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Russian realty market: break a leg

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Russian realty market: break a leg

Realty prices keep on falling. That is why it is better to buy and sell it now.

How will the realty market develop in the second half of 2016? How should the stagnating construction complex be revived? These issues were discussed at the round table titled “What will occur with the housing prices in the second half of 2016?”

 

Are hopes justified?

The realty market proposal volume is at its historical maximum: only in Moscow, more than 7 m sq. meters of the newbuilt apartment housing are being sold. However, the effective demand is low and it keeps on falling. Thus, in May, 2016 it decreased by 9% as compared with May, 2015 at an annual rate.

Meanwhile, the demand falls differently in different segments. Elena Nickolaeva, First Deputy of the Chair of the VI calling State Duma Committee on housing policy and utilities, remarks, that it has most fallen in the sector of elite housing. It means that the wealthy class feels economic insecurity and avoids investing in realty.

The demand for business-class apartments is at the last-year level. As far as economy-class is concerned, the situation is motley: thus, a slight rally has appeared in the sphere of newbuilds. But the secondary market is stagnating. It is mainly connected with the potential buyers’ expectations of the price decrease.

Are these hopes justified? According to the parliamentarian, the Ministry of Construction, Housing and Utilities has increased the price of the housing purchase by 1200 roubles for 1 sq. meter. It refers only to the housing the state buys within the framework of state programs. As it is, the fact is outstanding, indirectly it says that one cannot expect dramatic decline of prices in the nearest future. It is a signal to all developers to revise price guideposts.

At the same time realty is quite expensive in Russia. The average price is — 37,020 roubles for a sq. meter, for the last 12 months it has decreased by 10%, and in some regions even more. Still, there are territories where the price fall was not so significant – in Moscow and Saint-Petersburg housing efficient demand is traditionally high.

 

Pending the bottom

One of the main reasons of the demand decrease is the so called deflationary trap in which many potential buyers awaiting the prices to reach the bottom have got. However, Vice-President Of the “Business Russia” Public organization, Nickolay Ostarkov, is sure it may play a low-down trick with them: constructors may be unable to meet all demands when people rush buying flats.

The thing is that at present many construction companies are in complicated economic condition, and they try to reduce expenditures: fire staff personnel, sell equipment, etc. And it will be difficult for them to start constructing again when it is required.

The same fall is noted in the construction materials production. Brick production has reduced by 30%, and even cement production has fallen by 10%.

The number of companies having gone bankrupt is growing on such background. In 2015, it increased 5-fold. As analysis shows, not just fly-by-night companies leave the market: 70% of the ruined construction firms had worked on the market for more than 7 years. That is, quite experienced companies are washed out by the crisis, even they cannot manage the current unfavourable conditions.

According to the assessment by the RF Public Chamber, about a quarter of all construction companies are in pre-bankruptcy state. Many companies stay on the market due to local authorities who directly or indirectly help them.

The condition is likely to deteriorate. The RF Minister of finance, Anton Siluanov, recently claimed that the state is going to freeze some construction sites and not to start new construction. Similarly, construction is the first thing business gets rid of in a difficult situation. That’s why few will win if the market reaches the bottom.

Russian realty market: break a leg 

Be ready to changes

The situation on the secondary market is no better. According to Mikhail Kulikov, Chairman of the Moscow Realtors’ Association Committee on Real Estate Business, prices will go down by 3—5%. The demand constantly drift from the primary segment to the secondary one and back. Such drift from newbuild to secondary housing is likely to take place in autumn.

It is caused by the impossibility for the builders to decrease price due to the prime cost and efficiency ceiling, next to which is bankruptcy. And the cost efficiency of the secondary housing is null, as majority of owners got it during free privatization, so they may decrease prices limitlessly.

There is only one boundary here – real estate owners’ psychology. It is Business as Usual. To sold a flat its price had to be decreased a year ago, but people try to do it only now.

Not more than 10% will be sold of the total volume of proposals, Mikhail Kulikov predicts. The rest secondary housing will wait until its owners decrease prices. Unfortunately, many real estate owners do not understand that a flat costs as much as a buyer is ready to pay, not as much as the seller wants to get.

It does not mean that the secondary market will always stagnate. The delayed demand is being stored. Life cannot stop because of the crisis in the country; people need housing to live in.

So, the moment will come when the purchase volume will grow rapidly on both primary and secondary markets. And the construction industry readiness to it is highly questionable.

 

It is necessary to act promptly

Now the industry faces the twin challenge of reviving the construction and increasing the demand for its production. As Nickolay Ostarkov remarked, the main tool to solve the problem is co-funded construction. Recently the State Duma adopted really revolutionary amendments to 214-FL making co-funders’ risks minimal. Now, on the second stage, it is necessary to make the schemes developed in the document work efficiently.

One of the key-point issues here is to decrease the mortgage loan rate to 7—7,5%. According to Elena Nickolaeva’s calculations, if it is done, the probable real estate buyers’ market will grow manifold and make more than 40 m people.

But the state will not subsidize mortgage loan credits for a long time. The anti-market program is likely to complete in 2016.

Real financial mechanisms capable of decreasing the cost of the credits is needed. They do exist, but political courage is necessary to implement them, and it is lacking. As the deputy stresses, it must be done quickly as the dynamics on the construction and real estate markets is negative. And the trend is probable to enhance, if the situation is not reversed.

Russian realty market: break a leg 

New philosophy of the housing policy

One of the main reasons for the real estate market stagnation is in the absence of the full-scale rental housing market. From Elena Nickolaeva’s standpoint, the main effort in the housing policy is to be applied in this direction.

The comfortable rental housing market formation is of great economic significance as it will trigger the migration process inside the country allowing people to live where they work but not work where they live.

It took for years to prepare the corresponding law, but when it came to power, the economic crisis broke out. A number of mechanisms were developed in the law to create the market: the opportunities to receive land plots for construction without tenders, to connect utilities line for free, to reimburse rental housing construction credits rates.

The parliamentarians succeeded in regions’ adoption of their own laws in this sphere, though it was not easy. It was necessary to determine the categories of citizens who have the right for top-priority moving in at low rent rates. Besides, it goes about the housing which may be transferred by succession.

Rental housing is a different philosophy in the housing policy. It is the thing we lack badly, Elena Nickolaeva is sure. But the economic crisis has restrained the process. Fortunately, some projects in different regions of Russia are being implemented. Now Moscow is launching its program.

The rental housing under construction has its peculiarities: there are a lot of studios and small flats.

— I hope that this project will develop in Russia. And then the situation on the housing market will change, Elena Nickolaeva resumed.

Vladimir GURVICH

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