Recent reports about Moscow as the most expensive city in the world (24% more expensive for expat workers than New York), and stories about hundreds of new 24-hour casinos, boutiques, clubs and multi-million dollar condos bring Europeans and Americans to a simple conclusion – Russians are getting rich only because of high oil and gas prices. This stereotype is wrong. As always, things are not quite as simple as they appear in Russia.
It is normal to assume a rising economy drives up prices for real estate and common goods; that’s how it is in Western Europe and Northern America. However, consider the late 1990s in Russia: in 1998, oil prices bottomed out at $10 per barrel. Even so, castles in the Moscow suburbs and luxurious apartment complexes in the city were being built just as fast as they are today. The difference between Russian and American wealth creation is the fact that a rising economy in America means that almost everyone is a little bit better off; but this new wealth in Russia trickles down much more slowly, and the vast majority of the population sees no improvement.
Putin’s economic reforms have indeed improved the situation of urban middle class Russians, but the question remains: can a middle class family pay cash for a five million dollar condo? Or a fifteen million dollar home in the Moscow suburbs or the Black Sea resort of Sochi? The answer is “No”, so even if middle class Russians are doing better, the rising price of housing is pushing their American dream of home ownership out of reach.
The “riddle wrapped within an enigma” of Russian real estate consists of two related issues: good old supply and demand and the lack of other investment opportunities in Russia besides natural resources and real estate.
There are quite a few people in Moscow who have money and want to live in a nice place, but due to the physical Soviet legacy the demand for decent apartments far outstrips supply. The rising price of oil is “blamed” in the West for the outrageous real estate prices in Moscow, but if you look at the numbers, you’ll find out that the oil prices increased almost by five times; roughly speaking, that means that someone who used to make 20 million dollars from their energy investments now makes a hundred. What’s the difference in buying a two million dollar condo versus five million? None. Remember – the oligarchs made their vast fortunes in the 1990s, when oil was still cheap. The accumulation of their fortunes had little to do with world oil prices.
Old-style Soviet bloc apartment buildings are still the norm in Moscow, and they are in huge demand, since the population of the city (including illegal immigrants from the former Soviet republics) has grown from nine million to nearly fifteen million people in less than ten years. As a result, apartments in Moscow have increased fivefold in average value (which can be viewed as an investment rate). A one bedroom condo which sold for $50,000 cash in mid-nineties goes for $250,000 today.
It makes little sense to talk about the skyrocketing prices for upscale housing today, because there were no mansions or luxury apartments to speak of in the Soviet Union. Even top party members dachas would be considered run-down by today’s oligarchs and upwardly mobile New Russians.
Russia Blog’s recent article about the Discovery Travel Channel show “Super Homes: Moscow” quotes real estate agent Phil Bogdanov saying that there are many people who want luxury and a view, but unlike in America or Western Europe, there are very few places for him to show his clients. It is not even a question of a temporary gap between supply and surging demand: there is huge demand and almost no supply. This is why Mr. Bogdanov said that “one can ask as much as he wants.” in what the narrator calls the ultimate seller’s market.
Recently the Federal Anti-Monopoly Bureau of Russia did some research, trying to find out if there is collusion in the real estate market to drive up prices. According to the common middle aged-Russian’s Soviet-era logic, the price of one square meter (ten square feet) of an empty concrete space generously called a “new apartment” should value at $1,300. Instead it goes for $3,000 on average for a middle class housing, and the market, according to many real estate firms, is poised to reach $5,000 – 6,000 per ten square feet. Luxurious condos or apartments with a view reach the tag of $25,000 per square meter (10 square feet!).
The results of the federal antitrust investigation revealed enormous corruption and kickbacks for local officials in charge of land administration, construction safety, local fire departments etc. However, the agency was unable to find any “conspiracy” or “monopoly” in the major cities. The number of construction companies in the market is astonishing, and so is the competition. The prices that sound ludicrous to Americans are quite real. An executive of the Moscow-based real estate company MIEL-Brokerage, Natalia Kirpichenko, said: “Considering the fact that it does cost $600 to build one square meter of housing in Moscow, $1,300 seems fair for a retail price. But we don’t live in a central planning economy anymore, it is free market, and the free market is ready for the price tag of five to six thousand dollar per square meter”.
There is a simple reason why prices will reach this point, and it is not oil money: if you are a newfangled Russian millionaire, there isn’t anywhere else to put your money in Russia besides natural resources and real estate.
Imagine a successful small town gangster who saved up five million dollars or a member of parliament who collected ten million in bribes over four years. What can they do with their small fortunes?
The Russian banking system is still considered unstable and there are no mortgages to speak of or bonds that Russians can trust. Most Russian banks are used for international wire transfers and to safely store large sums of cash while families are traveling outside the city or country. After the 1990s run of bank failures, no Russian in his right mind trusts the banks enough to put his money in CDs. The only profitable Russian stocks are oil, gas and metals companies, most of them co-owned by the state. Buying significant shares requires connections, or hiring a law firm and reviewing a lot of bureaucratic paperwork before you get to risk your money. And if five million is all you have with no future income – do you really want to play the Russian stock market?
Many would ask – why not invest your money abroad? Let’s imagine again that the small town gangster took his five million to America along with the former MP and his ten million dollars. How long will it last them here, if they have to pay property and sales taxes out of pocket, along with insurance, medical bills, etc? The answer: it wouldn’t last as long as in Russia. I know a story about a lady who came to Florida from Moscow in the late Nineties with two million dollars. In her first year, she bought a house and a nice car. During her second year, her husband got into a car accident and they had to sell their house to pay the medical bills. Now she is homeless and begs outside a local McDonalds. With her poor English skills and arrogant attitude it really is hard for her to get a job. This story is true.
So what would wealthy Russians spend to live in security, comfort and respect? As much as it takes. And where else in Russia would a middle class family spend all of the few hundred thousand dollars they have managed to save? Because if you buy an apartment; and rent it to tenants, it will provide income for many years to come, and one day it can be sold to pay for retirement or be given to the children.
Even if the oil prices miraculously collapsed to $15 a barrel tomorrow, real estate prices in Russia will only continue to go up.
Comments
There's a couple of things that don't add up when I consider this. First, there is certainly an influx of illegal immigrants to the city, but where are these people living? Just how feasable is it for the ambitious alien to afford any sort of residence (view or not) in Moscow? That said, I don't know that illegal immigrants can drive real-estate prices that much. Secondly, you mention the astonishing number of construction companies, but when considering a free-market situation, would that not imply a great deal of competition, and so competative prices?
Posted by: Daniel | August 18, 2006 12:02 AM
One of my friends in the real estate business in Piter told me that most of the people buying apartments in the city come from the oil-rich provinces where they have made some decent money. Other than a (relative) few who make money via corruption and kick-backs, the only people making decent money in Russia are those who work on the oilfields. Where else can you earn three times the average national salary as soon as you join?
Now, supply and demand in the housing market only governs how much somebody is willing to pay, not how much they are able to pay. So the money has to have come from somewhere, and I am really struggling to see where it can come from in such quantities other than the oilfields, weapons sales, and heavy industries.
Another thought...the housing market in Russia is not really a market. Somebody who bought their apartment in 1991 for $200 might now be told that it is worth $80,000 if he or she were to sell it. And if they did, then they'd pocket the cash. But here's the rub: where would they live? In Russia, it is not possible to rent as you lose the registration, so you are classed as homeless. You must have a permanent residence, and that means owning or getting some relative or friend to register you in their property. So it is not possible to sell the property and move abroad for a while to make some money, nor is it possible to sell your house in say Kazan and move to Moscow and rent a place there whilst you work.
So the only people selling existing housing in Russia are the offspring of dead relatives who are cashing in the inheritance, or those who are upsizing or donwsizing (both of which need another property to be available) and this doesn't seem very common in Russia, most housing being of similar nature.
If the ludicrous registration system is scrapped, you'll see a proper housing market form, but until then all that will be on offer is massively expensive new-builds which only the very rich can afford.
Posted by: Tim Newman | August 18, 2006 12:14 AM
Hi, I found your blog through a link on another site. I thought this was a very interesting post. You're absolutely right about real estate prices:
they'll still go up no matter what the price of oil is. Thanks for your perspective!
Posted by: RisingSunofNihon | August 21, 2006 3:23 PM
Well, its a nice analysis. However, it is absolutely untrue that in America the wealth "trickles down". The fact is, that as more and more Americans become super-rich, it is at the cost of those who are faster than ever becoming super-poor. As a homeless person, I can testify to that.
The so-called "minimum wage" in the US is nothing if not slave wagery. One
cannot live on it. It is impossible to find domicile for the poor because of the rich and their way of monopolizing economic activity. Thoes making the "minimum" wage had to pay in extra money to the gov for the first time last year, criminalizing vast numbers of them who could not afford this unforseen expense at the cost of their family finances and life support system. The hordes of poor in America are sure to grow exponentially with the new tax breaks granted by the Bush regime.
Sincerely,
Lois DuPey
P.O. Box 107
Cannon Beach, OR 97110
(a homeless person)
Posted by: Lois DuPey | August 21, 2006 3:24 PM
looking to buy a nice property
Posted by: nelson | September 4, 2006 6:40 AM
A Tenant’s Guide to Renting
The first challenge every tenant faces is finding an apartment for rent that suits their individual needs. For today’s tenant, the most effective apartment search can be done using an online apartment finder. Tenants should decide what they require in an apartment or house rental before beginning their search. For example: the number of bedrooms, location or distance from public transportation and how much the tenant can afford to pay in rent, furnished or unfurnished apartment, etc. By making these important decisions first, tenants can avoid renting an apartment or house only to regret it later. Many tenants today are taking advantage of the convenience of the internet to locate apartments for rent as opposed to the traditional print publications.
Once a possible apartment or home has been found, it is the tenant's duty to thoroughly inspect the premises making a commitment in the form of a security deposit. A tenant should not rely on the landlord or the landlord's agent to tell the tenant if anything is wrong with the property. The tenant must inspect the property carefully and ask questions about it.
Inspecting the condition and functionality of the following areas/features of the apartment before committing yourself as a tenant is highly recommended.
1. Kitchen appliances in working order.
2. Water pressure strong, plumbing without leaks.
3. Electrical outlets and wiring working.
4. Walls and ceiling painted or papered without cracks
5. Ventilation or air conditioning accessible.
6. Floors, railings and bathrooms in good repair.
7. Fire escape easy to use.
8. Stairs safe and well-lighted.
9. No rodents or insects.
10. Heating system in working order.
11. If furnished, check and write down condition of all furniture.
12. Windows and doors operable and weather-tight; screens provided.
The tenant should also check the security of the building to find out if there is a dead-bolt lock, security chain, or through-the-door viewer.
BEWARE OF EXISTING DAMAGES: In order to avoid being blamed for damages that already exist in the rental unit, the cautious tenant should take every step for self-protection. Before moving in (or as soon as possible thereafter), the tenant should make a list of all existing damages and repairs that need to be made. A copy of the list should he presented to the landlord and attached to the lease This way the landlord cannot blame the tenant for damages caused by others and the tenant will know what the landlord intends to repair. If the tenant keeps good records the landlord will not be able to keep the tenant’s security deposit for damages that were actually caused by others. Taking pictures before moving in is also strongly recommended.
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Posted by: Micasa Emlak - Real Estate - Immobilen | October 30, 2006 7:27 AM