Moscow house prices continue to rise

Real estate prices, especially housing prices, have been gaining pace in Moscow since last year's hike, contrary to predictions that the market would slow down in 2004. One square metre of residential space is now selling at a record-high $1,600, on average. Few European capitals can rival this figure.

In 2003, Moscow's real estate market grew by 40%. Financial forecasts made at the end of last year were quite comforting; they promised that the leap would be followed by a period of stability, with the prices climbing up at a rate of under 20%.

However, the trend continued into 2004, making specialists jittery and fearful of a new financial collapse looming on the horizon. Even Economic Development & Trade Minister German Gref publicly expressed his alarm over the ongoing price rise in February.

Talk about an imminent bubble burst on Moscow's real estate market has gradually subsided. Local banks are continuing to open mortgage programmes, and estate agents' morale is running high.

A detailed analysis shows that the current situation is more complicated than it seems, and may even be considered typical for a rapidly developing economy overcoming numerous problems. The Russian market can be compared, at its present stage, to a recuperating patient who takes pleasure in subjecting his still-weak body to all kinds of stress.

The growing oil prices and the weakening dollar are two key macroeconomic factors behind the current boom on Moscow's real estate market. The inflow of petrodollars is too large for the Russian economy to digest. Both Gref and the Central Bank's top officials acknowledge that Russia has too few financial instruments at its disposal, and is short of investment ideas. This leaves holders of "hot" money with just two options-they either can take it to the stock exchange or to the real estate market.

According to experts, about one third of all the money circulating on Moscow's real estate market has been brought in by petroleum sales. A drop in the world oil prices may cause the local housing market to collapse.

As for the weakening US currency, many small Russian investors now are trying to get rid of their dollars by putting them into the real estate market. Investments in housing yielded greater profit last year than bank deposits, unit investment trusts, and the purchase of metal values. Speculative transactions in real estate trade have grown sharply, and their overall value now accounts for up to 30% of the total amount of capital. Housing is sold even before the foundations are laid and once commissioned will go at double its original price.

Why worry? Some may pose this question, reasoning that the flow of capital into the real estate market will boost the development of the construction industry and that supply and demand will eventually reach a balance, making prices stabilise. This would be the case in a perfect world. In reality, however, a whole number of economic constraints come into play. Thus, for instance, the Russian capital has a huge demand for housing, which may take decades to fully satisfy. Sociologists have estimated that Moscow's per capita share of housing stands at a mere 18 square metres today. In large European cities this figure is 40 metres, on average. Every other Moscow resident wants to improve his/her housing conditions. Another factor is the ever-growing influx of migrants from the Russian provinces, as it has always been prestigious to live in the capital. All of them will, too, need somewhere to live.

Yet another constraint is Moscow authorities' welfare policies. A great deal of cheap housing is now being constructed for low-income families. Municipal housing projects are largely funded from the pockets of those who buy commercial housing. As a result, cheap housing, which many Muscovites could afford, never reaches the market while expensive real estate is offered at marked-up prices.

In addition, there is not much vacant land left for development projects in Moscow. The erection of a new building in developed districts is usually much more expensive than the development of wasteland, as the former involves the demolition of run-down structures, the accommodation of their tenants in alternative housing, and compensation payments to those living in nearby houses. Naturally, all these costs make the sale price higher still. Other factors compounding the situation on the Moscow housing market include the relatively high inflation rate and the city authorities' alleged monopoly on the construction business.

It is anyone's guess where the Moscow's real estate market will end up in two or three years' time, as its development is under the influence of too many contradictory trends. The federal government is worried, but estate agents are upbeat. The latter are certain that their business will continue to prosper even if oil prices plummet and the dollar picks up. They say that for the Russian housing market to collapse, world oil prices will have to drop to 15-16 dollars per barrel and stay at that level for a few years, which is a highly unlikely scenario. And even if that happens, they claim, house prices may just go down a little or stop growing for a while, but the market will survive.

As for the federal government, it will have to think of how to diversify financial instruments for investors. It may be examining its options already, but alternative financial instruments are unlikely to appear any any time soon. This means that Moscow housing prices will continue to climb in the months ahead.

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