The Kremlin ended a generous mortgage subsidies programme on July that is expected to cool the housing market and construction business and become a tool for bring down painfully high inflation.

Banks have been offering deals with an 8% interest rate in June against the 18% central bank prime borrowing costs and 9% inflation rates in a deal that Russians have been snapping up.

June saw a spike in borrowing as Russians rushed to close a mortgage deal before the deadline. The mortgage portfolio expanded by 3.1% over the month, compared to 1.7% in May, according to preliminary data. Until then subsidised mortgage programmes accounted for 80% of all loans issued for the programme that has been running for years.

However, the volume of issued mortgages tumbled after the programme was curtailed in July. Banks issued 76,700 loans totalling RUB348.5bn ($4.1bn), according to preliminary data from the analytical agency Frank RG, down by almost half from a year earlier when 168,900 housing loans worth RUB654.2bn ($7.7bn) were taken out. That is a decrease of 55% in the number of loans and 47% in loan volume.

Despite the drop in issuance, the average loan size in July increased by 3%, reaching RUB4.54mn, an all-time record, according to Frank RG data.

The end of the programme appears to be part of a broader strategy to cool and overheated economy and fight painfully persistent inflation. CBR Governor Elvia Nabiullina has been aggressively hiking interest rates since the first quarter of 2023 to tackle persistent and rising inflation, caused by the heavy state spending on the war, but to little effect as the economy overheats on the military Keynesianism effects.

Never a fan of the mortgage subsidies, which she feared would create a housing bubble, it seems the CBR governor has finally got her way and the subsidise programme has ended as one of several non-monetary policy changes that will cool the economy. Among other things, Ministry of Finance (MinFin) is also planning to reign in military spending in the next two years.

For his part, Russian President Vladimir Putin has insisted the programme continues for longer than his advisors recommended as it provided work and growth for the population and has been enormously popular. Putin currently enjoys approval ratings of 80% and the majority of Russians think the country is going in the “right direction.”

The mass mortgage programme for new buildings with state support, which ended in July, accounted for about 55% of all state-supported mortgages. Since its launch in spring 2020, banks have issued nearly 1.6mn loans totalling over RUB6.1 trillion ($71bn), according to Dom.RF data, reports Vedomosti. The family program, the second most popular and available to families with three or more children, has provided 1.14mn loans totalling RUB5.2 trillion since its inception in 2018. The government revised the programme terms on July 10, narrowing the categories of eligible families.

The end of the programme will hurt both banks and developers hard. Sberbank estimates that the volume of mortgages issued by the end of the year will decrease by 25-30%, according to Alexey Leipi, director of Domclic says Vedomosti.

State-owned bank VTB predicted in early August that Russians would take out mortgages totalling RUB4.6 trillion by the end of the year, a 42% decrease from last year's record RUB7.8 trillion but comparable to the 2022 total of RUB4.8 trillion. In July, banks provided citizens with loans totalling 1.25 trillion, a decrease of RUB422.6bn, or 25.3%, compared to June.

And has part of her drive to cool the economy, Nabiullina is also squeezing other kinds of credit; she has also been worried about a growing consumer loan bubble, driven by the mushrooming use of credit cards in Russia. Cash loan issuances have also declined for the second consecutive month in July. Citizens took out 3.33mn cash loans worth RUB620bn, representing a 3% decrease in quantity and a 0.2% decrease in volume month on month. Annually, the number of issuances decreased by 7%, but the volume grew by 5%.

Conversely, car loans and point-of-sale (POS) loans saw growth in July. Citizens took out 162,700 car loans, up 10% year on year worth RUB239.5bn, or 8% y/y. Overall car loan issuances increased by 44% in number and 43% in volume over the previous year.

Despite the Central Bank's tightened credit policy for auto loans effective from July 1, which requires banks to apply increased risk coefficients for borrowers with medium and high debt burdens, the volume of auto loans issued hit a record high, according to analysts.

The POS loan segment grew more modestly, with a 14% increase in quantity and a 9% increase in volume, totalling 1.5mn loans worth RUB43.1bn. Annually, the segment showed a 3% increase in total amount but a 1% decrease in quantity.