Politics and builders

In June vice-premier Alexander Zhukov admitted that the rates of housing construction in Russia since the beginning of 2008 had noticeably dropped. The increase in housing construction activity from January to May 2008 was 106%, and in the past year this number reached 141%. Zhukov explained the decrease by the rise in price of the mortgages that led to a reduction of demand. Another reason is scarcity of territories for construction. The authority will combat this, putting unused land of federal state institutions into circulation. In the opinion of the director of the analytical portal IRN.RU, Oleg Repchenko, a no less important factor is the problem with facilities, in particular - by electrical and gas piping systems. These problems are not new; they existed yesterday, and will be with us tomorrow…

In the height of the season, in June, prices on cement suddenly began to fall. The Pikalevsky plant, the largest in the region, reduced prices by 9% - the first case since 2005. The plant, which accounts for two thirds of the needs 2/3 which ensures the needs of house builders in Petersburg and the Oblast, decreased output of cement by three times in spring because of repairs at the Pikalevsky aluminum plant, that provides raw material.

The cancellation of customs duties also played a role: raw material began to be imported from Turkey, Belarus, and even China. But the duty (5%) was not critical in the past, and import held rather kept the lack of shipping capacities in check.

Prices on cement, analysts note, are characterized by instability. In 2006 they grew by 14.4%, from January to September 2007 - by 106%. The further scenario is unpredictable - clear reasons for reduction in the prices of the cement were not observed. Prices of housing and cement are connected only partially: in the price of apartments the share of concrete is about 7-7.5%. But this is an important market indicator, and it behaves incomprehensibly.

The Deputy Minister of regional development RF Sergey Kruglik assumed that the situation in Russia is influenced by the world crisis on the mortgage and housing market. Partly yes: it is possible to build socialism in an individual country but not a developed housing market.

However, the international news increasingly resembles reports from the front. In July one of the largest mortgage banks of the USA, California IndyMac, went bankrupt. The share price of the semi-state mortgage companies Fannie Mae and Freddie Mac fell drastically ($60 billion Russian gold currency reserve is invested in the papers of the American Finance Ministry. And another $100 billion in bonds of Fannie Mae and Freddie Mac). They control bills of a sum of approximately $5 trillion, and their crash would lead to a social upheaval, comparable with the Great Depression. George Bush has already asked congress to give to them credit of $300 billion; advance issue of shares is also being discussed (the owner of which may be the state).

The statement of the RF Ministry of Finance said, that Russian rubles were not invested in the shares, but in the bills of Fannie Mae and Freddie Mac, and that the U.S. Government publicly stated its readiness to support these companies. Aleksey Kudrin stated at the press conference: the Russian budget “has not lost a cent” because of the problems in the USA.

But there are indirect losses: our banks can clearly next expect stabilization on world financial market this year, and even the following year is open to question.

Mortgage at the crossroads

In the first half-year, the mortgage creditors of Petersburg issued 11 000 loans for the sum of more than 28 billion rubles. Average sum of credit was 2.5 million. rubles. The growth rates in mortgage underwriting continue to drop. In the second quarter, the increase in the number of loans issued was only 2%. In the opinion of experts, this is directly connected with the toughening loan conditions: “If before the crisis I was confident of the approval of client in 90% of cases, then today this probability is not more than 55-60%”, says Maxim Yeltsov, general director of First mortgage agency. In the opinion of the director of Filin, Vladimir Medvedev, reduction in the demand for the mortgage is connected with the state of real estate market: “Prices on housing in Petersburg have grown by 30% since the beginning of the year, and many potential buyers have not yet digested this fact financially or psychologically”.

Experts note that the problems began with “the bubble” of overvalued real estate on the housing market. In the USA the statistics in June proved to be higher than expected: there was an increase in the number of the houses started and building permits. But general tendencies are thus far the same: an increase in private defaults, reduction in the price of house ownerships, decrease in the volumes of transactions… Last year 2 million Americans lost their homes. The slowing down of growth in construction, an important industry for the USA, is reflected also in related industries.

Prices in Great Britain dropped by 2% in June (by 8.7% for the year), and mortgage rates are increasing: this decrease threatens to cause a British economic depression. In Spain they also speaking about “the crisis”; a development company in Valencia went bankrupt; in Catalonia it is proposed to build small apartments (from 15 to 40 sq. m.). The decrease is most noticeable, where prices on housing grew intensively in recent years. Besides the USA, England and Spain the list includes Ireland (- 13,7% since the beginning of the year) and Latvia (- 28,7%).

No agreement among participants

In Russia the statement of the head of Oneksim group, Mikhail Prokhorov is cause for discussion

“Many development companies will collapse as a result of the increase in the prime cost of projects and worsening in the access to markets for financing. There will be companies that can be acquired. For developers at the present moment it is already very difficult to get loans. But they have launched so many construction projects!”. The head of Mirax Group Sergey Polonskiy disagrees.

The head of AFI Development Alexander Khaldey considers that “the world crisis of liquidity, which complicated developers’ access to loans, may even become a problem for the important players”. In the interview with Reuters it he stated that it will be possible to buy out building by autumn.

In Petersburg no one is talking about a crisis so far. “A correction of demand by 20%” is noted. “Sales are not going as well,” confirms the general director of Itaka Sergey Galalu. “Although I would exclude the possibility of protracted stagnation in the next 1.5-2 years”.

In summer several important construction firms announced discounts: M-Industriya is giving away every 10th square meter in the housing complex “Poem by three lakes”, Stroymontazh” proposes to save up to 1 million rubles (discount plus special conditions on the mortgage). LEK promises to give away from 2 to 6 sq. m. - depending on the area of the apartment. Severny Gorod proposes “special conditions” for purchasing parking spots…

Mikhail Bimon from Peterburgskaya Nedvizhimost notes: “Discounts are caused by the fact that these firms somewhat overestimated their objects (with the calculation of market growth, which did not happen in June)”. Possibly, these are ordinary “seasonal games”. But the stagnation of 2005 was at first also accompanied by discounts and other methods of stimulating demand

Will there be stagnation?

General director of Adveks Vladimir Gavrilchuk speaks about “stagnation phenomena”: “Today's situation is characterized as unsteady equilibrium. And the market may recover in different directions”. Gavrilchuk considers key factors to be the social and economic policy of the state (including investing in housing programs), the loan situation, and also energy prices. A new factor is the area of social expectations. “To anticipate it is complex. In the rest of world, real estate (for wealthy people and the middle class) is priority number one. In Moscow and Petersburg especially, the prices cut off the substantial part of the new middle class. Even many wealthy people rent housing for years - and they are not going to change their way of life. But the change of priorities is a complex and long-term task”. According to Gavrilchuk, a new group appeared: “These are even not top managers, but simply highly-paid specialists. They are the ones who fill the bars, restaurants, entertaining institutions… But it is thus far unclear, whether they are ready to acquire prestigious housing.”

Vyacheslav Semenenko (Setl group) also talks about “the qualified, economically active” group: “They take a loan for 6 years - but they prefer to return it in 2 years!” According to the data  from “Expert”, we get an interesting picture of the distribution of the “mean” wage: it is received by about 5% of the population. For another 10% - it is higher and considerably higher. The remaining 85% receive less. But housing prices are already higher than in Central Europe. “Economically active” citizens actively occupy neighboring Finland, and they purchase apartment in Montenegro or Bulgaria… however, the stagnation of demand has occurred before. But in the past it was not “was propped up” from below by dozens of abandoned multi-million dollar projects. 

Prices of housing under construction (per sq.m.)

Data from Petersburgskaya Nedzhimost marketing department

Price dynamic on the secondary market (per sq.m.)                  

Data from Dmitry Zhitkov and Nedvizhimost Peterburga

Dynamic of Petersburg market of mortgage loan

Data from Nedvizhimost Peterburga