The extent to which Moscow real estate prices have subsided since their peak depends largely on what currency buyers and sellers are thinking in terms of, with analysts divided in their views on the outlook.
After a three year property boom, fuelled by a buoyant economy, crude prices which reached a peak in July 2008, and a population boom which has some experts quoting Moscow’s population well above its official census of 12 million, the last 6 months have been like a bucket of ice water on Moscow’s property investors.
Prices Down: But by how much?
The impact of the global financial crisis on the nascent Russian mortgage lending market, the economic downturn which has followed, coupled with the slump in prices for most of Russia’s commodity exports, have combined to push prices lower. Although the extent to which they have dropped is a matter of debate.
With widespread reports of a major slump, Dmitry Taganov, Head of the Analytical centre at Incom says most of the fall stems from the devaluation of the Russian Rouble against the U.S. dollar in the last quarter of 2008 and first quarter of 2009. He says that falls when expressed in Rouble terms have been much less.
“The whole world today says the price for accommodation in Russia has fallen, which is absolutely wrong. In fact, we do have a drop of about 30% in dollar terms. But we should remember that in our country all payments are effected in Roubles. So, with the Rouble devaluation of those 25% – 30% mentioned, we have just a slight fall of 1-2% in Rouble terms which is natural after the pick we had last August.”
Vladislav Lutskov, CEO of Analytical Consulting Centre MIEL is seeing a bigger fall in Rouble terms for existing apartments, but is drawing a clear distinction between what is happening with this (the secondary) housing market, and what is happening in the primary market for newly constructed homes.
“In fact, the situation in primary and secondary housing markets differs. Rouble prices for new apartments in Moscow haven't changed much since the beginning of the crisis – rising only 4% – whereas existing homes have become almost 12% cheaper. This figure includes homes of different quality. So, prices for cheap homes have fallen the most, down 11.3%, and standard housing and premium housing falling less.”
Lutskov also notes that the extent of price falls varies between Moscow regions, with regions such as the Zelenogradsky administrative area down 16.5% on average, areas close to the Moscow Ring Road (MKAD) such as Brateevo and Solntsevo down 13% and 14% respectively, and the declines being much less in areas closer to the centre. Despite the falls in prices, he notes that prospective sellers aren’t taking their apartments off the market, with numbers of existing apartments for sale at a 2 year high, and new apartment numbers for sale remaining steady.
“The fall in prices for existing homes didn't make sellers take their apartments off the market. Quite the opposite, the supply today is the biggest in two years, with currently about 47000 flats on sale. As for primary market, the volume of supply has remained stable since the beginning of the crisis with between 295-310 thousand new homes available.”
Lutskov isn’t expecting a rapid recovery in housing demand and prices, but believes the outlook will become clearer later in the summer. Dmitry Taganov, from Incom also believes that the number of apartments changing hands is relatively stable, and expected to remain so for the short term.
“As for the number of new contracts, it has become stable now after the growth in the first quarter. Today it's neither falling nor growing and we expect the same situation till mid summer.”
Data from the Federal Registration Service indicates that sales contracts for apartments increased from 4626 in January-February 2009 to 9124 in March-April. Interpretations of this tend to fall into two clear groups. On the one hand there are those seeing buyers looking to get into the market before it picks up again, and others seeing a rise in ‘alternative’ contracts – swapping apartments, in largely non cash transactions, by those searching for cheaper accommodation.
Mortgage Availability
A key factor is the availability of mortgages. Prior to the downturn an estimated 20-25% of property transactions across Moscow involved mortgages, with the figure rising to as high as 80% in some regions.
Its here that the credit crunch has had a major impact with the number of mortgages being made available, as well as being sought, falling in the new year. A number of lenders have stopped making available loans to prospective applicants, reflecting their difficulties on accessing funding, as global lending markets dried up. Coupled with this has been the major impact on the financing of major property developers, making some lenders more wary of lending for properties on the primary market. Tamara Polyanitsina, a senior Vice President of Rosbank, believes that underlying demand remains, but that the capacity of banks to offer loans, and worries on the part of applicants about the economic outlook are key factors.
“Today Rosbank, as well as most other banks, has ceased giving mortgage loans for new homes. We give loans for the purchase of existing homes but uncertainty is still there in both markets. Of course, one of the main problems today is people’s uncertainty about their future income. But still there are people with money, solvent demand remains.”
Mikhail Shlemov, banking sector analyst for VTB Capital, says demand for loans for primary housing fell in 1Q 2009. He says tightened lending standards from those banks still making loans at available prices, coupled with the economic outlook, and prices which are still relatively high have contributed to the downturn.
“Actually, there are three main reasons for the fall in the number of given mortgage loans. Firstly, it's a higher price for primary housing. Far less people today can afford a new apartment at such high prices. Now banks are mostly involved in working with the contracts concluded before the crisis. Secondly, the initial installment has risen significantly – to around 30% of the total sum in many cases. This increase is a part of the tighter monetary policy of the Russia's Central Bank. It has raised the interest rate in an attempt to fight inflation. As a result, the cost of funding itself has increased significantly, pushing the credit rate up. Thirdly, there’s the decline in peoples' income. This factor has a dual nature. On the one hand, it reduces natural capacity of people in the street to buy flats. On the other, it makes banks more cautious. They have introduced various measures to be sure they get money back, such as more stringent income assessments for applicants.”
The Outlook
The outlook for prices is expected to reflect the wider economy, with an economic rebound expected to drive prices higher, but further signs of a protracted economic downturn likely to see further falls in property prices. The latter view is giving rise in some quarters to thoughts of a ‘second bottom’ for the housing market, with potential for prices to fall further should the economic outlook deteriorate. Support for this view stems largely from the slump in energy prices (which account for the bulk of Russia’s export earnings) and the value of the Rouble to levels last seen about 3-4 years ago, when housing prices were significantly cheaper.
Those disagreeing with the theory note that changes in the market since the early 2000’s, with the focus turning away from new apartments (which have declined from 70% of the housing sector to about 30% now) towards the secondary market, and the change in new apartment construction from cheaper accommodation to premium quality apartments, means that there is unlikely to be major further falls. Tamara Polyanitsina from Rosbank, agrees that some potential buyers are waiting to see if prices fall further, but she thinks another key factor is potential sales by cash strapped property developers to State organizations change the supply balance in the wider market.
“Some are just waiting for that much debated second bottom in house prices. Whether the prices will go down or remain at the existing level depends on the supply. Currently, Russia’s biggest construction companies like PIK, Glavstroy or SU-155, for example, are holding talks with Government, namely the Ministry of Defense and the Regional Development Ministry. If construction companies do sell their stock of ready apartments to Government, the number of flats on sale will be much lower with the demand remaining the same or even going up.”
RT Business: James Blake, Anastasia Kostomarova