Surge in home ownership heralds the rise of the Russian middle class

Getting a mortgage is a rite of passage for Russian professionals. By Mary Dejevsky
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The Independent Online

Risky mortgages and banks that pursue over-optimistic lending policies may lie at the root of the financial crisis afflicting the US and Britain. But in Russia it is – so far – quite a different story. Obtaining a mortgage – "ipoteka" in Russian – is the latest rite of passage for Russian professionals in pursuit of a middle-class life-style.

What many in the West now take for granted as one of the most basic of all financial services – a long-term loan to buy somewhere to live – is at the leading edge of what Russia's fledgling consumer banking sector has to offer. A public education campaign is in full swing.

Over the past decade, Russia's advertising hoardings have supplied a running catalogue of popular aspiration. First it was beer and cigarettes. Then came consumer durables – flat-screen televisions, washing machines and leather sofas. Cars were next, followed by garden furniture and swimming pools, with fitted kitchens not far behind.

Two years ago, new houses and flats started to feature, many of them in landscaped suburban developments. Now those same street hoardings are emblazoned with offers of mortgages and property insurance. Not that Russians seem to need much encouragement: the take-up of mortgages has risen 150 per cent over the past year.

The arrival of mortgages says much about the evolution of post-Soviet Russia. Home ownership – once the preserve of those "new" Russians who could pay in suitcases of cash – is now filtering further down the income scale. After 20 years of social turmoil, Russians feel secure enough about their own prospects and the wider economic context to consider a long-term financial commitment. And the banks see a market ripe for development, and it is one they would like a piece of.

The political establishment, right up to President Putin, has thrown its weight behind the idea, probably with a variety of motives. Speaking to foreign Russia-watchers recently, Mr Putin argued Russia's growing middle class held the key to the evolution of a stable political system in the country and noted that property-ownership was an essential part of being middle class.

Mr Putin praised home-ownership in almost evangelical terms. One of the things Russia really needed, he said, was decent and reasonably priced housing. He praised those who were building their own houses, but said it was still quite an expensive proposition for most Russians.

"Many of these people," he said, "have taken out loans, which they will have to pay back. They have to calculate how much they will have left and learn how to budget. They are, and will be, the bearers of an ideology; they will have an interest in stability, common sense and the rule of law."

MPs, ministers and local authorities are keen on mortgages from a rather more practical perspective. They understand housing conditions are a source of popular discontent. They also understand people living in run-down Soviet-era blocks are not prepared to contribute to their refurbishment.

They may do up their own small flat – indeed, since the arrival in Russia of the Swedish superstore Ikea five years ago, many already have. But they cannot be persuaded to pay to bring the common areas up to a decent standard, partly because they are used to Soviet-era cheap rents and partly because they do not regard it as their responsibility, but mainly because they see no future in such dereliction.

As one very senior minister presented it, the policy now is to make it easier for those who want to move out to do so – with mortgage-funded home ownership one option for those who can afford it.

The banks are still choosy about who they advance mortgages to. One professional Moscow couple, whose application was successful, described the dozens of papers they had to submit and the exhaustive checks that had to be made. Having obtained their 15-year mortgage, at a rate of 10.5 per cent, on a city-centre flat they are now refurbishing, they suggested that friends in an apparently similar financial position try their luck – but their application was turned down. The lending policy of Russian banks seems, not unreasonably given the volatility of the Russian economy until recently, to be at the opposite end of the spectrum from Northern Rock's.

The attitude of Russians who qualify for a mortgage also seems to be a little different from that of Western borrowers. A recent article in Russia's daily economic paper, Vedomosti, said Russian banks had been surprised to discover that three out of four borrowers paid off their mortgages early – so reducing the returns on interest payments and skewing the financial model. Many were repaying 10 or 15-year mortgages after only three years or less. This meant not only that many banks were receiving less interest than they had budgeted for, but that they had also been unable to dispense all the money allocated for home loans. They are now considering the introduction of a penalty for early repayment.

Tatarstan, an oil-producing region in the centre of the Russian Federation that enjoys quasi-autonomy from Moscow, is in the forefront of the mortgage revolution. The regional administration has bought licences from Canadian and Finnish producers of "kit" homes and allocates land cheaply to those who can contribute to financing their home. The mortgage arrangements on offer include very low-cost shared-ownership schemes for those who would otherwise be unable to afford to own or build. The idea is to speed up the replacement of the region's substandard housing stock, but also to make Tatarstan a more attractive place to live.

One effect of more private financing is that would-be home-owners have a wider choice of where to live. In Moscow, where the price range is wider than elsewhere, this has brought an element of stability to what had been until recently a highly unpredictable, if ever-rising, market.

As more new blocks are completed all over the city, prices of flats in old Soviet blocks have begun to fall. The effect is to price more Muscovites into the housing market. So far, the mortgage-lenders are highly selective and flourishing. The concept of sub-prime is still a long way away.