as we watch the end of Russia’s housing bubble, we’re left with a few burning questions: Will the market find a new equilibrium? How will the Russian economy steer these choppy waters? And what lessons can other nations learn from this housing saga?
One thing’s for sure—this is a story that’s far from over. Stay tuned, folks, because the world of economics is nothing if not a rollercoaster ride.
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