Vice Premiere Advocates for Nationwide Halt in Residential Construction
Rethink That Housing Prediction: What's Going On With Construction in Russia?
Vice-Premier of Russia Marat Husnullin hinted at a possibility that housing construction could come to a standstill in the country by 2027, given that mortgage rates remain prohibitively high. In an interview with Russia 24, he expressed hope that the recent abolition of commission fees will lead to an increase in mortgages, getting us through this tough period.
According to Husnullin, many construction projects are currently stalled due to the high mortgage rate. This suggests a potential drop-off or significant decline in housing additions by 2027.
The statement was made ahead of a Central Bank board meeting. As most experts predict, the regulator will keep the key rate unchanged or only minimally lower it. The Central Bank maintains the key rate at 21% to curb inflation. However, high borrowing costs have a negative impact on businesses.
Housing Crisis in Russia: A Deeper Look
- Sagging Residential Sales
- Residential sales in Russia began to slip in February, declining by 12.3% in March and a staggering 39.8% in April compared to March. The share of home purchases using installment plans reached 54% after the abolition of the preferential mortgage program and bank rate hikes.
Here we provide a broader look at the potential causes for a potential construction industry meltdown in Russia:
1. Economic and Geopolitical Forces - Sanctions and Isolation: The ongoing conflict in Ukraine and international sanctions have affected Russia's economy, restricting access to foreign capital, technology, and even oil and gas revenues. Although construction has not come to a halt, continued economic strain could eventually make large-scale projects infeasible. - Global Demand and Rising Prices: Sanctions, currency fluctuations, and inflation can escalate costs for construction materials and labor, making projects less viable or causing delays.
2. Regulatory and Logistical Challenges - Complex Permitting Processes: The Russian construction sector faces formidable regulatory hurdles, as projects require numerous permits and need to comply with various layers of government oversight. These complexities can slow or even block new development. - Supply Chain Disruptions: Restricted access to specific imports due to sanctions or logistical disruptions could further complicate construction.
3. Shifts in Government Priorities - Infrastructure Focus: Current investment is focused on massive infrastructure projects, such as highways, railways, and ports, as part of a government’s modernization plan. This could divert crucial funding from residential development, making it more challenging for housing projects to move forward. - Resource Allocation: In times of heightened crisis, such as a prolonged conflict or worsening economic conditions, the government may prioritize military or critical infrastructure over residential construction, potentially leading to a halt in non-essential construction.
Effects on the Construction Industry
1. Colliding Short-term Growth and Long-term Risks - Market Expansion: Projections anticipate the Russian construction market to expand, reaching over $227 billion by 2030, driven by ongoing residential and infrastructure projects. - Local Demand: Despite the challenges, housing remains a significant priority, keeping construction activity afloat (as long as external shocks don't intensify).
2. Long-lasting Consequences of a Halt - Economic Downturn: A dwindling housing market would result in a loss of employment and economic activity in the construction sector, affecting related industries and local economies. - Capital Flight and Investment Uncertainty: Persistent regulatory, economic, or geopolitical challenges could keep investors—domestic and foreign—at bay, slowing overall market progress. - Urbanization and Social Burden: A decline in new housing construction might exacerbate urban overcrowding and affordability issues, especially in rapidly growing cities.
Summary Table
| Factor | Potential Impact on Housing Construction | Industry Consequences ||------------------------|----------------------------------------|----------------------------------|| Economic Pressures | Reduced investment, project delays | Slower growth || Regulatory Complexity | Slows/prevents new projects | Increased costs, operational hurdles || Infrastructure Focus | Diverts resources | Shift in sector priorities || Long-term halt | Reduced housing supply | Economic, social impacts |
While there are no current signals of an outright halt in housing construction by 2027, the construction industry in Russia must navigate various pressures from the economy, geopolitics, regulations, and shifting priorities, any one of which could slow or halt new projects if conditions worsen.
- The potential economic and geopolitical forces, such as sanctions, restrictions on foreign capital, and rising construction material prices, could drive a decline in housing construction in Russia, leading to a housing crisis.
- The cement and finance industries could experience a significant downturn due to delayed or stalled housing projects, as a lack of new residential development might lead to urban overcrowding, affordability issues, and economic instability.
