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House prices in Russia’s secondary real estate market skyrocketed nearly 500% between 2000 and 2007 in one of the country’s largest booms, but the global financial crisis eroded these gains as much there as everywhere else and only now are things beginning to stabilize. One large part of the stabilization story is occurring in Moscow where property prices increased by 3.86% in the first quarter of 2012, while in St. Petersburg, Russia’s second-largest city, prices were down by nearly 5% during the same period when adjusted for inflation. For more on this continue reading the following article from Global Property Guide.

During the year to end-Q1 2012, the price index for all resale apartments in Russia rose by 7.88% (3.86% inflation-adjusted), the fastest annual growth since Q1 2009, based on figures released by the Federal State Statistics Service (Rosstat).

In Moscow, the capital, the price index for resale apartments increased by 4.02% (0.15% inflation-adjusted) in Q1 2012 from the same period last year.

On the other hand, in St. Petersburg, the country’s second largest city, the price index for resale apartments dropped by 0.74% (-4.43% inflation-adjusted) over the same period.

Russia had a massive housing boom from 2000 to 2007, with secondary market prices skyrocketing by 436% while primary market prices rose 362%.  Property prices started to weaken in late-2008, and began falling in the second quarter of 2009.  During 2011, the average price of new apartments dropped 9.3% to RUB43,686 (US$1,347) per square meter (sq. m.), 16.8% down on the peak of RUB52,504 (US$1,619) per sq. m. seen in 2008.   Likewise, the average price of apartments in the secondary market dropped by 19.6% to RUB48,243 (US$1,488) per sq. m. by end-2011.

In 2011, the total area of residential housing constructed in Russia increased 6.7% to 62.3 million sq. m. from the previous year, based on figures from Rosstat. The total area of housing stock in the country was about 3.3 billion sq. m. in 2011.

According to the Land Code of 2001, private ownership of land properties is allowed for both locals and foreigners. The legislation was extended to Moscow in January 2006.

Russia’s massive housing boom (1998 -2007)

From 2000 to 2007, prices in Russia’s secondary market rose 436%, while primary market prices rose 362%.

  • The Central Federal District (FD), which includes Moscow, registered the highest secondary market house price increases from 2000 to 2007, at 589%. Primary market prices rose 345% over the same period.
  • In Northwestern FD, which includes St. Petersburg, house prices rose the least from 2000 to 2007: 338% for the secondary market and 293% for the primary market.
  • In the primary market, Urals FD (593%), Siberian FD (507%), and Far Eastern FD (400%) experienced the fastest house price increases from 2000 to 2007. The increased mineral and fuel extraction from these districts partly explains the large price increases.

Despite the house price falls during the last 4 quarters, the ratio between per square metre prices and GDP per capita in Russia is still one of the highest in the world – always a danger signal.

 

 
SECONDARY MARKET
PRIMARY MARKET
 
CHANGE IN HOUSE PRICE (%)
CHANGE IN HOUSE PRICE (%)
 
2000-2007
2007
2008
2000-2007
2007
2008
RUSSIA
435.8
20.6
15.3
362.0
23.4
10.3
Central FD
589.3
12.2
19.1
344.7
19.9
11.6
Northwestern FD
391.8
21.1
19.2
334.0
21.9
11.4
Southern FD
337.9
34.2
21.9
293.4
31.4
21.5
Far Eastern FD
410.1
30.4
21.9
279.9
17.1
21.9
Urals FD
486.7
20.9
6.2
507.0
15.7
6.2
Siberian FD
567.3
41.4
7.0
592.7
34.9
7.0
Volga FD
419.7
24.7
7.1
400.5
29.9
7.1
Source:Rosstat


Rents stabilizing, but gross yields are down

The Russian elite rental market is already stabilizing. In March 2010, the average rent for elite apartments with a total area of 80 sq. m. to 150 sq. m. was US$6,615 (RUB201,548) per month, almost the same as last year, according to Knight Frank, though during this period supply grew 12.6%.

In June 2009, gross rental yields in Moscow’s upper-end areas were only 3.41%, on average – 1.62% lower than a year ago, according to Global Property Guide research. On the other hand, St. Petersburg apartments generate higher yields at around 6.9%, on average, though still lower by 1.57% than a year ago.

Moscow is among the world’s most expensive cities to live in for expatriates, according to the 2009 Mercer Cost of Living Survey. Rent payments are commonly in US dollars or euros, which can be paid on a monthly or quarterly basis.

Interest rates are falling

Average interest rates for ruble and foreign currency-denominated housing loans fell to 13.9% and 11.1%, respectively, in the first quarter of 2010. The central bank left its main interest rates unchanged in June 2010 – a signal after 14 consecutive months of interest rate cuts.

Mortgage market is now getting state aid

Most Russian banks stopped making loans during the crisis, while others dramatically raised interest rates. Total outstanding housing loans fell 6.5% during the year-to-end-Q1 2010. 83% of these were in rubles, the remaining 17% in foreign currency.

Only 14% of homes were bought using mortgages in 2007, and 26% of purchases of newly-constructed apartments, mostly higher-end homes. 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 reserve dollars days in advance.

Prime Minister Vladimir Putin has pledged to lower mortgage interest rates and down payments. In 2006, laws underpinning mortgage-backed securities were introduced, allowing banks to refinance housing loans for the first time. The state has now promised to provide financial aid totaling US$8.3 billion (RUB250 billion) to commercial banks to facilitate housing loans.

Modest economic growth in 2012

In the second quarter of 2012, the Russian economy grew by a healthy 4%, but it was down from a GDP growth of 4.9% registered in the first quarter of 2012, according to the Federal State Statistics Agency (Rosstat).

Russia’s GDP is projected to grow by 4% in 2012, after annual growth of 4.3% in 2010 and 2011, according to the IMF.  The European Bank for Reconstruction and Development (EBRD) is less optimistic, predicting real GDP growth of 3.1% in 2012, with the eurozone crisis and lower commodity prices are expected to dampen growth in the country.

The country fell deep into recession in 2009, with GDP contracting 7.8%, after global energy prices dropped. It was Russia’s deepest recession in 15 years, after robust economic growth from 1999 to 2008 (average GDP growth of 6.8% p.a.) thanks to booming energy and commodities revenues.

Unemployment never became a serious problem. In fact, Russia’s unemployment rate has been on a persistent downward trend, from over 9% in January 2010 to around 5.5% in June 2012. However, the unemployment rate in the country’s Federal Districts remains highly differentiated, varying from about 3.2% in Central Federal District to 13.2% in North Caucasus Federal District, according to Rosstat. The lowest city unemployment rates in June 2012 were in Moscow (0.8%) and St. Petersburg (1.1%).

In June 2012, the country’s annual inflation rate was 4.3%, far below the average inflation rate of 11% from 2003 to 2011. However, consumer price rises are expected to accelerate and could exceed the central bank’s target of 6% by end-2012, due to regulated tariff increases in July 2012 and the impact of the depreciation of the ruble on import prices.

This article was republished with permission from Global Property Guide.