Economic recession has broken the real estate market. Someday the crisis will end, and it is important to study its lessons. What are they?
The majority of analysts, though having different points of view, agree that the conditions on the Russian real estate market haven’t been so tough for a long time, and its imminent prospects can hardly be called positive. This was discussed by the participants of the analytic conference, “The real estate market: condition, tendencies, prognosis”, having taken place in CCI. The provider is the Moscow realtors’ association with the support of “Business Russia”.
The domestic real estate market, together with the economy on the whole, has been growing tremendously due to constantly expanding demand. The latest upsurge was at the end of 2014, with the boom capturing the population because of the ruble crash. In December, demand grew by 11.4%.
On the real estate market the crisis started not with a price fall but with a sales volume decrease. Prices fall when supply surpasses demand, Gennady Sternik, professor at the G.V. Plekhanov Russian Economy University, explains. And now we are moving towards this point.
According to experts’ opinion, the current crisis on the real estate market resembles the previous one, that of 2008 – 2009. Then, a noticeable fall in demand and the growth of mortgage loans rates also took place. But the difference between this one and the previous one was in its impermanence: by 2010, everybody had forgotten about it.
Now the situation and the reasons for it are quite different. The current crisis is a display of abnormalities having accumulated since 2000 and even earlier. Firstly, it is focused on the Moscow region, where a vast real estate bubble popped.
As the leader of the IRN.RU analytical center, Oleg Repchenko, says, in the 2000s easy cash appeared in the country, and especially in Moscow, and the prices for housing began to grow. And now the market has returned to more or less normal prices.
According to Oleg Repchenko’ assessment, the normal level is $2,000 for a square meter, or about 120,000—140,000 rubles. Experience shows that real estate at that price sells well. If the price is higher, the sales process will be longer, and the realtor will have to offer significant concessions to a purchaser.
By the way, the average price of Moscow realty in August, 2015 dropped beneath $3,000 for a square meter to $2946, analysts from the realtors’ company “Inkom-Nedvizhimost” have calculated. Thus, currency prices for housing in the capital went back to the level of February, 2006. Of course, these are quite crafty figures: they do not take into account the significant difference between the rate of the ruble to the dollar then as compared with now and the fall of the ruble’s purchasing capacity.
What floor shall we fall from?
To save the sector, developers have proposed that the Government subsidize the rates to 4%.
— And why should it be saved? asks Konstantin Aprelev, Director General of the “Savva” Real Estate Agency, rhetorically. — What have construction companies done during the year to improve their conditions? Nothing, on a large scale.
As soon as the ruble weakens, the demand for housing grows. The state supports the primary housing market, which results in the secondary housing market shrinking. And the builders hope that they will be helped again and do not take any measures.
The state prefers not to reform the general situation (which is usually done in the majority of countries during a crisis), but to save the market by displacing risks onto the population.
The majority of developers do not want to face up to reality. They start new projects without thinking about who will buy new housing, office and trade realty. If they analyzed the current situation, conditions in the construction industry could be better, experts are sure.
The hope that everything built will be bought is not based in reality: demand will shrink for a number of reasons, including the fact that the state increases taxes for realty to fill the public purse. Besides this, state construction programs are being reduced everywhere.
Statistics shows that the Russian market for real estate is currently shrinking. Sale and purchase transaction registration looks likely to fall twofold by the end of 2015 as compared with the previous year. Things were especially bad in the second quarter. The figures are being corrected: in some regions prices have decreased by 10—15%. In the capital they are the same on paper, but the majority of transactions take place with a significant discount, of up to 40-50%.
From Konstantin Aprelev’s point of view, the realty market is influenced by a number of factors.
1. Its investment attractiveness is decreasing (though the majority of those who invested in realty will carry on with it despite everything).
2. Income of business and the population is decreasing.
3. Business is decreasing financing connected with housing purchase.
4. The CB key interest rate is still high, and it determines the high rates for mortgage loans.
5. Investment housing purchased in autumn 2014 is entering the market, and is influencing realty proposals.
6. Fewer houses are being put into operation.
The ‘Grey Cardinal’ of the realty market
According to the latest proposals from the government on the gradual liquidation by 2020 of equity participation in the sphere of construction - the main burden of its financing will lie with the banks. Their role is growing now and how soon the construction complex on the whole and the realty market in particular will recover depends on them. That is why the conditions in the banking system directly influences the processes in construction. However, the Russian banking system today, as well as the economy of the country, is battling hard times. This is to a great extent connected with population and business incomes and volume of trade. It is good for banks when clients borrow a lot of credit and, conversely, it is bad when the credit portfolio shrinks. The population’s incomes have fallen by at least 8-9% and people are buying fewer goods and services. This results in credit shrinking.
The banks’ capacity to lease credits directly depends on their ability to attract financing. First of all, this involves citizens’ deposits. Much is connected with the CB key interest rate. As it decreases, interest rates on deposits and credits go down.
Another process which directly depends on the CB policy is banking activity license withdrawal. This has been increasing lately: in 2013 – 2015 the number of banks in Russia decreased by 16.6%. There were 797 banking institutions in the country by July 1st of 2013. 145 licenses have been withdrawn over two years, including 17 from the largest 200.
According to Dmitry Lepetikov, Head of VTB24 Department, despite the mass “cull” of the banks, the population trusts the domestic banking sector. Deposits increasing by 10% in 2010 vouch for this, even with a decreasing interest rate on deposits.
In 2016, “expensive” deposits will mature (they were opened when the ruble rate began to fall), and will improve their financial basis. At the same time, the process of consumer credit decrease and corporate credit increase will be ongoing. On the whole, according to expert assessment, the bank portfolio credit volume decrease will go into a phase of stagnation.
Bank and builder: to build bridges
In analyzing credit market conditions, it should be understood whether or not the population has a lot of credit. By Russian standards, they have a lot, but there are still large reserves. In 2015, people borrowed fewer credits than in the previous year. The credit burden for a family went down, and there were fewer “bad” debts.
The structure of a Russian credit portfolio still resembles that of an anaemic economy, with customer credit prevailing. In developed countries the main part of the portfolio is taken up by mortgage loans: on average in EU, this can be up to 80%. In Russia it is only 29% and that includes a lot of potential mortgage loan development. These are not forecasts - this is reality. Four years ago, mortgage loans accounted for only 10% of the total volume of credit. During the last two years, the number of borrowers has increased from 4% to 7%, and among people with monthly income, by more than 40,000 rubles, to 17%.
Dmitry Lepetikov predicts that, in 2016, mortgage loans may grow by 10%, while car credit will fall by 6.5%. So mortgage loans will keep the status of the economy driver of banking system growth. In particular, it will become evident in the case of a mortgage loan rate decrease, which may bring many potential borrowers to the banks.
Taking into account the new role of banks in construction, the government wants to expand its role as a financial intermediary and constructors’ duties fulfillment supervision body. However, credit organizations are not hurrying to express their attitude towards this, and are keeping silent.
They may be understood thus: they do not want to include problematic and incidental assets in their asset list because these demand additional expenses and they have no idea what to do with them. Besides, as experience shows, not all the banks can, or want to, analyze construction risks.
Nevertheless, in the near future, banks and constructors are to build bridges. And the fates of both the construction complex and the realty market depend on the success of this dialogue. But now it is still a long way away...
What is beyond the crisis?
From Gennady Sternik’s (Professor of Russian Economy University named after G.V. Plekhanov) point of view, realty demand will not fully recover before 2020. And now, in spite of some panicky prognoses, it is far from the nadir of the crisis.
The problem is that neither constructors nor developers have learnt to live in these new conditions. As has already been mentioned, nobody is stopping projects in spite of the uncertainty of their fate, neither mass construction nor point projects.
Experts think that it is time to optimize the work of the construction line on the whole, to change their approach. The head of the “Best-Novostroy” company department, Tatiana Sharova, thinks that it is necessary to enhance the attractiveness of the projects, and to design them according to the customers’ claims. First of all, it is important to design more budget-oriented flats: even in the business-class segment, studio flats are most in demand.
— The elite customer has changed in the period of the crisis, says the Director General of GC “SMU-6”, Alexei Perlin. — There are fewer clients who need an entrance decorated with gold or the name of a super-famous architect on the façade in the sector of “business+” or “elite” housing.
Few are ready to pay highly for it. At the same time, more attention is being paid to to “landed” factors: the house’s location, the quality of the construction and engineering systems, the social surroundings, the terms of housing erection and, of course, the price.
But unfortunately, very little thought is given to the demand in two or three years. Everybody lives for the day. But it is necessary to foresee what will occur beyond the crisis. There are a number of priorities: quality conditions of living, flats’ layout according to customers’ wishes, the creation of a comfortable environment. But we do not have that now.
The Russian realty market lags behind the new reality, and unless its participants change their ways, it will not survive the hard times.