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Prices for Moscow Apartments Skyrocketing

The first quarter of 2006 saw a price hike of 15% to 20% per sq. m of living floor space in a Moscow apartment. The price rise for March, according to analysis center IRN.ru, was 7.5%. The hike for April was an all-time record high of 10% - a jump the Moscow real estate market had never seen throughout its 15-year history.

What is causing the snowballing of the cost of living accommodation in Moscow?

Some of the main causes of soaring prices are objective ones: Compared with last year, supply on the primary market has dropped by nearly 30% due to greater solvent demand and to a shortage of suitable construction sites (especially in downtown Moscow). Furthermore, developers face tougher government regulations: The law on shared construction projects adopted a year ago has drastically slashed the market for newly built quarters.

The present real estate boom, however, is largely due to subjective factors. Looking at their competitors, developers and sellers whip up their prices for fear of missing extra gains, while investors snap up living quarters ahead of another round of price hikes in order to sell their acquisitions for double the price later. Gennady Sternik, head of analysis at MIEL-Real Estate, sees nothing reprehensible in that. "All players on the real estate market keep a watchful eye on each other," Sternik says. "Do you think that electronics or automobile corporations worldwide don't behave in the same way? They aren't making any secret deals. This is a marketplace."

The authorities, however, have a different opinion. In March, Sergei Kruglik, head of the Federal Agency for Construction and for Housing and Communal Services (or Rosstroi), promised within four to six weeks to analyze the market from the standpoint of speculative demand and to figure out the percentage of apartments that are bought for immediate resale. Special taxes are to be slapped on such traders. Specifically, their earnings from the resale of an apartment will be subject to high taxes, thereby making the speculative purchase of apartments unprofitable.

Soaring prices are gainful for objective reasons to certain market players, namely, developers. In 2004, when real estate prices froze, the construction market began to crumble as building companies went broke. The result was a shortage of supply. Consequently, prices began to soar from the second half of 2005. Now that they are making super profits, developers are investing in construction; for example, they are beginning to complete their formerly frozen building projects. By so doing, they will save the market, Gennady Sternik says.

Still, there are far more people and entities that don't like the present situation in the real estate market. Mortgagees stand to lose: When buyers come to the seller every day and offer him hard cash, he finds it unprofitable to wait for mortgagors, as it would take them a long time to complete all the paperwork for the mortgage.

Strange as it may seem, realtors too are losers - they lose their "string" or alternative deals in which two or three clients participate. It takes time to arrange a string of apartment exchanges that will suit all the clients involved. If we had a normal market, one without frantic demand and convulsive price jumps, a realtor would have been able to cope with such a task within just four to six weeks. In the prevailing situation, no seller of an apartment will wait for the realtor to arrange a string of exchanges. As a result, according to Sternik's estimates, the proportion of string transactions has dropped from 60%-80% to 20%-30%.

The biggest loser in this situation are the buyers. Many people give up hope of resolving their apartment problems when they look at the prices. Still, according to Oleg Repchenko, CEO of the analysis center IRN.ru, the majority of clients do not buy apartments for cash; they exchange their old apartments for new ones. Accordingly, the prices of both apartments go up - the one that one has and the one that one wants to have. Repchenko says that although a slowdown of price growth is most likely to happen toward summer, a square meter of floor space will not cost less than $3,000. The market is inert. Even if many new apartment buildings suddenly mushroom and supply increases sharply, a tangible correction in prices will happen not earlier than toward next year. Even if prices do decline toward summer, it will be easier to transact an alternative deal.

Sternik too expects a slower rise in prices in the second half of this year "until the market stabilizes completely." The prices of real estate in Moscow, however, will surge 20% to 25% over the next two or three years. Yet there is an alternative to buying an overvalued Moscow apartment. Those who do not like to live in a megapolis are finding a place to live in the countryside around Moscow. According to the head of IRN.ru, good housing is available for $1,000 per sq. m. Moreover, access to transport facilities can be no worse than in a number of Moscow districts located beyond the Moscow Ring Road.

Repchenko cites as an example the housing estate in Aprelevka, from where you can get to the Yugo-Zapadnaya metro station in 20 minutes via Kievskoye Highway. "It takes as long to travel from Peredelkino to Yugo-Zapadnaya, yet housing costs twice as much in Peredelkino," he adds.

The tendency to move to cheaper, quieter, and ecologically cleaner places has long been observed in all megapolises around the world. Evidently, Moscow is no exception.

The Moscow News, 2006-17-14

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