The Scale, Determinants, and Trends of the Informal Housing Rental Market

Abstract

The rental housing market in Russia is becoming an increasingly important component of the national housing system and can no longer be viewed as a secondary or marginal segment of the real estate sector. It fulfills a number of important socioeconomic functions, including promoting labor mobility, providing flexibility in ­housing choices, and offsetting the decline in the affordability of home ownership. In recent years, the role of rental housing has grown as a result of a combination of factors, including rising real estate prices, tighter mortgage lending conditions, and growing household demand for more flexible housing solutions. As homeownership becomes less accessible to a significant portion of the population, renting is increasingly viewed not as a temporary alternative but as a necessary and long-term housing strategy. At the same time, a significant portion of rental transactions in Russia takes place informally, outside the legal and tax framework. The shadow rental market refers to the conclusion of residential lease agreements without written physical documents, tax returns, or official registration. All of this significantly reduces the transparency of the housing market, prevents the collection of accurate statistics, narrows the tax base, and weakens the legal protection of all parties to the lease. This is particularly acute in the economy-class rental segment, where gray-market transactions predominate due to lower average rent payments, a desire to avoid associated costs, and limited incentives to follow official procedures. Drawing on official housing market statistics and academic research, the study identifies the main challenges and drivers of the shadow rental housing market. These include the perceived tax burden on landlords, the administrative complexity of drafting lease agreements, insufficient legal safeguards, limited enforcement of contracts, and low levels of trust in government institutions. Particular attention is paid to the dynamics of the housing market: changes in rental rates, an increase in the number of apartment rental listings, and a decline in mortgage lending volumes. Nevertheless, there is very little official data on the rental market, as a significant share of lease agreements remains in the shadow economy. All of this creates significant risks for both parties: landlords face major difficulties in recovering their losses from damage to the rented property and in collecting regular rent payments, while tenants remain vulnerable to early eviction, unagreed rent increases, and the lack of guarantees regarding continued occupancy of the rented property. The paper also examines international practices aimed at combating the informal rental market. The examples cited from Ireland, England and Wales, as well as a number of OECD countries, show that the most successful method for bringing rental transactions out of the shadow market is when governments combine simplified compliance procedures with tangible legal and financial benefits. The most effective tools of such a policy include: mandatory but user-friendly digital registration of lease agreements, an accessible and understandable system for planning and accounting for rent, the development of schemes to protect security deposits, and simplified tax regimes. Based on this analysis, the paper proposes a set of policy measures for Russia. These include the introduction of a simplified electronic system for registering lease agreements, the creation of a state-supported digital platform for housing rentals, legal advantages for registered agreements, strengthened protection of tenants’ and landlords’ rights, as well as tax incentives encouraging formal participation in the rental market. The findings indicate that the legalization of the rental sector should be approached as a comprehensive institutional reform, rather than merely as a measure to ensure compliance with tax legislation. To reduce the scale of informal activity in the rental sector, increase market transparency, strengthen legal certainty, and support the sustainable development of the residential rental sector in Russia, a balanced combination of regulatory, fiscal, and digital tools is necessary.