Why are there such high mortgage rates in Russia?
Inflation in Russia is higher than in Europe, only 2%. The difference in average mortgage rates is more than 5%. Where does it come from?
Our citizens who have visited abroad like to say that they can take out a mortgage there at only 2-5%. Even in not very rich Bulgaria, the rate is about 4.5%. Why is it wrong with us? There was always an easy answer to these surprises - they say that in our country inflation is much higher, and the rates are proportionally different. But if you start counting on numbers, then this answer does not seem sufficient. The difference in inflation is significantly lower than the difference in mortgage rates.
Please look at the statistics below:
| Inflation,% | Mortgage rate,% | Inflation - the difference with Russia,% | Mortgage - difference with Russia,% | |
| Finland | 2.2% | 1.47% | - 2.8% | - 8.19% |
| Switzerland | 0.4% | 1.56% | - 4.6% | - 8.1% |
| France | 2% | 1.77% | - 3% | - 7.89% |
| Germany | 2.2% | 1.89% | - 2.8% | - 7.7% |
| Belgium | 3.1% | 2.07% | - 1.9% | - 7.59% |
| Austria | 3.3% | 2.11% | - 1.7% | - 7.55% |
| Netherlands | 2.3% | 2.47% | - 2.7% | - 7.19% |
| Latvia | 0.2% | 2.63% | - 4.8% | - 7.03% |
| Estonia | 3.4% | 2.64% | - 1.6% | - 7.02% |
| Norway | 1.9% | 2.69% | - 3.1% | - 6.97% |
| Sweden | 2.5% | 2.95% | - 2.5% | - 6.71% |
| United Kingdom | 2% | 3.22% | - 3% | - 6.44% |
| Malta | 2.7% | 3.72% | - 2.3% | - 5.94% |
| Ireland | 2.4% | 3.76% | - 2.6% | - 5.9% |
| Poland | 4% | 3.85% | - 1% | - 5.81% |
| Serbia | 2.2% | 3.88% | - 2.8% | - 5.78% |
| Bulgaria | 4.2% | 4.36% | - 0.8% | - 5.3% |
| Greece | 2.9% | 4.9% | - 2.1% | - 4.76% |
| Kosovo | 1.8% | 5.34% | - 3.2% | - 4.32% |
| Georgia | 4.1% | 11.79% | - 0.9% | 2.3% |
| Turkey | 7.8% | 20.36% | 2.8% | 10.7% |
| Medium | 5% | 9.66% | - 2.26% | - 5.4% |
Mortgage rates and inflation in Europe
Thus, the difference in mortgage rates with Europe is more than 5%. And only 2% of this difference is due to the difference in inflation. As a result, in real terms, mortgages in Russia are about 3% more expensive than in Europe. And this is taking into account Turkey, which due to the recent political crisis has anomalous macroeconomic indicators. What is the reason?
Banks bear all interest rate risks
But the oligopoly in the Russian banking market was finally formed not so long ago (in explicit form - after the massive sweeps of the Central Bank of the Russian Federation in 2015-16), while high mortgage rates in Russia have always existed. The next factor applies only to lending to individuals, but it is no less important.
Russian deputies, when adopting certain laws, often proceed from populist considerations. Many points of domestic law are designed to appeal to a mass audience. A typical example is the Labor Code. It is designed to protect the position of employees (the most mass audience) as much as possible. As an example, dismissing a negligent employee often becomes an extremely big problem, but much less attention is paid to the interests of entrepreneurs, as the category is less numerous in the electoral plan. In our case, a similar situation arises. The Civil Code (Clause 2, Article 810 of the Civil Code of the Russian Federation) allows individuals to repay a mortgage loan ahead of schedule at any time (the bank has no right to limit this possibility in the agreement). On the one hand, it seems convenient for borrowers - there is free money, you can easily repay it. But in fact, this leads to the following. Mortgage loans are concluded for a long term, in case of an increase in interest rates in the economy, the bank loses income - despite the fact that it attracts deposits at new, more expensive rates.
In the case of falling rates, the borrower can easily take a new mortgage loan at a neighboring bank at a lower rate, pay off the current one ahead of schedule and thereby pay the mortgage further at a new lower rate (i.e. refinance the mortgage) .
In this situation, the bank loses again - it does not receive the benefits of falling rates in the economy, because it attracts and allocates funds already at new, reduced rates. Speaking in a more scientific language, interest rate risk is beared only by the bank itself - the borrower is exempt from it. As result, the bank lays all these costs in the price. As a result, the Russian borrower, thanks to parliamentary care, gets the opportunity to early repay the mortgage at any time, but overpays for this opportunity every month a certain number of percentage points.
Lack of long-term funding
You probably noticed that in the Russian market it is difficult to find deposits for a period of more than 3 years (and even if you meet such deposits, their real share in banks' liabilities is negligible). Such is the psychology of the Russian investor - he is used to a wide variety of collapses both in the banking sector and in the domestic economy as a whole and is not ready to entrust his hard-earned money to such a suspicious structure as a bank for a conditional 10 years. What will happen there after this time is hard to guess. However, a mortgage loan, on the contrary, is usually long because of its specificity - 10-20 years are the average maturity. As a result, the bank’s assets (income) are fixed for a long time (and can only decrease, as described above), and liabilities (expenses) are short-term, that is, the rate can change many times during this time. And again there is an excessive risk - banks are forced to lay it in the price.
Oligopoly in the Russian banking market
It is difficult to disagree with the article in Russian Forbes - the Russian banking market today is a classic oligopoly. Oligopoly is usually understood as such a market in which several large sellers provide most of the market supply.
Sberbank, VTB, Gazprombank, Russian Agricultural Bank and several other major players accumulate the vast majority of free cash funds of the population and companies.
They control the rate on the interbank market, which other banks use to replenish their funds in case of a lack of liquidity. In theory, oligopoly can affect prices in different ways - including up to fierce competition in rates. However, given the near-state nature of most major players, this is clearly not the case. Hence the lack of competition and high rates. From regulator point of view, such market structure decrease risks of the appearance of defrauded investors, but in the long run this depressingly affects the rate.
Moreover, there is no competition in the Russian financial market, even in a broad sense. In many countries, long-term projects are financed not from borrowed (bank) funds, but from direct investments in the equity of enterprises. One of the important sources of such financing, along with private investors, is pension funds, which could also indirectly compete with banks. Due to such mechanisms, in particular, the problem of a shortage of "long" money, which we mentioned above, is solved and there are more long free resources on the market for investments. In Russia, pension funds are almost invisible in the financial market - including due to the fact that employer contributions there are frozen. As a result, if you need money, then you need to go to banks. As it was written above, in a very limited number of banks. And when competition is not enough, prices will be high.
Real inflation may be higher than Rosstat data
Our calculations above were made on the basis of inflation indicated on the Rosstat website. The inflation indicator in our country is of great political importance - like any indicator that a mass audience is interested in. Most Russians face a rise in prices every day, and not everyone takes mortgages. A simplified macroeconomic policy is usually based on the following rule - the higher the interest rate in the economy, the lower inflation (people take fewer loans, demand falls, prices do not rise). That is, by simplifying the situation a bit, the Government is forced to choose between high inflation and high interest rates (we are primarily talking about these indicators in real terms). According to the decisions made, it is quite obvious what choice the Russian authorities make in this situation. It is enough to recall how, in 2014, after the devaluation of the ruble, the key rate was sharply raised - just to combat high inflation risks.
I think you already realized how important for very high officials is the figure that Rosstat publishes monthly. And serious chairs can be lost if this figure is unexpectedly higher (by the way, we told in detail , due to which methodological tricks Rosstat manages to achieve such low inflation). Our estimates based on Rosstat data which can have an error.
You can come up with many more reasons that explain such high mortgage rates in Russia - most often the low solvency of Russians (and enhanced default risks), corruption, etc. are mentioned. But all this - nuances and tens of percent. The main effect is provided by the non-optimal structure of the banking market and the high interest rate risks already included in the rate.
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