How to make money on the real estate market growth. Part 1
At the moment the real estate market is growing. In this tred we are considering how to make money on it.
What is happening on the market now?
This year, real estate prices have increased significantly in most regions of Russia. According to experts, for 9 months of 2020, the accumulated price growth in the primary housing market amounted to 10.5%. In real terms, excluding inflation, prices increased by 7.4%.
There are two key factors for this growth. The first and most powerful is the reduction in interest rates. Since the beginning of the year, the key rate has been reduced from 6.25% to 4.25%, which is reflected in a comparable decrease in the weighted average mortgage rate from 9% in December 2019 to 7.3% in October 2020.
In the primary market, mortgage rates decreased to 6.5% due to the state subsidy program launched in April 2020. Buyers of housing in rural areas could take advantage of the rural mortgage program, which allows you to take out a loan at a rate of no more than 3% to 3 million rubles.
The decline in mortgage rates directly affected housing affordability. With the same amount of mortgage payments, the borrower was able to purchase a more expensive apartment, and buyers with a small income could in principle consider purchasing an apartment or house.
The second factor is the growth of investment demand for real estate. For many Russians, real estate remains the most reliable asset for saving money and the first alternative when refusing a Deposit. A sociological survey showed that 50% of respondents would place a large amount in residential real estate. Another 17% preferred investing in land.
Against the background of lower Deposit rates, tougher tax legislation on Deposit income, and the weakening of the ruble, which at its peak in March was more than 30% by the beginning of the year, people became concerned for the safety of their funds and began to look with great interest towards real estate. The same factor had a positive impact on the inflow of investors to the stock market.
Market in 2021
The mortgage subsidy program in the primary market has been extended until June 2021. The rural mortgage program is valid indefinitely. According to the Central Bank’s baseline forecast, there is still room for a key rate cut, and monetary policy will remain soft in 2021. This means that demand will continue to be supported by the lowest mortgage rates in the history of Russia.
The volatility of the financial markets in 2021 can be reduced. The launch of several COVID-19 vaccines reduces the risks of new lockdowns, and a soft monetary policy will support stock markets. This situation is favorable for the price of hydrocarbons and the stability of the Russian economy.
The spread of remote work can lead to the fact that part of the population will spend more time at home, and the purchase of comfortable housing will become a priority for people. Against the background of low mortgage rates, this may support high demand in the first half of the year.
The negative point is the decline in income of the population. Real disposable income, according to Rosstat, has been declining for several years in a row. For the first 9 months of 2020, the indicator fell by 4.3% year-on-year. In previous years, the decline was offset by cheaper mortgages. However, as prices rise and interest rates stabilize, this factor will begin to put pressure on demand.
Based on the combination of factors considered, we can assume a slowdown in real estate growth in 2021. But the positive dynamics may continue. It will vary depending on the region, market segment, and individual characteristics of the property, but the average range may be in the region of up to 6-8% per year.
At the same time, the main share of growth may occur in the first half of 2021, since from July 1, the mortgage program with state support at a rate not higher than 6.5% is planned to be completed. If the program is not extended, then in may-June there may be increased activity in the primary market, followed by a decline. In the second half of 2021, demand may focus on the secondary market, where low rates will remain, and prices may be quite competitive in comparison with new buildings.
Read the following in chapter 2.