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The Bottom Line

Will Prices Continue to Rise?
John Harrison

I heard that each sq. meter increases in value by $8 a month in Moscow, each day”, my wife excitedly told me. I looked at her in bewilderment, wondering what that means. I do know that the tiny 50 sq. meter where we live now, which I bought for $70,000 back in 2003 is now worth over $200,000. A rise even larger than the spectacular drop in value of the America dollar. Furthermore, the rise seems to be continuing unabated. The prices of the average sq. meter of flats in Moscow have risen on average by 7%-10% per month for the last 3 months, depending on the location, size and type of building, making Moscow real estate an incredible investment. But the questions is: will prices keep rising or not?

Surely, there must be a crash coming? Having drifted in deep negative equity for a period after the 1970’s London crash, I know that what goes up, does indeed, eventually, come down. But the Moscow rise continues inexorably. The Khodorovsky affair, Cheyney’s ‘Iron Curtain’ speech in early May, the failure of meaningful progress in the battle to diversify the Russian economy, a spate of high-level government firings, a clamp-down on the press, all seem to have failed to curb the rise. Prices in the ‘Golden Mile’ area average at least $15,000 per sq. meter, whilst an average of $6,000 to S$7,000 per sq. meter seems to be the average for older properties in the center, even those with ‘wooden perekritie’, which the mayor seems to be have his eye on demolishing, to make room for profitable development of new residential blocks. Alexander Ziminsky, the director of elite housing at Penny Lane Realty commented that average prices for elite housing have now reached $17,000 per sq. meter. “When we had that minor bank crisis two years ago, journalists asked me – how can $10,000 per sq. meter possibly be realistic? I answered – let’s just wait and see. Now it is not unusual to sell a property for even a staggering $35,000 per sq. meter, but that is for properties that have been decorated nicely.”

Expat-owners are enjoying the situation, renters are looking on, wondering whether they should, or shouldn’t jump on the bandwagon. Many are now unable to do that. High prices and a falling dollar have joined forces against us. As David Green of Green and Green Realty mentioned: “the market has become very difficult for foreigners. Most Russians buy in cash, something not all foreigners can do. Many are not very thorough with due diligence, but they get away with the best properties. High prices are good for occupiers, but not very good for those trying to purchase. High prices are also not very good news for agents like us.”

So should we buy or not? Is the market going to go up or down? Let’s try and answer this question by looking at the market using traditional methods.

Time taken to make a deal

Provided by Intermark

One sure indicator of establishing the way in which a real estate market is going, is to track the time it takes to make a deal. According to Mikhail Volgin, an expert on the secondary market at Miel: “because of the colossal demand, it takes a maximum of 10 or 14 days to find a buyer of a vacant flat, then about 2 weeks for registration, so about one month in all. This is about 25% less time than it took a year ago”. All agents interviewed for this article reported a speeding up process.

Earnings-to-borrowing ratio

Perhaps we should use the much heralded earnings-to-borrowing ratio which is 3.5 — 4 times in the UK for example. In recent years, this number has slid upward in the UK, leading some to predict a crash. A crash has yet to occur, but the market has slowed, indicating the validity of this approach. But in Russia, where real incomes are hardly declared, let alone registered anywhere, it is very difficult indeed to establish statistically what true incomes are. Official average income comes in at about $450 a month, meaning $5400 per year, meaning the average Moscovite can borrow a maximum of $21,600 using the UK method. You couldn’t buy a one bedroom flat in the basement of a factory due to be demolished for that in Moscow. So the earnings to borrowing ratio is out of the window.

Central Bank rate

Then we have the Central Bank interest rate. That’s a sure way to predict a dip in the market. Not in Russia. There is no direct link between the mortgage lending rate and the central bank interest rate.

Looking at bank rates to predict the performance of the residential market, because that determines the amount of money people will feel comfortable about paying off to their bank, is simply not valid in Russia. According to three real estate companies working on the sales market, 90% of property deals are done in cash. Unlike the car-purchase loan market, the mortgage market has not yet taken off. Purchasers are able, somehow, to be able to get hold of very large sums of money in cash.

Who are these people? Nobody seems to know. However, according to statistics provided by Intermark, Moscow does indeed seem to be second to none among the Russian Federation subjects in terms of share of profitable businesses and consolidated profit.

There is the argument that I have heard on many occasions that the market is about to collapse because there are a lot of new flats standing empty. In fact there are virtually no flats standing empty. They are all purchased, some of them by investors. There is a tax rule in Russia that makes it more profitable to hold onto property for 3 years before selling. This is exactly what investors are doing. There used to be many flats in properties like the massive Grand Park complex in north Moscow, for the first few years after it was built. But now virtually all flats are owner-occupied, or leased out.


Another popular argument is – “just look at the quality of the buildings, they are so badly built, who would want to live in a place like that?” Everybody. There is no choice. A new law ‘on dolevoe uchastie’ was passed in December 2004, and actually implemented from the 1st of April 2005. This is not a real estate magazine, so I won’t go into detail about what this law means; but basically it has made it more difficult for irresponsible developers to operate on the residential construction market. Many of the smaller companies have now switched over to commercial real estate where they can, for the time being, still get away with their previous practices. As a result, some 40% less product (as it is called by professionals) came onto the residential market in 2005, in comparison with 2004. So whatever is out there will be sold — this is a sellers’ dream market, and is likely to remain so for a long, long time.


There can be no doubt here that demand for flats for owneroccupation and investment purposes is huge. Demand is mostly Russians, and is not limited to Moscovites. A flat in Moscow is now considered essential by many regional business people, and bribe-greased civil servants; the new wealthy.

Political and economic situation

Finally, there is the general economic and political situation. It seems to be stable. Russia seems to be doing quite well. More importantly, Russians themselves perceive that their country is doing well; there is a confidence in the air. Everybody interviewed for this article did not see any major changes until the next presidential elections in 2008. There is always the chance of America declaring war on Iran, or some other catastrophe, but it is not clear what destabilizing affect if any this would have on the Russian economy. It might have the opposite effect, of making investments in Russia more attractive than they are now.

Naturally enough, there will always be a section of the population, and of the foreign community, which maintains that the whole economy will collapse if oil prices fall. Maybe. The following chart below, however, shows that flat prices are rising even faster than the average cost of oil.

True, both the price of oil and flat prices are moving in the same direction. Therefore, one can safely predict that if oil falls, there will be stabilization period. This is a point I brought up with David Green. “Not necessarily. For a start, oil is not the only resource Russia is rich in. What about copper for example – that has risen 500% in the past 5 years. What about nickel, aluminum and a host of other rare metals?”

The Moscow economy is strong. Moscow is the only region in Russia with a BBB rating from S&P’s investment rating. Moscow has never defaulted on any obligations related to the servicing and repayment of sovereign debt. The other members of the Big Three announced an increase in Moscow’s EF credit rating even earlier: Fitch in August and Moody’s in October 2005.

What does this all tell us. It tells us that the Moscow property market is going to continue to rise. How much and for how long is difficult to predict. As David Gilmartin of Intermark puts it: “A combination of high demand, limited supply, and the likelihood that the political/economic infrastructure will remain similar to what it is now, all point to one thing – that prices will keep rising”.

Economic indicators





GDP growth, % against the prior year





Inflation, %





Growth of real disposable income,
% against the prior year





USD exchange rate at year end, RUR/USD





Refunding rate, %





Average weighted rate on private ruble deposits
in credit organizations (at year end), annual %





Provided by Intermark

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