Page 111 - Russia OUTLOOK 2023

percentage points to reach 9.6% in October compared to the same month in
the previous year.

While construction is expected to cool in 2023 as the economy starts to
stagnate, it is also one of the sectors that is likely to continue to enjoy strong
state support, as it is one of the three big drivers of economic growth.

However, at the same time the CBR has expressed concern that mortgage
borrowing, egged on by a government subsidy programme to keep interest
rates affordable, has led to the beginnings of a bubble, so the CBR is likely to
tighten borrowing conditions somewhat in 2023.

The 2022 programme of discounted mortgages at a rate of 7% was due to end
in Russia at the end of 2023. Both the CBR and the Accounts Chamber have
repeatedly called for the scheme to be cancelled. However, President Vladimir
Putin recently announced that the programme would continue, albeit at a
slightly higher rate of 8%.

These discounted mortgages are causing Russia’s real estate market to
overheat. The primary and secondary housing markets are unbalanced (the
price difference between a new apartment and a “maintained” apartment was
40% in December).
Subsidies have made housing more affordable for more citizens, who have
decided to take out mortgages now rather than wait. Demand has risen sharply
– faster than supply can adapt – and prices are soaring. In Moscow, it is now
impossible to buy a comfort-class apartment in a new building without taking
out a mortgage.

However, this bubble is unlikely to burst, according to independent financial
analyst Sergei Skatov: developers have already sold more than 51% of the
housing due to come onto the market by the end of 2023. They need to sell a
further 10-20%, which is entirely achievable even if demand falls to summer
levels. Defaults on mortgage portfolios could also burst the bubble, but with a
failure rate of just 0.4% (and 0.15% in the primary market), this is also unlikely,
Skatov said.

The demand for new housing, especially in the biggest cities, remains high
and the largest developers continue to develop new projects.

In one of the first signs of the new realities, demand for luxury homes in
Moscow fell to its lowest level in five years in December, according to research
by real estate company NF Group.

The number of property sales in so-called elite new builds in the Russian
capital fell 44% y/y, from 1,620 sales in 2021 to just 900 in 2022, the lowest
number recorded for five years. A drop-off in demand in light of the
"geopolitical situation" and the economic crisis was anticipated, NF Group
analysts said.

At the end of 2022 the CBR also reported that transactions on the secondary

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