By Lev Sergeev, Anastasia Bakhur and Alexander Marrow

MOSCOW (Reuters) – Soaring borrowing costs are cooling demand in Russia's real estate market, with potential buyers scared off by mortgage rates of up to 30%, which is in turn fuelling a rental market boom and driving up prices there as well.

The central bank is widely expected to hike its benchmark interest rate from 21% to 23% or higher when it meets on Friday, a move that would put even more financial strain on some mortgageholders.

"Buying housing now is definitely unprofitable," said student Sergei Shoreshorin, hoping for an improvement that might one day mean he can buy his own home. "But at the moment the next one-, two-year outlook is dismal to be honest."

While high interest rates usually deter people from taking out mortgages, a Russian subsidised mortgage scheme launched during the COVID-19 pandemic, when the central bank's key rate was around 4.5%, had given demand a boost.

Subsidised lending has been rolled back since July, however, with only IT workers, families with young children and buyers in Russia's far east still eligible.

They can access loans paying interest rates of just 2% to 6%, with the state covering the rest.

High interest rates for hopeful buyers outside those categories are creating a barrier to entry, said Alexei Lipin, director of Sberbank's Domclick real estate service.

Nationwide mortgage issuance in 2024 will be 5 trillion roubles ($48.4 billion), according to Domclick, well down from the record 7.8 trillion roubles recorded in 2023 but still high relative to the last decade.

For some the only option is to rent.

Demand in the rental market is breaking records, Domclick said in a report on Wednesday, with the median rental cost per square metre up by 17.3% this year.

Renting can be highly competitive with prospective tenants having to pay for months of rent up front to secure an apartment or pay an entry fee.

"I plan to rent an apartment but it's a bit of a mess right now," said factory worker Grigory Zakuraev. "A mortgage is not an option at all. There are some prohibitive interest rates right now."

Average mortgage rates offered by banks are 23.03%, according to an index of more than 100 lenders maintained by Banki.ru, with some lenders offering rates as high as 31%. However, 70% of all mortgage loans are issued at subsidised rates, according to central bank data.

With fewer than 0.1% of all mortgage loans at floating rates, according to central bank data, only those seeking mortgages now face the prospect of exorbitant rates. Most borrowers are on long, fixed-term contracts.

High rates have scared off buyers but demand for mortgages remains when only a little money is needed, real estate agent Tatiana Ugai told Reuters.

"In slang, this is called an 'alternative deal'," Ugai said, where someone is upsizing and only needs a small loan to buy a larger place.

There are buyers, too, according to Ugai, but only those flush with cash.

"In 2024 very many deals were with people who work in the IT industry," Ugai said. "I met many of them in 2024."

Real wages have risen across Russia, largely due to soaring salaries in the defence sector and technology roles. But for many, wages have not kept pace with inflation, which is running at more than 9%.

"I'm outraged, honestly, I'm outraged because house prices are rising but wages are not," said marketing specialist Ksenia, who declined to give her surname and is resigned to the fact that she will need to save millions more roubles before being able to buy.

"It has become very difficult to buy an apartment with a mortgage because if you are not an IT worker, you have no family and you just want to buy an apartment, you look at these interest rates and just think: Rent."

($1 = 103.4000 roubles)