Moscow realty: the real crisis is just round the corner

The current situation on the real estate market does not resemble the crises of 1998 and 2008—2009, when after a sharp drop of prices the market entered a phase of active growth. The epoch of housing deficit has passed, and presently the situation is characterised by excessive offers whilst the consumer demand is rather low. The main thing is that it seems to be a long-term tendency.

 

Waiting for residents in vain

The main characteristic of the real estate market in Russia is excessive offers. In 2011—2013, the offers totalled 4—5 m sq. m, and by the beginning of 2015 they grew to 5.9 m sq. m, whilst at the beginning of 2016 it was already 7.1 m sq. m. In January, 2017, dwelling spaces offered for sale surpassed an absolute record and reached 7.5 m sq. m.

According to Oleg Repchenko, Head of the analytical centre “Indicators of the realty market IRN.RU”, there are no signs that this index will decrease significantly during the next two or three years. The number of construction permits are not decreasing.  This means that a lot of housing will be built in Moscow and the Moscow region. 

The conclusion is supported by data concerning the volume of new buildings. Between 2011—2013, their level was less than 5%. In 2015 it grew to 10%. By the beginning of 2017 this index equalled almost a quarter of the objects under construction, and in the coming two-three years it may amount to half of the market. Meanwhile, despite the rouble strengthening and a definite economic stability, the demand growth is not observed.

 Consequently, the market is flooded, and a great number of flats stay unsold. The situation does not lose tension even as the prices on realty are going down.  For example, they fell by 10% on average on the secondary market, and the prices for newbuilds at different stages of construction are lower than those on the market. However, if the prices previously grew by 30—50% after an object was completed, they presently stand at only 10—15%.

Additionally, it is not clear when this rollback will be over. In Moscow, the dollar prices on realty are the same as they were in 2004. And while during the previous two crises the market quickly played back all the price falls, it is quite different now because realty prices do not follow the dollar.

Thus, the incessant growth of the capital’s housing cost which started at the beginning of the 2000s has stopped and turned back. To remind you, in 1998 the prices reached the bottom for 2 years and then began to recover. After the crisis of 2008—2009 they regained their previous values within three years, but the present fall is unprecedented. 

And the slogan, “Moscow realty always carries a price”, which appeared at the beginning of the realty market development, is no longer valid.

Moscow realty: the real crisis is just round the corner

Fordian revolution

Regardless, available housing did not appear on the Moscow realty market at the beginning. Only a small percentage of Muscovites could buy flats. 

The situation somewhat recalled the automobile market before Henry Ford entered it, when a car was more a luxury than a means of transportation. And the automobile magnate turned the tide by making automobiles available to the majority of the population.

A similar process is taking place on the Moscow realty market. Previously, sellers reigned there by having the upper hand, whilst the situation is now different with the market becoming a  buyer’s one. 

The surplus of housing is the reason, and due to this the buyers’ structure is changing. Recently, the main offers on the market were aimed at the rich: first they bought flats and houses for themselves and then for their children, before later investing in realty, hoping that it would gain in value. Presently, nobody buys a dozen flats to either sell or to let themselves later. 

The rich do not need housing anymore, and it is time to think of common citizens, where attracting them is possible only on the condition of a sharp drop in the price. However, the construction business will then become loss-making. 

The situation makes developers look for solutions that are outside the box. Recently, all realty was subdivided into several classes, and presently these divisions have become less separated, with high-class realty being available to buy at the same price as that of a lower category.

Developers and constructors behave differently these days: formerly they were sure that any realty would be bought quickly, whilst they are now analysing what kind of realty is demanded by the market.

It is a very positive process. The developers are trying to understand who their potential buyer is. This influences the market and much smaller flats are being offered. Previously, the area of an average two-room flat was 60 sq. m and now it is about 50 sq. m, plus the number of studios has also increased greatly.

Moscow realty: the real crisis is just round the corner

When the flats will not be needed

The present condition of the realty market worries experts. But a real crisis may start in about 15 years and will be caused by a demographic factor.

Major buyers of realty will then be those who were born in the 1990s, and there are fewer of them. Besides, they will be provided with housing by their parents. According to some calculations, one citizen may have up to three flats. 

Actually, developers may come across this problem even earlier: the number of potential buyers will reduce by 20% by 2020. And every year the rate of this decrease will accelerate.

On the other hand, this does not mean that there will be no buyers. Those who bought a one room flat would like to buy two-room or a three-room one. And constructors should be aware of the demand and its change.

 

Crisis, but not presently

Although the market is “turning its face” to the buyer, it still remains separated: in order to buy a flat in Moscow a common citizen should save money for about 30 years. Mortgages are often unavailable due to their high rates. It is not by chance that an average mortgage credit is only 1.7m roubles, which is insufficient.

— Although there is a surplus of housing in Moscow, the situation is not dramatic, concluded Head of IRN Consulting, Tatiana Kaliuzhnova. Moscow has a great delayed demand, and the oversupply will disperse. But in three years, when the market gets saturated, the situation may sharpen. Then there will be a real crisis.

Well, let’s wait and see. 

 

Vladimir GURVICH

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