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Wednesday, March 21, 2018

The Russian housing expects double-digit decline

This year in Russia for the first time in several years there will be a serious housing bust, as evidenced by the data for the first quarter. This prevents a further fall in prices, which are now at historically low levels. Does it make sense, following the recommendation of the government, to invest in housing, or should I wait a little longer?

According to the experts of the market, by the end of the year the volume of housing construction will decrease by at least 10%, and a major factor in this process is the reduction in effective housing demand due to falling incomes. The government is trying to stimulate demand by subsidizing mortgage rates, but this mechanism is not a panacea.

Impregnable a hundred million “squares”

“Housing should be sold, and people need to buy. Now is the best time. Statistics is encouraging: we see that the mortgage began to grow not only on the primary housing market”

According to Rosstat, in the first quarter of this year Russia introduced a 15.6 million square meters of housing, or 16.3% less than in the same period of 2015. In the segment of individual construction (6.3 million sq m), the decline was even stronger – with 34.4%. Of the top ten subjects of the Federation, which accounts for almost half of the total volume of commissioned housing in the country, the growth of this indicator recorded only in two regions – Leningrad region (plus of 12.9% compared to the first quarter of last year) and Tatarstan (+0,8%). The other leading regions showed decline, in some cases very deep. For example, in Sverdlovsk region it amounted to 43.1% and in the Tyumen (including Khanty-Mansi and Yamalo-Nenets Autonomous district) – 45,1%. In Moscow region and Krasnodar territory, which have long occupied first and second place in Russia by volumes of housing construction, the Federal state statistics service noted a reduction of new housing at 14 and 15.1%, respectively.

However, officials claim that there is nothing catastrophic in terms of no. For example, the Minister of construction and housing of Russia Mikhail Men on the forum “real Estate in Russia” has made it clear that the current decline is partly due to the high base effect, since “the first quarter of 2015 was quite dynamic”, and today, the pace of new housing is 13% higher than the same period in 2014.

Market experts also treat the statistics with caution. In particular, the Association “National Association of housing developers” remind that the first quarter is generally not too significant for the construction market, since the bulk of the delivery (60%) most often occurs at the end of the year, when many developers completed building permits. The volume of construction in winter and spring period is always lower than summer and fall – both because of weather conditions, and because developers at the beginning of the year is usually swing only after the shock of the end of the previous year. At the same time, the head of the Association Kirill Kholopik notes that the study of the 20 largest housing construction of the Russian regions by the end of 2015 showed that exactly half of them, there is a decrease projected for commissioning in 2016, the volume of the housing from 6% to 23%. “This trend is directly related to the lower purchasing power amid rising prices for residential real estate. Almost none of the regions there was a reduction in the cost per square meter of housing”, – says Holopic.

“Indicators of housing construction are not the most optimal, since they reflect the trends of previous years. Worldwide current trends tracked by the number of issued building permits, but we have no such statistics”, – said in turn the General Director of consulting company Macon Realty Group Ilya Volodko. Thus, according to him, the reduction in the volume of input was expected because last year the drop in demand in different regions was 10-25%, and an average of about 17%. “This is indirectly reflected in the rates of housing delivery – the pace of construction has slowed, the number of objects passed into a stage of protracted,” says Volodko.

Back in 2014 the dynamics of housing construction in Russia amounted to 15% – while domestic builders managed to beat the record of the RSFSR, delivered in 1987 (84,2 million versus 72.8 million square meters of housing). At this rate in the current year, the Russian construction complex could easily reach the level of 100 million “squares” a year – such a reference point was designated in April 2011 in his speech in the state Duma Vladimir Putin (then Prime Minister).

His colleagues in the government gave more conservative estimates. For example, two years ago, citing Deputy Minister of construction, housing and utilities of the Russian Federation Alexander Plutnik it was reported that by the end of 2017 the volume of housing construction in Russia will reach 93 million sq m. But this level now looks impregnable – in the past year the volume of commissioned housing decreased by 0.5% to 83.8 mln sq. m, and this year can fall much more significantly. In March, the Deputy Minister of construction and housing and communal services Natalia Antipina said that in 2016, the new housing is expected to reach 76.2 million square meters, which is about 10% less than last year.

“The number of new projects is reduced. I think that this is not the peak of the decline – at the end of the year perhaps the deeper the fall”, – says the Executive Director of the Fund “Institute for urban Economics, Director of the real estate Market” Tatiana Polidi. According to her, the main fundamental factor determining the current state of the housing market, the uncertainty in the economy and the decline in real income. “This factor, in my opinion, only began to gain momentum – think the demand will continue to decline. Developers feel it and do not want to start new projects,” adds Polidi.

“It is obvious that by the end of 2016 the growth of volumes of input will not be – the only question is how much they will shrink. In this case, everything depends on the dynamics of incomes. Based on this factor, I think the drop will be about 12-15 percent,” predicts Mr. Volodko. Moreover, according to him, more acute, this process will be reflected in the leading regions of housing construction, and in those regions where housing is relatively little to build (this includes the majority of subjects of Federation), the falling input even 15% is not much impact on the situation in the construction industry. “In the Moscow region the situation is monitored by the authorities, there are problems with unfinished, therefore, strengthening the construction there have not been forthcoming. In Krasnodar region there were huge performance input, and now there is a large amount of unfinished, which, in my opinion, will be completed in the best case at the same rate” – describes the situation in the regions-leaders Polidi.

Demand around the head

Experts of the Rating Agency building complex (RASK) predict an even deeper recession in the industry at the end of 2016 20-25%, noting a gradual decrease in the volume of portfolio of projects (including housing projects), and a reduction in the total volume of orders for subsequent periods. Assessment RUSK, a continuous drop in the building industry, observed since 2013, and by the end of 2015 the volume of investments into fixed capital of construction companies in comparable prices generally returned to the level of 2000.

Like many other sectors of the real economy, projects are experiencing serious problems with access to loans, and high interest rates are compounded by the growth of overdue debts. According to RASK, for the last two years its share has quadrupled, from 5% at the beginning of 2014 up to 18-20% by the end of the first quarter of 2016. “At the moment the industry is supported by housing construction and stimulation of demand from the population. However, because of the decline in real incomes there is a risk of significant loss of value of domestic demand in the medium term”, – say the experts of the Agency.

A major factor in maintaining demand today is mortgage lending. As reported at the recent meeting of the state Council on development of the construction sector and improvement of urban planning Vladimir Putin, over the last five years that mortgage has provided growth of volumes of housing construction by 60%, and in the economy segment was achieved, an increase of 90%. In a speech at the forum “real Estate in Russia,” Mikhail Men said that in the first quarter of the mortgage market showed an increase of almost 48% and is moving towards the record levels of 2014, when it was delivered an absolute record of investment of citizens in mortgage loans of 1.7 trillion rubles. With the beginning of a new economic crisis, their volume significantly decreased (to 1.1 trillion rubles last year), but the Russian government decided to extend the program of subsidizing interest rates on the primary market, which again pushed the mortgage up. “If last year every third apartment was bought through a program with the state support today the results of a mortgage on the subsidized rate is over 45 percent,” – said Mikhail Men. In early April, the Central Bank reported that mortgage rates fell to the lowest level since the beginning of 2014 to 12.1%.

However, the pumping demand with the help of a mortgage can’t last forever. “Last year, the subsidy rates in the primary market helped to avoid a critical reduction of the mortgage market. But then this tool will be less effective, as there is a limit to the demand for such a mortgage”, – says Tatiana Polidi. In its forecast, this year in the best case we will see the volume of transactions at the level of 2015 or so, so as to predict the recovery to pre-crisis level as of yet.

To maintain the demand for housing and the state uses “verbal intervention”. “Housing should be sold, and people need to buy. Now is the best time. Statistics is encouraging: we see that the mortgage began to grow not only on the market of primary housing, secondary housing begins to intensify. If people used to think that the more the price drops, it is clear that it is unlikely that it can happen. Price still available, she justified,” – said in late April at the Collegium of the Ministry of construction at the end of last year, the first Deputy Chairman of RF government Igor Shuvalov.

Market experts agree with the Deputy Prime Minister, what the real estate prices are now at historically low levels, especially in terms of the currency. But to expect that they will soon begin to grow, too, is not necessary, said Ilya Volodko: “the Growth in housing prices will start at a stage of economic recovery, and this will clearly not happen this year and will not be abrupt but gradual. Today there are no fundamental factors for rapid growth of housing prices no. “The rapid price rise is unlikely to happen – at least in most cities (if the price of oil will rise to $ 100), – adds Tatiana Polidi. – But should we expect a decline in prices, depends on the specific city. If housing is needed to address the housing issue, I would not advise to postpone this issue subject to availability”.

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