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Real estate market: selling at all costs and at any cost

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Real estate market: selling at all costs and at any cost

Should we expect the real property market condition to improve?

The real property market is a very sensitive instrument for the processes taking place in the economy and in the country on the whole. In 2016 it showed that the condition of the sector is far from being good.  The crisis, despite not becoming too stormy, still made the situation unsteady. And we cannot see signs of improvement just yet. 

For a rainy day

The real property market does not exist separately: it is closely connected with the general condition of the economy. In 2016 it was not the best one. The GDP reduced by almost 0.7%, the population’s incomes fell by 5.5% and the official inflation was 5.4%.

Such macroeconomical statistics seriously change people’s consumption behaviour: they spend less and save for a rainy day. In turn, this influences the construction complex – customers buy less of its production, and construction lacks finance.

Besides basic factors, there are temporary ones impacting the market over short periods of time. This was rather noticeable in 2016.

Real estate market: selling at all costs and at any cost

 According to Gennady Sternik, Chairman of the Committee for analytics of the Moscow realtors’ association, due to the subsidising of mortgages, there was a sales pick up in the first quarter. 

In the 2nd quarter people were stimulated with some economic steadiness. In the third quarter there were a lot of migrants among buyers who had almost fully left the market in the beginning of the year. And at the end of the year there was a traditional growth in purchasing, especially in December.

There won’t be any fall

However, all this could not reverse the situation and last year the proposal surpassed the demand, on the whole.  According to the analyst, any crucial change is not likely in 2017. The proposal will decrease because the number of new buildings is being reduced, and the demand will fall as the population’s incomes do not grow.

Competent authorities agree on the opinion of an independent expert.

The Russian Ministry of Construction, Housing and Utilities issued their forecast in which they decreased the housing commissioning by 12,9% for 2017—2020.

The current situation is hard for the construction complex. The average yield of the construction projects’ realisation on the market is only 4%, with many construction companies being in the negative zone, meaning that some developers will leave the market. 

The market is getting more divided and at the same time massed in the hands of large players. On the one hand, it is becoming more reliable and predictable and, on the other hand, the monopolisation has always had well known negative consequences. 

Regardless, analysts agree that the sharp fall does not threaten the market in the current year, but a slow decrease is likely. According to Gennady Sternik, the situation may get worse because the present decrease of the new construction volumes will lead to offer reduction in a year or two. And this, in turn, will trigger the realty price growth.

More and more of those selling, fewer of those who want to buy

The crisis also resulted in the sharp reduction of the secondary realty market. At the beginning of the year, sales growth was registered connected with the dollar rate growth: people invested their dollar savings in real property.  But later the process stopped and the balance [?] reduced by 5%, on the whole, to 9,928,000 roubles. 

In 2016, the sales of the flats costing less than 6m roubles increased at the expense of the 1-room flats realisation growth. Housing sales ranging from 6m to 9m roubles and higher decreased.

— On the whole, customers prefer to buy inexpensive real property now, — Oksana Vitiazeva, Head of the research department of the MIEL company.

Following her statement, in 2016 two-room flats were the most demanded, and their price went down the least of all, by 4%. However, one-room and three-room flats went cheaper, by 7%.

Additionally, in 2014 the number of calls from those proposing to sell a flat actually coincided with the number of calls by those who wanted to buy. In 2015 a sharp reduction of the number of potential buyers was registered, and the number of sellers remained the same.

Real estate market: selling at all costs and at any cost

Last year the number of sellers even increased. This can be explained by the fact that many of them had come to term with the fact that prices were not likely to grow. And the number of buyers remained the same. 

Thus, the gap between those wishing to sell and to buy increased almost twofold. And this is a factor of further realty price’s decrease on the secondary market.

One of the reasons for the secondary market reduction is the mortgage program. The share of mortgages for newly built houses has always been significantly higher than for secondary housing. Due to the mortgage rate subsidising the gap has increased. In 2014 the number of secondary housing deals was 40%, while in 2016 it was 30%.  For the prices to go up in this segment, the number of mortgage deals should grow. The subsidising program is a trend that is likely to continue growing, as prices have been falling for two years.

Desirable price

The most interesting effect of the crisis is connected with the market participants’ behaviour change. According to Natalia Solomonova, Director General of “MITs-realty”, Moscow has never seen such an amount of infill construction. Constructors react to the market’s demands and offer cheaper product. 

— One has never been able to buy a flat within the MRR for 1.9m roubles ($33,000), she says. These are rather small studios of about 16 sq. m, but it is real housing. Besides, these are offered at reduced prices.

At the beginning of 2016 the discount was rarely more than 5%, but by the end of the year it grew up to 18%, and sometimes even more.

For many years a seller was the master on the market. Presently, the situation has changed and the market is regulated by the customer. The demand dictates the offer and flats become smaller and cheaper not only in economy-class, but also in business-class and even elite realty.

Curious processes are taking place on the secondary market: up to 80% of announcements on the sales of flats are fake, used only for creating an illusion of offers to support prices. Only a fifth is real advertising about flats that may be bought.

This situation tears potential buyers away from the secondary market because it is difficult to find a suitable object. This is why they convert to new buildings, although the risks (and prices) in this segment are traditionally higher at 3.5% on average. 

Then there is the question concerning what to do with this phantom market. According to Natalia Solomonova, these flats should either be taken away from the offer or prices should be sharply decreased.

— Many sellers evaluate their flats whilst having in mind their financial demands, not the real condition of the market, the expert is sure. In 2015 they used to follow realtors’ advice, but now they do not want to listen to them.

Real estate market: selling at all costs and at any cost

Another behaviour variant: people sell their real property, rent flats for living and wait for the prices to fall to buy a new one. One more worrying tendency is the growth of frauds by the so-called black brokers. According to Mikhail Kulikov, Director of Department at the “INKOM” company, the number of such cases where brokers deceive buyers has grown by 20—30%.

A further especially dangerous factor is that the quality of fake documents has improved. Even specialists have difficulty in differentiating between a false and original document. 

 

As if sky-diving

According to Mikhail Kulikov, the crisis has influenced people’s minds and their behaviour has become less predictable. Sometimes they even cancel the agreed deals. They worry a lot and are afraid to buy housing even when they have money.  This can be easily explained by the fact that the real property market as no other likes stability and predictability.

Even positive changes make people feel uneasy. A recent investigation showed that a person buying housing undergoes the same stress as when sky-diving.

Nobody believes anybody, Mikhail Kulikov states, and the real property market needs being put in order to recover.

On the whole, the forecast is unfavourable and in 2017 prices for housing will go down by 7—10%. It will knock developers down, and it will be even harder to solve the housing problem.

 

Vladimir GURVICH

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