Massive housing boom in Russia

The house price boom continues in Russia, though there are signs of a slowdown, similar to other countries in Europe.

In prime-central Moscow, the average price of new build residential properties rose to US$17,937 per sq. m. in 2007, 42.8% up on a year earlier. However, the increase was lower than the 68% price rise seen in 2006, according to Knight Frank.

The average price of existing properties rose from US$15,387 per sq. m. in 2006 to US$19,307 per sq. m. in 2007, a mere 25.5% increase. It is a far cry from the price increase of 73.6% in 2006.

A slowdown in house price rises was also observed in St. Petersburg. Annual house price growth for existing apartments dropped from 53.2% in 2006 to 42.2% in 2007. New build units registered 36.4% price increase in 2007, sharply down from 2006’s 112% increase.

Over-all house prices are expected to rise by about 9% to 10% in Moscow in 2008, while St. Petersburg will continue to boom with 20% house price growth.

Regional growth

Enormous house price increases have been observed across Russia since 1998, according to figures from Rosstat, the national statistical agency.

In 2006, residential prices in Russia’s secondary market (re-sale properties) rose 54.4% y-o-y, while prices in the primary market (new build properties) rose 48%. From 2000 to 2006, prices in the secondary market have risen 344%, while primary market prices have risen 274%.

The Central Federal District (FD) which includes Moscow, registered the highest secondary market house price increases from 2000 to 2006, at 514%. Primary market prices rose 271% over the same period.

House prices in the Northwestern FD, which includes St. Petersburg, rose the least from 2000 to 2006, 226% for the secondary market and 200% for the primary market, still very impressive amount.

In the primary market, Siberian FD, Urals FD and Far Eastern FD experienced the fastest house price increases. The increased amount of mineral and fuel extraction from these districts partly explains the huge price increases.

While central Moscow prices may have room for further growth, prices in the provinces are pushing against affordability limits, experts believe. The ratio between per square metre prices and GDP per capita in Russia is one of the highest in the world – always a danger signal.

Commodities and fuel boom

While countries around the world are up in arms about skyrocketing fuel and commodity prices, Russia is benefiting from them. Russia has the world's largest natural gas reserves, the 2nd largest coal reserves and the 8th largest oil reserves. It is the world's leading natural gas exporter and the second leading oil exporter. In 2007, it was the world’s top oil producer, overtaking Saudi Arabia.

Russia also has huge amounts of mineral reserves including platinum, nickel, aluminum, iron ore, copper gold and diamond. Oil, natural gas, metals, and timber account for more than 80% of Russian exports abroad. Revenues from oil and gas account for 50% of Russia’s budget.

The huge impact is visible in Russia’s economy, which expanded by 8.1% in 2007, up from 7.4% in 2006, and the highest annual growth since 2000. Average annual GDP growth from 1999 to 2006 was 6.8%. Real GDP per capita increased from US$1,834 in 1998 to US$9,075 in 2007.

Another factor that contributed to the housing boom has been the privatization of state-owned housing units. Owner-occupancy rose from 41% in 1995 to 70% in 2004. About 94% of households received their units free of charge.

In 2006, the new Russian Housing Code gave owners full responsibility over the maintenance of their property.

Lack of supply

The increase in demand, however, was not matched with an increase in supply, and this has led to higher property prices. New dwellings completed fell sharply in the late-1990s. From 1986 to 1990, around 800,000 dwellings are completed yearly. In 1990, more than one million apartments were completed, but from 1996 to 2004, less than 500,000 apartments were constructed yearly.

It was only in 2006 that new apartments constructed exceeded 600,000.

The majority of Russians live in ageing Soviet-era housing stock, particularly outside the main cities. More than half of these units are badly in need of repairs. Most have not been repaired in 40 to 50 years.

The lack of supply is more evident in major cities such as Moscow and St Petersburg. There are even accusations that developers are concealing new supply in anticipation of higher prices.

Mortgage woes

Russia’s mortgage market is still in its infancy at 2.3% of GDP, although it is rapidly expanding. The mortgage market grew to US$30 billion in 2007, up 140% from a year earlier.

With only 10% - 15% financed by banks, most real estate transactions are done in cash and paid in full with US dollars. Buyers and sellers use banks simply to avoid being mugged while exchanging wads of dollar bills. Buyers also have to reserve dollars days in advance.

The development of the mortgage market is hindered by inadequate legislation, immature financial markets, and lack of unified market standards. Two state banks hold about 52% of the mortgage market in 2007, Sberbank with 39.7% share and VTB Bank with 12%.

In 2006, laws underpinning mortgage-backed securities were introduced, allowing banks to refinance housing loans for the first time.

Bribery, risks

Getting permits for renovation and everything else also almost always involves bribes. This is a highly corruption prone country, and the environment makes no-one’s life easy.

Given the extent of bureaucracy in Russia, buying land is also not easy. One problem is the system of land registration. Changes in law and transfer of ownership are not well documented. Title search must be conducted to ensure that there is no lien in the property.

In turn this creates a fundamental insecurity for owners. Predatory mafia-like groups make a business of launching attacks on private owners, liaising with corrupt municipality officials and corrupt land registry officials to dispossess the rightful owners.

Real estate transactions, purchases or leases, in Russia are quoted and paid in US dollars. This creates another concern because property prices and rents move not because the value of the property changed but simply because the ruble has appreciated or depreciated.

All these dangers tend to restrict the supply of new units, raising prices and rents.