Square anomaly

18 March 2008

You can understand the embarrassment of realtors and builders. Most of them were certain that the growth in prices would not exceed inflation rates, and that the maximum increase would be 30-35% for the year. A noticeable price rise was supposed to begin after the elections. The head of the holding "Etalon-LenSpetsSMU", Vyacheslav Zarenkov, said: "Until March there won't be a growth in prices, because who will allow it..."

But the market doesn't look at the calendar. The market believes (and quite rightly) that the elections are already over. If you consider the price barometer to be political, the elections took place at the end of November.

According to the calculations of expert Dmitry Zhitkov, in January the average price of a square meter on the secondary market for standard apartments was 75,713 rubles. Over a month there was a growth of 2,650 rubles recorded, or 3.6%. "The last time prices rose at this rate was in October 2006," he says.

And from the beginning of February, the index of prices on the secondary market, according to data from "Byulleten Nedvizhimosti", the growth is 1.5-2% a week. For one-room apartments, the supply price grew by 2.47%. On the primary market - in new buildings - approximately the same picture can be seen.

This is a symptom. And a very unpleasant one. The price increase crept up unnoticeably, like a sudden snowfall on municipal services employees.

The growth in the price of square meters is not the only problem. The problem is that the activity of buyers is not falling, it is actually rising. According to general director of Itaka Sergei Galalu, "from the first day of work the number of deals concluded is higher than the ordinary level, and higher than before the New Year". However, Galalu does not think it is likely that there will be a repeat of the scenario of 2005-2006.

In January, employees of the state board for real-estate registered 3,787 sale and purchase contracts - this is of course less than in December (taking the holidays into account), but still the highest figure for the last six years.

Another symptom is the reduction in the percentage of one-room apartments in real-estate listings. This is a clear indication: if their percentage in the total volume of supply drops, then a growth will begin on the market.

According to data from analysts at Itaka, since January 2007 the number of rooms in the supply volume has dropped by 9.8%, and one-room apartments by 7.2%. Three-room apartments, on the other hand, have increased by 11.9%. People want to buy housing, but most buyers do not have enough money for a decent apartment. On the stable market one-room apartments account for 20-23% of the supply, but in January 2008 they only accounted for 17.8%.

This alarming trend could be broken by a significant growth of supply in new buildings. Especially as in 2007 housing increased by 11% compared to a year ago, while the amount bought was less.

However, the growth will not be significant. According to the prediction of market experts at Peterburgskaya Nedvizhimost, major projects will only start to appear on the market at the end of 2008 (Baltiiskaya Zhemchuzhina, Kudorov), with lines for 20-30,000 sq.m., and this won't change things on the market. Especially as these new apartments probably won't cause a drop in prices: the builders have spent a great deal on buying the land, laying pipes and electricity, and they won't sell the apartments for less than the prime cost.

Specialists are cautious in giving an explanation for the sudden rise in customer activity. One factor is obvious: private investors are taking funds out of falling fund markets. Some of the freed-up funds go into real-estate.

According to Igor Zhigunov, the deputy head of Gorodskoi Ipotechny Bank, there is so far no other comprehensible and accessible tool of investment apart from real-estate: "An effective stake in bank deposits usually does not cover investment losses. At the same time we can see on the investment market both a growth in prices and an increase in demand". And some companies - for example LenSpetsSmu -already felt this trend in November.

The deficit of reliable and at least moderately profitable financial tools in the past already led to heightened excitement on the apartment market. Perhaps history will repeat itself. Especially as for prices to double, there is no need to double the speculative component: all that is required is a few purchases "just in case" and "for investment", so that sellers focus on a growth strategy, and customers rush to make a purchase, seeing that there are competitors.

But there are also a few more tricks. This year budget contributions will reach a level that is critically important for supply and demand. In addition to the city programs that have already been launched -housing for young people, for budget workers etc., the administration has announced a large-scale program for evicting communal apartments and resettling people from dilapidated houses. Over the year, city initiatives will add over 5 billion rubles to the market (without taking into account the cost of evicting dilapidated houses, expenses for this have not yet been officially declared). According to current prices, this means over 65,000 sq.m. which needs to be found somewhere. Especially as the city does not declare "clean" purchases at the expense of the budget, but assistance to citizens and investors. In other words, for each ruble from the budget, 2-3 rubles of private investment needs to be found.

Communal apartments must be evicted, without question. But has anyone calculated how this will affect prices?

The city promises to increase municipal construction drastically: by state order, 500,000 sq.m. are to be built (compared to 188,000 sq.m. in 2007). This is important. If this much is built, of course. And if it isn't all put on the market in the fourth quarter.

Finally, mortgages. Deputy governor Mikhail Oseevsky talked with unconcealed satisfaction about the success in development of mortgage at a press-conference at Smolny. 18,648 loans for a sum of 46 billion, 800 million rubles have been issued. The number of mortgagees (compared to 2006) has grown by 68%, and people's debt to banks (not counting interest!) has grown by 2.5%. A colossal success.

The harsher conditions and growth of interest rates for mortgage loans may play the role of a natural inhibitor. There are simply not many people who are capable of paying this debt. And there are even fewer people who are able to buy housing without taking out a loan. And complicated "swaps" (the most popular way of improving living conditions) do not take place on a swiftly growing market.

At present, it is completely unclear how the simultaneous price growth on housing and the cost of loans will affect the housing market. Vladimir Medvedev, the head of Filin, says: "The tougher conditions for mortgage loans essentially lead to a drop in solvent demand. But in conditions of a giant deficit of accommodation, at this stage a fluctuation in interest rates of 1-2% will not have a significant effect on the market". Tatyana Andreeva, director of the mortgage center of the investment bank KIT Finance, says: "A change in conditions in mortgage programs together with a more thorough underrating may limit the capabilities of some potential borrowers to receive a mortgage loan. However, taking into account the high level of prices for real-estate, mortgages remain one of the most realistic ways of buying housing. A change in the conditions and interest rates of mortgages will in many ways depend on the situation on international financial markets."

According to Tatyana Khobotova, the head of the mortgage department of VTB 24, on the one hand, changes in conditions and an increase in interest rates restrict the number of potential borrowers; but on the other hand, their number will increase: "People do not have enough money to make purchases themselves, and the sums of loans depend on income (which does not grow at the same proportion as real estate), the term and the interest rates. In the end, the demand for mortgage loans will increase, but the possibility of satisfy  ing needs in full will be limited."

Approximately the same thing can be said about housing: people's needs increase, but the possibility of satisfying them lags behind.