House price growth in Russia: the result of housing
sector reforms or price bubble?
Gennadiy Sternik, Plehanov Russian
Academy of Economics
Andrey Tumanov, Institute for Urban
During last few
years Russian housing market experienced a stable price growth (about 20% per
year). Unexpectedly in 2006 average increase in prices exceeded 50% while in
some regions house prices doubled. Economists and housing experts debate what
were the reasons for housing inflation. Could it be a negative effect of
housing sector reform, focused on promoting affordable housing, or is it a
beginning of housing price bubble?
The article is
organized as follows. It begins with a brief overview of legislative initiative
in housing sector. We briefly discuss results of implementation of National
priority project “Affordable and comfortable housing for Russian citizens”,
started in 2006. Next we analyze factors which theoretically cause house price
growth and discuss their influence on housing affordability problem in Russia. The presence of highly isolated local housing markets restrain housing mobility and
requires in-depth analysis of housing price dynamics. That is why last part of
the article describes mathematical model for price forecasting on local housing
markets. We use technique of retrospective forecasting for evaluation of model
precision and produce forecasts of housing price dynamics in short and
middle-term periods. Thearticleconcludeswithfindings and
Russia, real estate market, mortgage,
affordability, price bubble, housing policy
In the second half of
90ies the state housing policy of Russia was shaped in accordance with the
state target program “Housing” and the Decree “Main agenda of the new phase of implementation of the state
target program ‘Housing’”.
In 1996-2000 legal and organizational basis of the state housing policies was
created, priority tasks were defined and mechanisms of implementation of the
state housing policy were finalized. Moreover, the regulatory legal framework
was developed, which secured the ownership right in the housing sector and
facilitated housing production, housing finance and mortgage lending. Budget
role in the housing finance underwent changes: budgets were retargeted at
subsidizing housing purchase by citizens.
One of Russia’s current priorities in its social and economic development is the development of an
affordable housing market via creating proper conditions for well-balanced
growth of effective demand for housing, including the development of
residential mortgage lending and the increase of housing construction volume.
With this goal in mind, in the end of 2004 the State Duma approved a package of
laws, which is widely known as a “package of federal laws on the development of
an affordable housing market” including completely new Housing Code, laws aimed
at developing mortgage lending, Town Planning Code.
For further implementation
of the new federal housing policy in 2005 the President presented a national priority
project “Affordable and comfortable housing to Russian citizens” and set up a
National Council under the President of the Russian Federation on housing
policies, which focuses on the measures aimed at increasing the affordability
of home-ownership purchase scheme. The main tool applied for the
implementation of the national priority project is the federal target program
“Housing” for 2002-2010 and its integral part – subprograms . For the purposes of
complying with the target indicators set out in the program (Figure 1) it’s
necessary to permanently monitor the housing market, which will allow to
substantiate any decision both in quantitative and qualitative terms.
1. National priority project “Affordable and comfortable housing to Russian
citizens”: key indicators for the attainment of the project’s objectives
One visible consequence
of the implementation of the new housing policy is the housing price growth
throughout the country. Thus, in 2006-2007 in the Russian Federation the real house prices grew on the average by 51% against the figures of
2005, and in 2006 – by 39% against 2005. In Moscow real house price in
2006-2007 grew up by 48% (in 2006 – by 50%, and in 2007 – it fell down by 2%
against 2006); in St. Petersburg – by 43% (in 2006 – by 34%).
In forty regions of the
Russian Federation the real house prices over 2 years grew up by more than 50%,
in 21 regions – by 25-50%, in 5 regions – by 10-25%, in four – by 0-10%, and in
10 RF regions the real house prices dropped (Figure 2).
2. Rate of growth of current housing prices in the Russian Federation
constituent entities in 2006-2007 (% to 2005)
The size of each segment
reflects the share of local population in total RF population
Source: IUE computations
based on the data obtained from Rosstat.
In terms of development of
housing policies and strategy for increasing the affordability of housing it’s
important to identify the reasons behind such a boom in prices and to find out
whether it was a price bubble.
The first part of this
paper investigates the factors stimulating housing inflation. The second part
contains the analysis of the impact of the situation on the housing market on
the affordability of housing. And in the third part we verify the hypothesis
about the price bubble via analysis of local housing markets in major Russian
cities, which analysis is made with the help of mid-term and long-term forecast
of price dynamics. And finally, we formulate main conclusions.
Factors of house price growth and
affordability of housing
Analysis of factors which
determined the growth of housing prices in Russia in 2006-2007 demonstrated
that the prices were mostly affected by the increased incomes, which exceeded
the effective demand for housing, and by the slowed-down growth of housing
supply in the market. The increased effective demand and growth of prices were
affected to some extent by other factors, such as boom in residential mortgage
lending and high investment attractiveness of housing against the background of
lower yield of other financial tools. We analyzed in more detail the impact of
4 factors on the growth of housing prices in 2006-2007: household incomes,
residential mortgage lending, budget subsidies for housing purchase, investment
behavior in the housing market. In addition, we analyzed whether demand for
housing was satisfied or not.
The most important factor,
which traditionally affects the housing prices, is the income. High-income
households can not only save enough money for housing purchase within a short period
of time, but also obtain bank loans for this purpose more easily than
households with smaller income. Analysis of data (Figure 3) across RF regions
confirms that household incomes affect housing prices.
3. Average cost of one square meter of housing in primary and secondary markets
and average per capita incomes in 2007.
Income growth stimulates
the demand for housing. However, if in such situation the market fails to
provide adequate growth of housing supply, it leads to the increase in housing
Development of residential mortgage lending
can use loans to purchase houses as well as savings.
According to the Central
Bank of Russia, the volume of outstanding mortgages increased six fold over
2006-2007. In two regions it was more than 20 times increase over 2006-2007, in ten regions – a 10-20 times increase, in 52 regions – a 5-10 times increase. In other
regions the volume of outstanding mortgages increased in 2007 (against 2005) by
It’s a commonly believed
that such significant development of residential mortgage lending as nothing
else contributed to the growth of house prices in 2006-2007.
Controversially we found
that residential mortgage lending most actively is developing in the regions
with higher household incomes, which, along with a rather limited supply of
quality houses, determine market prices (Figure 4).
However, direct impact of
mortgage lending on the growth of demand so far has been not so important due
to insignificant share of mortgage transactions in the housing market.
According to the Federal Registration Service and the Agency for Housing Mortgage
Lending, this share was about 14% in the first half of 2007 (9% in 2006, and
4% in 2005).
In some constituent entities of the RF this share in the first half of 2007
varied between 8% and 19% (Figure 5).
Figure 4. Outstanding residential mortgage balance (per capita), as
of January 1, 2008, and average per capita incomes in 2007.
Source: Rosstat, Central
Bank of Russia
5. Proportion of residential mortgage transactions in the Russian housing
RF – Russian Federation, CFD -
Central Federal District, NWFD - North-West Federal District, PFD -
Privolzhsky Federal District, SFD - Southern Federal District, UFD - Urals
Federal District, SFD - Siberian Federal District, FEFD - Far East Federal
Source: Agency for
Residential Mortgage Lending; Loans Rescheduling: more funds for mortgage
lending//Information&Analysis magazine “Perviy Ipotechniy”. 2006, #0, p.11.
Another factor, which
affected the growth of effective demand for housing and the growth of housing
prices, was the lack of alternative investment opportunities which could ensure
both the preservation and extra yield on savings.
Bank deposits and foreign
currency were traditionally perceived as the most reliable and convenient way
of investing idle funds in Russia. Bank deposits in RUR in 2006-2007 were
unable to make profit, because interest on RUR deposits was below the rate of
inflation. USD deposits and investment in foreign currency also made no
earnings and proved to be loss-making when adjusted for inflation (Table 1).
1. Dynamics of RUR exchange rate in 2004-2006
RUR/USD exchange rate Index (% to the previous period)
RUR/Euro exchange rate Index (% to the previous period)
Other financial tools,
such as shares, bonds, mutual investment funds are not yet attractive enough
for the population because they are more risky, frequently less liquid and less
familiar, although they could be the highest-yield investments if a proper
investment strategy is pursued. In addition, while Russian stock market has
already suffered a crisis, Russian RE market hasn’t yet had such a stressful
negative experience, which could result in the loss of all, or the most part
Budget subsidies for housing
Budget subsidies for
housing purchase in 2006-2007 were allocated mainly within the framework of the
implementation of two state-programs - “Discharge of state liabilities for
providing housing to certain categories of citizens, as envisaged by federal
legislation”, and “Providing housing to young families”, both of which come
under the federal target program “Housing” for 2002-2010.
In 2006 1.1% of total
transactions in the housing market were completed with the help of federal
subsidies, and in 2007 this figure grew up further, although the mentioned
scope of incentives for greater demand didn’t seriously affect the dynamics of
prices in the housing market.
Balance between housing demand and
to the Federal Registration Service of the Russian Federation, in 2005 2.2
million sale transactions of housing were registered, and 3.6% of them were
closed with the help of mortgages. In 2006 the turnover in the housing market
grew up by 9% and 2.4 million transactions were registered, of which 332,000 transactions
were registered in the primary housing market, and 2.07 million – in the
secondary market. In the first half of 2007 the share of transactions based on
debt finance grew further and amounted to 14%.
At the same
time, the housing supply in the market was considerably lower than demand and
less than 70% of demand was satisfied in 2006-2007, according to IUE
At the same
time, housing production per 1 million RUR of actual annual household incomes
(in 2006 prices) in 2007 was 2.8m2 against 3.5m2 in 1999 (Figure 6). This
reduction demonstrates that unsatisfied demand for housing has grown up,
because housing construction volumes fail to match the growing capacity of
population to purchase housing.
Figure 6. Housing production in Russia per 1 million RUR of actual
household incomes per year (in 2006 prices)
Source: IUE computations
based on the data obtained from Rosstat.
affordability ratio (housing price to household income ratio) is widely used in
international practices for the assessment of housing affordability. It’s
computed as a ratio of median housing cost to median household income per
annum. The resulting figure corresponds to the number of years which a
household needs to save enough money for purchasing an apartment, proceeding
from the assumption that total household income is saved for housing purchase.
into account the limited statistic available within the framework of the
federal target program “Housing”, this ratio is computed as an average market
price of a standard apartment of 54 square meters to an average total annual income of a family of 3.
worth noting, that prior to the economic collapse of 1998 a family of 3 had to save within 4.9 years all its cash incomes in order to buy a standard
housing at an average price, while after the collapse this period expanded up
to 7.3 years and more. After 1999 this indicator registered permanent downward
trend (Figure 7) over several years, which was definitely positive dynamics.
2006, as a result of housing price growth, the rate of which exceeded the rate
of growth of household incomes, the housing affordability ratio grew up to
approximately 4.7 years, and later, in 2007 – up to 5.3. It should be noted
that the federal target program “Housing” envisages that by 2010 the target
value of this indicator will be 3 years.
indicator characterizes only one side of housing affordability: the ratio
between prices in the housing market and the level of household incomes. From
this point of view, the housing affordability ratio which doesn’t exceed 3-5
years is internationally recognized as a normal practice. In 2007 in 35 RF Regions the housing affordability ratio met these brackets, and in 5 regions with
population less than 2% of total population household had to save money for
housing purchase over a period of less than 3 years. In 39 regions with 50.5%
of total RF population, the average affordability ratio exceeded 5 years.
Figure 8 reflects the distribution (%) of the RF population by housing
affordability ratio (which falls into the above-mentioned ranges).
7. Ratio of housing affordability in Russia, 1998-2007.
*Note: for 2010 – target indicator
set by the federal target program “Housing”
Source: 1998-2007 – IUE computations
based on the data obtained from Rosstat.
8. Distribution of the RF constituent entities’ population by various housing
affordability ratio (within the mentioned ranges) in 2007
Source: IUE computations
based on the data obtained from Rosstat.
worth noting that the differences between federal districts (Okrugs) became
smaller and there is a trend towards the leveling of average housing
affordability ratios: in 2007 the difference between the federal districts with
maximum ratio and those with minimum ratio was 46%, while in 1998 it was 94%.
It means that differences in housing affordability in federal districts are
gradually decreased. However, this positive trend slowed down in 2006.
In Europe this indicator varies on the average from 3-4 years up to 5-6 years. In some CIS
countries it amounts to 7 years (Figure 9). In USA, just like in Russia, regional differences, as far as this indicator is concerned, are significant: in 2006 the
smallest indicator was registered in Fort Wayne – 2 years, and the largest – in
Los Angeles (11.4 years).
Figure 9. Housing affordability ratio in various
countries (ratio between the housing price and household incomes)
Source: IUE, UN Habitat, 3rd Annual Demographia International Housing Affordability Survey.
The federal target program “Housing” for estimating uses the
indicator “proportion of households capable of purchasing housing, which meets
the housing space requirement standards, by using their own funds or via
This indicator allows to precisely and comprehensively evaluate the
affordability of housing by using own funds or via borrowing on the basis of
the data about distribution of households by income levels and parameters of
mortgage loans available in the market. Such an algorithm of computations is
described in Addendum 9 to the federal target program “Housing”.
In 2004 this indicator equaled 9%, while by 2010, within the
framework of the national project, it is expected to reach 30%, which means
that 30% of households will have an opportunity to purchase standard housing
with their own funds or via borrowing.
be noted, that due to the successful development of mortgage lending and easing
of lending terms (decreasing of interest rates, extension of loan term, etc.)
we observe considerable improvement in the general dynamics of this indicator,
which in 2006 amounted to 19% (against 14% targeted by the federal program
“Housing”). However, in 2007 it amounted to 18% (against targeted 17%).
it can be said that development of mortgage lending increased the chances to
buy housing and facilitated the growth of the number of households which can
purchase housing in the market with their own funds in spite of worsened prices
to current incomes ratio.
Much to our
regret, this indicator cannot be easily compared across countries. On the
average, in the countries with well-developed housing market this indicator,
most likely, varies within the ranges of 40-60%. For example, the drop of this
indicator in the UK from 46% (in late 80ies) down to 37% by 2002 caused much
concern and gave rise to discussions about comprehensive measures needed to
improve the situation and increase housing affordability.
10. Share of households able to buy dwelling using savings and mortgages
Note: 2004-2007 – computations by IUE.
Average size of housing – 54 sq.m; LTV=70%; payments to income ratio – 30%
(2004), 35%(2005-2007); loan term and interest rate in 2004 – 15 years and 15%
accordingly (estimated figures), in 2005 – 16.8 years and 14.6% (data about a
typical average borrower submitted by the Agency for Residential Mortgage
Lending), in 2006 – 15.2 years and 13.7% (according to the Central Bank of RF),
in 2007 – 16.6 years and 12.6% (according to the CB RF).
2008-2010 - forecast, according to
the federal target program “Housing”. Average housing space – 54 sq.m;
LTV=70%; payments to income ratio – 30%; loan term – 15 years; interest rate –
10.5% (2008), 9.8% (2009), 9.1% (2010).
Source: Rosstat, Agency for
Residential Mortgage Lending, IUE, Federal Target Program “Housing”.
Stylized facts of the housing market
development in Russian cities in mid-term perspective
present housing mobility in Russia is very low. Extreme isolation of housing markets
puts constraints on spatial migration. Moreover, there are no official
statistics about housing markets in cities. For the purposes of analyzing the
situation and finding out whether there is a ‘price bubble’ in the market,
we’ll rely on the data obtained from RE market analysts.
2005-2007 housing markets of Russia cities went through yet another price
growth cycle, as a result of which prices doubled, or even tripled (grew
2.6-3.4- fold). According to the data for the past 3 years all analyzed cities can be divided into two groups:
1)cities and towns where nominal housing prices
grew more than 3-fold: Tver, Yaroslavl, Perm, Novosibirsk, Ulyanovsk;
2)cities and towns where nominal prices grew
2.5-3-fold: Yekaterinburg, St. Petersburg, Krasnodar, Izhevsk, Moscow and the Moscow countryside towns, Rostov-on-Don, Kransoyarsk, Ufa.
Growth was a common
phenomenon for all cities and towns, but it wasn’t synchronized: in the first
calendar year (2005) the growth varied between 9% (St. Petersburg) up to 55% (Yaroslavl), over two years (2005-2006) it varied between 46% (Krasnoyarsk) up to 211% (Yaroslavl), and over three years (2005-2007) it varied between 161% (Ufa) up to 238%
(Tver). Therefore, for the purposes of finding out stylized facts of price
growth common for various cities it’s necessary to analyze extended time
Analysis of data contained
in Table 2 and in Figure 11, which reflects the situation in Moscow, as well as
data in Figure 12, which describes price dynamics in other cities, allows us
to arrive at a conclusion that over the past 16 years of Russia’s market modern history the dynamics of housing prices evidently passed through two stages.
The first stage (from June 1990 till June 2000) continued for 10 years in Moscow and for 8-9 years in other cities. The second stage has been continuing for more
than 7 years in Moscow and for more than 6 years in other cities. During the
first decade of legal existence of RE market one was able to see the take off
and the leap of prices, transition towards stabilization, followed by the
1998-1999 crisis. In mid 2000, when the housing market hit the bottom after
the August crisis, the first stage of unstable, wobbling development of the
market came to an end. Over the next 7 years, up till now, housing prices in
the market have been constantly growing, although rate of growth tended to
change for a brief span of time (and sometimes even stabilized).
2. Housing market development stages and their duration in various Russian
regions in 1990-2007
**** – only St.Petersburg went
through this stage during the preparations for the 300th city
anniversary celebrations, when housing prices sky-rocketed beyond the expected
11. Housing market development stages, Moscow
12. Housing price indices in Moscow and other Russian cities by December 2001
Meanwhile, all other
cities went through more or less similar stages, just like Moscow and the
Moscow countryside towns did: take off and leap of prices (up to 1995),
stabilization (up to 1997), crisis (up to 2000), post-crisis recovery (till
2001, stabilization-2002, “oil generated” growth, stabilization-2004, “mortgage
and oil generated” growth (2005-2006), moving towards stabilization (end of
2006), stabilization-2007, start of new growth.
The following specific
features characterize these cities and towns:
-asynchronized start and end of separate stages;
-certain differences in the unfolding of events
during concrete stages.
The price dynamics graph
presented in the Appendix allows us to identify one stylized fact, common for
all surveyed cities: since 2001 prices never seized to grow and there were
neither price drops, nor crises.
Another stylized fact of
long-term evolution of prices in regional markets was brought to life by
asynchronized development of these markets: in the early stages of growth due
to the fact that this growth starts in the regions a bit later than in Moscow
and St. Petersburg price trends split apart (the gap between the lines in the
graph widens), while at the end of the ‘growth’ stage, when movement towards
stabilization begins – trends are gradually consolidating (the gap narrows).
The first phenomenon was observed in 1990-1995, 1998-1999 (when prices
dropped) and can be seen in Figure 12 (summer-autumn 2003), in autumn 2005, and
in the end of 2007; the second phenomenon was observed in 1996-1997, in the end of 2000-beginning of 2001, in early 2005 and in the end of 2006. During the periods
of maximum stratification of market the ratio between maximum and minimum
indices of growth varied (in June 2004 and in October 2006) between 1.8 and
1.9. While during the periods of maximum market consolidation – in June 2005
and in December 2007 – it was within the ranges of 1.2-1.3.
The end of 2007 saw yet
another consolidation of trends which testified to the start of a new spiral of
growth of housing prices in Russian cities. The data presented demonstrates
that the long-term growth of prices in fledging markets is undulating, rather
than steady. It’s accompanied by cyclic fluctuations of monthly rates of
growth – from zero up to 10-12%, and the frequency of fluctuations varies from
2.5 to 3 years. Within one cycle prices start to grow, reach the ceiling rate
of growth, pass it, and then once again stabilize. And within one cycle only
prices register a 2.5-3 fold growth.
Such price pattern is,
first of all, the consequence of one phenomenon common to fledging markets –
total effective demand there considerably exceeds supply.
Forecast of housing price dynamics
Economic and mathematical
models of behavior of fluctuating systems were applied in the Russian cities for a long time for the purposes of
forecasting the trend of prices in the housing market, and until 2001
(including the stage of post-crisis market recovery) such models ensured the
high accuracy of forecasts.
Over the past 6-7 years
all Russian cities witnessed permanent housing price boom. At first this fact
was perceived as a hurdle for economic and mathematical modeling in the absence
of market fluctuations. Forecasts (which were frequently unsuccessful) were
made on the basis of analysis of separate factors and their impact on prices.
However, steady growth of prices in the second stage of the housing market
development in Russia, especially the price boom in 2003 and 2005, were not forecasted
by the models, and the consequences of these stages were assessed by us as
prerequisites for formation and burst of “price bubble” in the housing market
of Moscow. By comparison, British analysts during the same period of time
viewed the “bubble” scenario as the most probable one for the housing markets
of the UK, USA, Canada, Australia and other countries. In the summer of 2006, a hypothesis was formulated, according to which the RE market in Russia followed the stable
growth pattern of the whole national economy on a long-term basis. The method of “unharmonious
expansion of price trend” allows to make in December- January a mid-term forecast (for 2007-2008) price
dynamics in Moscow, Moscow Oblast and in 8 other cities.
comprises the following equations:
= y+ Δy2 + Δy3 + Δy4 +
…. + Δyn, (1)
y1 = a3 x3 +a2x2 +a1x +a0, (2)
Δy2 = , (4)
Δy4 = , (5)
Y – forecasted cost of 1m2of
housing in month “x”, RUR ($)/square meters;
Δy1 – forecasted growth of average price of 1 m2 of housing in month “x”
basic trend, RUR
Δy2 - forecasted
growth of average price of 1 m2 of housing in month “x” against the
second order trend, RUR
growth of average price of 1 m2 of housing in month “x” against the
third order trend, RUR
growth of average price of 1 m2 of housing in month “x” against the
“n” order trend, RUR
a i , b i , c i , d i (i=1..5) – equations’ coefficients (of various order trends), which approximate
are evaluated on the basis of actual data via using the least-squares method.
forecasts, based on this model, demonstrated that in the beginning of 2007 the Moscow region would enter the stage of stable prices with possible fluctuations in the
range of +/- 5%, and that this stage could continue at least till early 2008,
but after that a new stage of faster price rate growth will follow (see Figure
13. Forecast of market housing price dynamics in Moscow, in 2008-2009
quality of these forecasts is good enough: in terms of quantities the forecasts
were pretty accurate, although the margin of error for Perm, Novosibirsk and St. Petersburg for half-year exceeded 10%. In Moscow, the Moscow Oblast, Yekaterinburg and
Tver the forecasts for 10 months proved to be very precise, although the last
2-3 months saw a new price boom the rate of which was higher than the
forecasted one. The reasons behind such a phenomenon are listed below.
first, and the main reason lies in the sphere of politics: the country
leadership managed to avoid confrontation between political structures, between
the authorities and businessmen during election campaigns. As a result there
was no significant outflow of capitals from the country and deferred demand for
housing was realized, which was supported by considerable growth of real
incomes and savings (real wages in 2007 grew up by 16% against 13.4% in 2006).
second, macroeconomic reason was a considerable growth of oil prices in the
world in the end of 2007, unbelievable growth rate of investment and inflow of
capitals into the Russian economy.
third reason goes with the above-mentioned and consists of the continuing strengthening
of Russian rubles, freezing mortgage affordability a reaction to the mortgage
crisis in the US, surge of inflation in autumn 2007, which, in their turn,
created a new wave of mistrust in the Russian financial system. The latter
served as an additional incentive for high-income groups of population to spend
their money in the RE market.
result of all this, the stabilization stage in Moscow and the Moscow Oblast was
10 months, which is 3-4 months shorter than forecasted, while in other cities
it continued for 4-8 months and the incremental growth of price was slightly higher
by the end of the year. However, the forecasted pattern of price dynamics has
proved to be correct everywhere.
obtained results made it possible to apply the model discussed above for
forecasting price dynamics in Moscow and other Russian cities in 2008 - 2009
(see Table 4)
4. Forecast of price dynamics in Russian cities in 2008-2009
Price growth indices
to the forecast, in 2008 growth of prices in Moscow will continue, and by
December the prices will reach $7,500-8,500/m2 (45-50% growth over
the year, and 80-85% growth against December 2006). In the Moscow Oblast the
prices might reach $4,000-5,000/m2 (65-70% growth over the year, and
similar growth against December 2006). Price dynamics in early 2008 allow us
to say with high degree of probability that events will be evolving in
accordance with the above-mentioned scenario. Thus, in January there was 5%
growth of prices against the background of a reduced number of exposed
apartments, which signifies the excess of demand over supply in the Moscow housing market.
made for other regions demonstrate that the housing price situation there will
evolve in much similar way. In 2008 prices will grow by 40-45% in Tver, by
60-70% - in Perm, Izhevsk, Rostov-on-Don, Novosibirsk; by 80-85% - in St. Petersburg, Yaroslavl, Yekaterinburg, and in Ulyanovsk – by more than 100%.
three years (2007-2009) prices in the Moscow Oblast, Izhevsk, Moscow, Yaroslavl
are expected to grow by 1.7-1.9 times; in Yekaterinburg, Rostov-on-Don, St.
Petersburg – by 2.5-2.8 times; in Perm and Novosibirsk – by 3.4-3.5 times, and
in Ulyanovsk – by 3.7 times.
(probably, after 2010-2011), provided that construction volumes and housing
supply grow up significantly, we forecast a slow-down of price long-term growth
forecasted price dynamics will experience the influence of numerous groups of
factors, both stimulating the price growth, and obstructing it. These factors
can be grouped into two categories: external factors outside the RE market
(political, macroeconomic, factors of interaction with adjacent markets) and
internal factors inside the RE market (progress of the national priority
program “Affordable Housing”, growing housing mobility of population,
interaction with adjacent segments of the RE market) (see Table 5).
Table 5. Balance of factors determining mid-term
dynamics of housing prices
Factor impact on prices
Election campaign: extra financing of
presidential campaign, higher effective demand due to larger fees of
political technologists, mass media staff, show business representatives
Certain risk of higher social tension in the
period of presidential election campaign, replacement of governors in several
regions, government formation
Further growth of GDP (although at lower rate –
6-6.5% against 8.1% in 2007), growth in budget spending and actual household
Continued growth of capital inflow, primarily
due to corporate borrowing (in 2005 net inflow of the latter for the first
time ever was positive - $0.1billion), in 2006 it amounted to $42 billion
and in 2007 – to $82.3billion.
Continued growth of oil prices (according to
some forecasts, up to $200 per barrel).
Process of Russia’s admission to the WTO, as
well as low political risks facilitate the inflow of capitals from foreign
companies, banks and funds to Russia, especially against the background of
signs of economic recession in the United States.
Continued strengthening of Ruble and higher rate
GDP growth rate declined, which impaired
authorities’ ability to address social and economic problems and to maintain
the growth rate of household incomes.
Further growth of capital flight volumes for the
purposes of direct investment.
Possible drop in the inflow of speculative
capitals in the situation when attractiveness of financial facilities both in
the US and Europe increases, provided residential mortgage crisis is defused.
Factors of interaction with adjacent markets
Fall in the world stock markets indices and
signs of crisis in the RF stock market, including return of capitals via
mutual funds, which facilitate the flow of investments to the RE market and
cause the growth of prices of RE.
RF stock market development, creation of various
high yield financial tools, which contributes to free flow of capitals from
the RE market to adjacent markets.
Continued consumer boom, which implies reduced
savings of population which could be used for housing purchase.
Increased volume of defaults on consumer loans,
which might entail additional banks’ liquidity problems and cause decline in
the rate of growth of mortgage lending volumes.
Domestic factors affecting the housing market
Further development of the national project “Affordable
Increased volume of state incentives and
mortgage lending, first of all, in the new housing construction market.
Maintaining current volumes, or reduction of
volumes of housing supply in Moscow (against the background of certain increase
in the volumes of new housing production – from 4.8 million sq.m in 2007, up
to 5.0-5.3 million sq.m in 2008) due to the fact that almost 50% of housing
space will be handed over to the municipality for its programs execution.
Increased volumes of housing construction in the
RF regions (nationwide in 2007 – 60.4 million sq.m, and in 2008 – not less
than 72 million sq.m) and greater supply of housing in the primary market.
Slowing down of rate of growth of mortgage
transactions and reduction of proportion of mortgage transactions in the
total number of housing sales due to accelerated growth of demand and
depletion of supply, and due to the growth of bank interest rates by 1-2%
(while the Agency for Residential Mortgage Lending plans to increase the volume
of refinancing mortgage loans in 2008 up to 65 billion RUR).
Increased residential mobility of population
Inflow of buyers from far away regions to the
Urals region, Volga region, Central and North-Western regions; from regions –
to Moscow and Moscow countryside; from Moscow – to less expensive Moscow
Oblast, which contributes to the growth of effective demand in Moscow and
Outflow of low-income and moderate-income groups
of population from Moscow to the near and more distant Moscow countryside,
which results in the drop of effective demand in Moscow proper. Competitive
supply of housing for high-income strata of population in St. Petersburg and
Sochi, in the cities of middle and southern Europe, which results in the drop
of effective demand in Moscow.
Interaction with adjacent segments of RE market
Continued accelerated growth of investments into
retail and commercial RE construction, transportation and social
infrastructure, which altogether increases the attractiveness of housing market.
Flow of investments into commercial RE market
(trade, offices, recreation sites, logistical complex facilities,
techno-parks, etc.) against the background of drop of yield of housing
the balance of factors points at a strong upward trend in price dynamics of the
housing supplied in the Russian cities and confirms the results of the
analysis of the above-mentioned indicators testifies to the fact that the
growth of housing prices in 2006-2007 was stimulated by the following factors:
§Housing supply rate lagged behind the rate of
growth of effective demand, which was caused by the growth of per capita cash
incomes and the increased affordability of mortgage loans, not to mention other
§Absence of alternative ways of investing cash
for savings or extra earnings.
By far and large, the
housing market in 2007 registered an obvious, and practically nationwide
slow-down of the rate of price growth. With due account for the impact of macroeconomic
factors, we can talk about an emergence of a number of cities and towns, which
for the first time in their history registered the reduction of real-term
prices (adjusted for inflation).
Mortgage lending facility,
which was looked at as a main lever for increasing the housing affordability,
was subjected to rigorous testing because of elements of crisis in the American
economy. To a great extent its future depends on the general economic
situation in Russia, which includes its ability to withstand a negative
pressure from outside. At the same time, the analysis of the market of
residential mortgage-backed transactions over the past couple of years
demonstrated that the behavior of the mortgage market depends on the general
situation in the housing market much more, than on the terms of lending. Given
stable prices and a considerable volume of housing supply, even if demand is
shrinking, we witness the increase of the volume of mortgage transactions and,
especially, the growth of the share of such transactions. At the same time, an
increased demand, reduced supply and high rate of price growth lead to
slow-down of rate of growth of the volume of such transactions and to reduction
of their share in the market.
In the end of 2007 the
housing market of the Moscow region entered a new stage of development – the
increasing rate of price growth. Forecast for 2008 for Moscow and the Moscow
Oblast anticipates a considerable price growth: annual growth of prices will
amount to 45-50% and 65-70% accordingly, while in the other cities it will
amount to 45-50% (Tver), 65-70% (Perm, Rostov-on-Don), Izhevsk), 70-85%
(Novosibirsk, St. Petersburg, Yekaterinburg) and 100% (Ulyanovsk). No housing
price drop is forecasted for any surveyed city or town.
Over three years
(2007-2009) prices will grow up by 1.7-1.8 times in Moscow, the Moscow countryside, Izhevsk; by 2.5-2.9 times – in St. Petersburg, Yekaterinburg, Tver,
Rostov; by 3.4-3.5 times – in Novosibirsk and Perm, and by 3.7 times in
The long-term forecast
(for 10-15 years) envisages stable growth of prices (dollar-denominated nominal
prices) and a gradually increasing annual rate of growth of 25-30% with monthly
rates varying from zero up to 8-12%.
Therefore, the natural transition to the stage of growth
of prices in 2008 and the growth forecasted for 10-15 years can be explained by
disastrous disparity between low volumes of housing construction and supply and
high volume of effective demand, which can be interpreted as an absence of
“price bubble” in the housing market.
Approved by Resolution #595 of the Government of the RF, dated
June 20, 1993.
Presidential Decree #431, dated March 29, 1996.
 With amendments approved by the RF Government Resolution #865,
dated December 31, 2005.
See: Loans Refinancing: more funds
for mortgage lending//Information&Analytics magazine “Perviy Ipotechniy”.
2006, #0 (in Russian).
Hereinafter average housing prices per annum are used for the
computation of the housing affordability indices.
It should be noted that the margin of error explained by the
application of data about average household income, rather than median average
income in the present-day Russia, is rather big and results in the overstating
of the housing affordability in Russia when it’s compared with other countries.
See: 3rd Annual Demographia International Housing
Affordability Survey: 2007 (http://www.demographia.com/dhi-ix2005q3.pdf).
Barker K. Review of Housing Supply. Final report:
Recommendations – London, HMSO, 2004 – www.barkerreview.org.uk
An analyst of the RE market certified by the Russian Guild of
Realtors should regularly monitor the housing market prices in his city in
accordance with the common methodology, therefore his data is considered
 Comparable data were available for the following cities: Moscow (since June 1990), St. Petersburg (since December 1991), towns located in the
Moscow Oblast (since December 1996), Novosibirsk (since December 1996),
Yekaterinburg (since December 1991), Tver (since December 1991), Rostov-on-Don
(since December 2001), Perm (since December 2001), Ulyanovsk (since December
2001), Izhevsk (since December 2001), Yaroslavl (since December 2001),
Krasnodar (since October 2002).
Petropavlovsk-Kamchatsky stays aside: over 2005-2007 prices
there grew up less than 1.9 times, which can be explained by the city’s
remoteness from most other cities and towns included in the sampling.
Econometric analysis and forecast of housing prices in the
Russian cities/ G.M.Sternik// Materials of the ENHR conference on the
economics of the housing market, Vienna, February 1997.
Unharmonious expansion of price dynamics of the housing market
of Moscow/ G.M.Sternik, A.N.Krasnopolskaya.- www.realtymarket.ru, July 2006.
Prices in the housing markets of the Russian cities in
1990-2006: analysis and forecast/G.M.Sternik and his group of analysts. - www.realtymarket.ru, January 2006.
What’s going on in the housing market of Moscow? Macroeconomic
analysis (Report at the Analytical Conference of the Moscow Association of
Realtors “RE market: status, trends and forecast” (August 30, 2007)/
G.M.Sternik, A.V.Pechenkina. - www.realtymarket.ru,
Unaffordable “light in the Moscow windows”/ Yu.Ignatyeva//
Izvestia, February 29, 2008, p.1,7.