Construction savings banks – an alternative to mortgages?

Recommendation points

• The history of the first construction savings banks
• World experience in the application of housing savings systems
• Prospects for the formation of construction savings banks in Russia
• Features of the draft law “On construction savings banks” submitted to the Russian Duma
• How will the formation of SSK affect the domestic real estate market

About a third of the population of Russia has an average of no more than 9 square meters. m of living space per person. More than 5 million people do not have the means to purchase new housing and are queuing up for an apartment, wanting to get new housing at public expense. Nevertheless, the state is not able to provide housing for all those in need, therefore, the solution of the housing issue for most citizens is moving at an extremely slow pace..

Unfortunately, mortgages are also not available to all citizens for one reason or another. Therefore, the authorities have to look for various alternative options for enabling people to buy a new apartment. One of the proposed options is the draft law “On Construction Savings Banks”, which is based on the experience of SSC in a number of European countries.

The history of the first construction savings banks

Modern technologies for investing in residential real estate all over the world are based on three main principles:

• governmental support;
• mortgage credit lending;
• contract savings.

Of course, in different countries, the methods of implementing certain areas may differ significantly, but the principles are the same. With regard to building savings banks, all such organizations belong to the third group, which is based on the principle of contract savings.

The first systems of contract savings appeared in Prussia in 1783. Later, at the beginning of the 19th century, similar systems of building savings began to appear in other countries and regions (in Austria from 1811, in Saxony from 1843).

The first associations, which served as a prototype for savings banks, began to appear in small mining villages in Germany and they worked according to a simple principle: if for the construction of a house, for example, 100 thousand monetary units were needed, and each of those who wanted to build a house could postpone only 10 thousand, it is obvious that he could build a house only after 10 years. When 10 such applicants were pooled at the same time, one of them could get a new house in a year, the second in 2 years, the third in 3 years, etc. Consequently, all participants win, except for the last one.

Pastor von Bodelschwing

Pastor von Bodelschwing’s first building savings bank was opened in 1885. This direction began to develop actively after the Second World War in 1948. The impetus for their development was the lack of financial resources in post-war Germany, when the housing problems of the population began to be solved with the help of savings banks..

On the territory of Germany, one of the most famous and largest systems of building savings banks still operates..

?In other European countries, the advantage of the building savings system was assessed much later – at the beginning of market reforms. Laws on building savings banks are currently adopted in the Czech Republic, Great Britain, Slovakia, Hungary, France, Croatia, etc. In addition to national ones, German building savings banks also operate in these countries. It should also be noted that modern construction savings banks differ markedly from the first attempts to organize collective savings for housing construction. And it is the construction savings banks that are now the main instrument for investing in residential real estate in Germany. Thus, the construction of 3 out of 4 houses in this country is financed with the participation of collective contractual savings.

In the modern form, SSCs as a source of resources for financing housing loans use deposits of citizens, borrowers’ fees for using the loan and the established state premium, which is paid in accordance with the concluded contract on construction savings, provided that during the year the depositor has contributed to his account specified in contract amount of money.

At the same time, a housing loan in a construction savings bank can only be obtained by its investor and only after the expiration of the time established by the contract (about 5-6 years), if he made monthly deposits to the account in the SSC for the amount specified in the contract. It should be noted here that interest rates (both on deposits and loans) are fixed for the entire duration of the contract.

After receiving a loan from the SSC, its repayment is carried out within the period established by the contract. Typically, the maximum loan maturity in this case is 12 years. At the same time, interest rates are lower than in the case of mortgage lending.

World experience in the application of housing savings systems

Of course, a lot of time has passed since the first building savings banks appeared in Germany. Today, similar building savings systems exist in many countries. According to statistics, almost half of Europeans use construction savings banks to save money for the purchase of housing. As we have already examined with the example of Germany, all depositors enter into an agreement with the savings bank, which sets out all the conditions: the amount of the contribution, interest on deposits and loans, the term of the agreement, etc. The contract is implemented in three phases.

Accumulation.Before receiving a loan for the purchase of an apartment, each member must accumulate a certain amount (a share of the total loan amount established by the agreement).

Getting money and buying an apartment.At this stage, the member of the SSC receives his accumulated money along with interest, as well as a certain amount of the loan, determined by the agreement. Using this money, the investor buys housing.

Loan repayment.According to the terms of the agreement, the borrowed funds are returned to the construction savings bank along with the interest on the loan within the specified period..

The number of participants in the construction savings bank is not limited. Obviously, the financial stability of the entire system depends on the number and regularity of attracting new depositors..

Mass Action. Ivan Pols. 2009

It may seem to some that SSK are like pyramid schemes. But it is not so. The peculiarity of the existing building savings banks, which ensures their stable operation, is that they are completely independent of the capital market: all funds, circulating within the system, form a vicious circle.

It turns out a kind of circulation of money. At the expense of attracted deposits, the cash office issues loans, which are then returned and again sent to lending to other members of the system.

And this flow never stops by attracting new depositors, as the new generation actively uses the opportunities offered by construction savings banks. It should also be noted that in most European countries CCMs are actively supported by the state, which provides depositors with additional housing subsidies (they are also called premiums). For example, in 2000, in the Czech Republic, 0.26% of GDP was allocated from the budget for the payment of state premiums on household deposits in the SSK.

In addition to SSC, working according to the principle described above, in Europe there are several more varieties of such systems. For example, in France, there are 2 types of housing savings accounts:

1. Savings book A), on which you can initially save up to 20 thousand euros and then receive a soft loan for the purchase of an apartment in the amount of up to 30 thousand euros at 3.75% per annum. In addition, a state bonus of 1.5 thousand euros is annually added to this targeted contribution..
2. PEL Savings Accounts (Housing Savings Plan). On such an account, a person can save up to 80 thousand euros, and then receive a preferential housing loan of up to 120 thousand euros at 4.8% per annum.

In the UK, there is a system of building societies, the mechanism of which is somewhat similar to the principle of work of the German SSC, but here, in order to obtain a housing loan, it is not necessary to be an investor in a building society. In recent years, due to the liberalization of British banking legislation, the activities of all construction companies began to overlap more with the activities of commercial banks..

Construction savings banks exist in many countries and, along with mortgage lending, are a tool for solving housing problems of the population..

There are also examples of negative experience with building savings banks. For example, in Argentina, such a system was quite active and successfully operated until the 70s of the XX century. However, due to high inflation, household savings in construction savings banks have sharply and strongly depreciated..

In India, the building savings bank system also crashed. Experts believe that the main reason for this development of events is the lack of effective asset management. In particular, at the initial stage, the SSC did not create cash reserves. In addition, due to illiterate management, disparities arose between the amount of accumulated savings and the volume of loans issued. As a result of these ineffective actions, Indian construction savings banks quickly went bankrupt. Nevertheless, despite individual examples of the negative experience of the SSC, over the several centuries of their existence, they managed to prove their effectiveness and reliability. Construction savings banks exist in many countries and, along with mortgage lending, are a tool for solving housing problems of the population..

Prospects for the formation of construction savings banks in Russia

First of all, it should be said that some kind of building savings banks have been operating in Russia for a long time. Surely many people know such a concept as housing and housing cooperatives. In total, about 30 guilds are currently operating on the territory of Russia in different regions, uniting these cooperatives..

Andrey Gorodnichev. Carpenters (detail)

Unfortunately, in the form in which they now exist, housing cooperatives have not been able to achieve significant success. Even despite the fact that the total number of depositors of such organizations exceeds tens of thousands of people.

The main problem is that these cooperatives operate without government support. And the population does not trust such organizations very much, because there is no reliable legislative base that would strictly regulate their work, which is why scammers often use this.

That is why, back in 2006, representatives of the Fair Russia party submitted for consideration to the Duma a draft of their own draft law “On construction and savings banks”. It is assumed that SSCs will differ significantly from housing cooperatives in both the status and level of control by government agencies.

Features of the draft law “On construction savings banks” submitted to the Russian Duma

It should be noted that this bill has already been submitted to the State Duma of the Russian Federation twice. However, it was rejected and sent for revision. Over the past several years, a whole group of specialists has worked on the document, including representatives of the Bank of Russia, the Ministry of Finance, the Ministry of Economic Development and the Ministry of Regional Development.

According to the project developers, construction savings banks in Russia can be a good alternative to mortgages and should increase the availability of new housing for a wider population.

The bill provides for the creation of specialized banks that will be able to carry out a limited list of banking operations. Each depositor of the construction savings bank will have to conclude a savings accumulation agreement with the bank, providing for the payment of fixed contributions to their savings account in the bank within a certain period.

When the depositor has accumulated about 30-50% of the cost of the apartment, he will be entitled to receive a loan in the amount necessary to purchase a new apartment. The loan term and interest on it will be set in advance in the agreement.

In addition, the bill provides that interest rates on loans should not exceed rates on savings deposits by more than 3% per annum..

In fact, this bill is aimed at creating a new financial institution in the country. Since it clearly states that construction savings banks will receive the status of a bank (financial and credit organization), which will specialize exclusively in attracting money from the population to construction savings deposits and providing targeted loans to their depositors for the purchase of housing.

It is proposed to create a special insurance fund, which will be used in the event of a sharp decrease in the volume of attracted construction savings deposits.

SSC, according to the developed bill, will be able to carry out a very limited range of banking operations. So, they will have access to: attracting deposits from individuals and legal entities, placing attracted deposits in low-risk assets (for example, government bonds), servicing individual accounts, making settlements on behalf of citizens on their bank accounts, selling and buying foreign currency (only in non-cash form), as well as the issuance of bank guarantees. Such restrictions on available transactions are designed to minimize the risks of SSC.

The draft law also contains separate norms to ensure the financial sustainability of building savings banks. For example, it is proposed to create a special insurance fund that will be used in the event of a sharp decrease in the volume of attracted construction savings.

Also, the standards of financial stability, according to the developers of the document, should be based on the calculation of individual cumulative indicators of each individual investor and the determination of the order of investors. Also, additional restrictions on the use of accumulated funds should be established when they are distributed among members of the SSC..

The bill also provides for government support for the construction savings system. The developers have provided for the accrual of a premium on the savings deposit in the amount of 20% of its annual growth, which will be paid from the federal budget. At the same time, for one citizen of Russia, the maximum amount of state awards per year should not exceed 26 thousand rubles..

Supervision over the activities of construction savings banks will be entrusted to the Bank of Russia, which will establish special standards for SSC that differ from the standards for other commercial banks. In addition, so that construction savings banks are completely isolated from the banking and stock markets, interest on both savings deposits and loans will be determined at the conclusion of the agreement. In this case, the building savings bank will not have the right to change the terms of the agreement throughout the entire term of the agreement. The maximum permissible difference between the deposit and credit rates will be set by the Bank of Russia.

How will the formation of SSK affect the domestic real estate market

At the end of February 2012, the Speaker of the Federation Council, Sergei Mironov, announced that the new version of the bill was again submitted to the Duma for consideration. He also noted that the law “On Construction Savings Banks” may come into force in 2013.

How will the adoption of this law affect the domestic residential real estate market??

This law will clearly regulate the activities of building savings banks in Russia. This will help us get a working tool that allows the population to save up for new housing. The adoption of the law is a responsible and necessary step, as a legislative base will appear that can protect the rights of people and make the system of construction savings completely transparent.

The advantage of SSC is that due to the fact that all financial flows circulate within the system, it becomes possible to set low interest rates (noticeably lower than on mortgages). At the same time, rates do not depend on fluctuations in the financial market and cannot change throughout the entire term of the contract with the construction savings bank..

It is obvious that the creation of an SSK in Russia will become an alternative to mortgage lending and will enable citizens who do not have funds for an initial mortgage payment to accumulate the necessary amount in a construction savings bank, and then buy new housing on credit.

In addition, their creation should have a favorable effect on the overall development of the residential real estate market: the money collected by the SSC will be used to finance new construction. Consequently, the volumes of new housing to be commissioned will grow, and prices on the market will stabilize..

The principle of operation of mortgages and SSCs is completely different, therefore, their clients will be different. Consequently, these institutions are unlikely to become serious competitors..

As for mortgage banks, they should not be afraid of serious competition from building savings banks. They can peacefully coexist and work together. As a rule, in countries where SSCs have existed for a long time and have been working effectively, the personal housing savings of the population account for about 30%, another 30% of citizens invest in SSCs, and the remaining 40% falls on mortgage lending.

The principle of operation of mortgages and SSCs is completely different, therefore, their clients will be different. Consequently, these institutions are unlikely to become serious competitors. It’s just that the system of construction savings banks will expand the possibilities of citizens and provide an opportunity to buy housing for those for whom a mortgage is currently not available.

In conclusion, I would like to say that in any case, the efficiency and stability of the construction savings banks will depend on the accuracy of compliance with the law and government support. As the world experience confirms, the FCS system simply cannot acquire a mass character without serious support from the authorities..