MORTGAGES ONLY TAKE HOLD IN THE PROVINCES

MOSCOW (RIA Novosti political commentator Yana Yurova)

Although mortgages arrived in Russia nearly ten years ago, only residents of small provincial towns seem to have taken any interest in them.

In the past, banks generally examined this issue, from their own point of view. However, the Economic Development and Trade Ministry launched a pilot project last year to assist the relocation of disabled people and the unemployed from the country's polar regions. Specialists analyzed the housing market in the European Russia as part of this scheme. They found that, despite the concentration of capital and affluent residents in major cities, mortgages had not become popular there. Indeed, mortgages are only used for 1% of the housing purchases in Moscow every year, whereas the figure for St. Petersburg is just over 2%. Loans are taken out for buying houses, but not mortgages.

However, the provinces surprised the researchers. Torzhok, a small town in the Tver region, set a record. Although the town's population does not exceed 25,000, every month 20 apartments are bought using mortgages, or 30% of the total number of purchases.

Prices in the big cities are driving people out to the provinces. The legacy of the 1998 financial crisis was that people had no money to buy. But now the residential market has stabilized in Moscow, St. Petersburg, Pskov, Novgorod and Tver, demand has fuelled prices. For example, the price of a square meter of residential property in St. Petersburg has risen steadily in the past few years (in summer 2003, it cost $200, and in April 2004 $470). Although prices now seemed to have reached a very high ceiling, there is no sign that they will fall in the near future.

People's purchasing power has been nearly exhausted in such cities. It is very difficult to sell an apartment in Moscow now. For instance, supply on the secondary market has increased by 60% in the past six months, but the price of a square meter varies by no more than 1%. As a result, the capital is currently not the best place for commercial lending.

The Torzhok phenomenon is due to the low price of a square meter. Researchers have found that Torzhok is one of the cheapest Russian cities in terms of this indicator. Until recently, a one-room apartment cost about $5,000 there. This meant that a borrower had to earn about 6,000 rubles a month to qualify for a bank loan. This is quite a sum for a provincial town, but it is still realistic. And the low prices spurred demand for a long time.

However, Torzhok is not unique. Mortgages are taken out for almost 30% of the properties bought in Penza and high indicators have been registered in Ufa and Perm. In short, research shows mortgages schemes are developing faster in the provinces than in big cities. Regional housing markets start from a very low level almost everywhere, which means growth rates are high. Besides, comparatively low incomes mean people have to solve their housing problems by taking out mortgages rather than using their savings.

At the same time, the migration factor goes some way to explaining greater interest in mortgages. Andrei Sapozhnikov, who took part in the economic ministry's pilot project and is a consultant with a non-commercial fund for restructuring enterprises and developing financial institutions, says that local residents' financial resources have been virtually exhausted almost everywhere except the Volga region. Therefore, buyers are mainly migrants from the extreme north and the CIS. They are obviously interested in cheaper apartments, and they are only on offer in provinces. As a result, up to 60% of all housing in the regions goes to the newcomers, most of whom take out affordable mortgages.

Due to local specifics, the picture is different in the Far East. In the past two years, residential prices in Krasnoyarsk, Vladivostok and Khabarovsk have gone up by 60-70%. Price trends in these cities are a year behind the capital's, but the local authorities artificially inflate prices to hold back migration from China. This leaves local residents with a feeling that housing is becoming increasingly expensive, which has in turn led to rapid purchasing as people try to buy whatever they can to sell it later, when prices rise to their highest level. This speculative aspect gives another impetus to the development of mortgages in the region.

Nevertheless, the potential for developing mortgages has not been used to the full even in the provinces. The demand for housing in many small towns exceeds supply. So far, 80% of the transactions have been made on the secondary housing market, whereas there is little new housing, for which mortgages were originally introduced, on offer. This situation helps accelerate construction. However, in keeping with the rules of business, the very first house built in a city is the most expensive and elite. Accordingly, the builders try to earn the maximum profits before going on to build a second block, which is simpler and cheaper. Apartment blocks are only built en masse after that. At present, however, Russia still needs to make the transition to building standard housing.