Proposal for Regulating Installment-Based Home Purchases by the Central Bank
In the Russian real estate market, a significant shift has been observed in the purchasing patterns of homes, with an increasing number of buyers opting for installment plans over traditional mortgage options. According to analysts at Dom.RF, the share of mortgage purchases has fallen to 58% from 77% the previous year.
This trend has sparked concerns among financial experts, with some suggesting that banks should verify the ability of individuals purchasing real estate on installment plans to either secure a mortgage or make the remaining payments from their own funds. Alexander Danilov, in a conversation with Forbes, advocated for such a measure, hinting at its potential introduction to the market within a month.
However, the risks associated with buying real estate on installment plans are not limited to these concerns. Both buyers and developers face a variety of financial and market risks.
For buyers, default risk, interest rate risk, market risks, and liquidity risks are significant concerns. Default risk refers to the possibility of facing challenges in making timely payments, which can lead to financial penalties and damage to credit scores. Interest rate risks come into play as installment plans often come with interest rates, and changes in interest rates can increase the cost of the loan over time, affecting affordability. Market risks are inherent in any real estate transaction, as property values can fluctuate. If the market declines, buyers may end up paying more than the property is worth. Liquidity risks arise when buyers may not easily sell the property if needed, trapping them in a deal.
Developers, on the other hand, face credit risk, market risks, regulatory risks, and cash flow risks. Credit risk involves the risk of non-payment by buyers, which can impact their cash flow and ability to fund ongoing projects. Market risks are similar to those faced by buyers, as a declining real estate market can affect developers' revenue and profitability. Regulatory risks stem from changes in regulations or laws regarding installment plans, which can impact developers' business models and profitability. Cash flow risks arise from managing installment payments, requiring careful cash flow management to meet project obligations.
Despite these risks, the use of installment plans continues to rise. Svetlana Nazaryova, managing director and head of real estate financing at Sberbank, reported that the share of apartment purchases on installment plans has risen to 25-30%, up from 15% a year ago. This trend seems to be unaffected by the concerns and warnings issued by the Central Bank of Russia, which has expressed apprehension about installment plans, particularly for buyers with high debt loads and long installment periods.
The Central Bank has warned about potential risks associated with these plans, including hidden increases in buyers' debt loads, deterioration of project economics, and credit risks for developers due to "lower account fill rates" in escrow accounts. In response, the Bank of Russia is planning to introduce a verification mechanism as part of a risk assessment concept for project financing.
Despite the concerns and warnings, the accumulated volume of installment plans has already exceeded 1 trillion rubles, according to CB estimates. It remains to be seen how this trend will unfold in the coming months and years, and whether the new verification measures will help mitigate the risks associated with real estate installment plans.
The rise in real-estate purchases via installment plans concerns financial experts, who propose that banks should verify the financial capability of buyers to either secure a mortgage or make the remaining payments from their own funds. However, both buyers and developers face a multitude of financial risks, such as default risk, interest rate risk, market risks, liquidity risks for buyers, and credit risk, market risks, regulatory risks, and cash flow risks for developers, making the use of installment plans a potentially precarious business decision.
