Whats Going on in Russia

Don’t let the New Cold War put you off buying property in Russia. Most if not all of the political analysis in the English-speaking press is shallow and simplistic, and doesn’t acknowledge the fact that almost everyone in Russia loves the idea of being European. What’s more, the war part of the Cold War was based on the presence of several enormous, battle-ready armies in one small area, and neither the armies, the battle-readiness nor even the border are what they were. Russia might be throwing its weight around rather clumsily at the moment, but in that it’s not unique amongst wealthy, overarmed countries. Non-geopolitically speaking, is it worth buying here?

Prices

The value of my investments here has increased by 70% in the past 18 months, and I have neither been particularly canny nor had the clout to buy in bulk. In monetary terms, 750,000 roubles (about $28,000) invested in an ordinary flat back then is worth 1.3 million (about $51,000) now, which taking into account the depreciation of the dollar, brings the profit up to more like 80%.

To sell now would cost a few hundred dollars in costs and 13% tax on the amount the sale was over a million roubles, ie. 13% of 0.3 million.

Good news aside, though, the market has been stable for several months, and for a year in Moscow. Ordinarily the summer is quiet, but the expected price jump has failed to materialise this year and analysts are talking about the plateau lasting until the spring.

Why?

One theory is that the new requirement to be a local resident has temporarily made it more difficult for speculators to sell, although I have found that red tape here is quite elastic and can’t see it holding any heavyweights back. There are plenty of other theories, but there is one fact, and that is that most Russians are nowhere near being able to afford most flats.

In my neck of the woods a typical flat now costs $50,000, as I mentioned, and an annual net salary of $5000 would be considered low but reasonable. A local is doing really well to take home $10,000 a year. Being out in the sticks, the mortgage market is at the beginning of its infancy, and interest rates are in the order of 12% with enough nasty surprises to put a lot of people off.

Whereas 95% of property deals in the US involve mortgages, only around a tenth of Russian ones do. This has, however, insulated the market from a US sub-prime-style crisis.

Rentals

This is not a conspicuously profitable business, but high house prices are pushing rents up. At the moment the average person can barely afford to rent, and paradoxically the demand consists only of those who absolutely have to rent- the poor and foreign contract workers. For this reason renovation tends to be minimal in rental properties, and you might be able to buy one cheaply. To subsequently let it out, though, would only bring an 8% return where I live, and there is a big drive to get landlords to pay their taxes.

A popular route for landlords is letting “po chasam”- by the hour, or else for a night. They charge a good rate – about $20 in my provincial city- to let a young couple have the flat for an hour or two. They tend to promise great things, but whether or not the flats are as good as they claim I must admit, having a few flats of my own to choose from, I don’t know. The requirement to handle the clients aside, I’m dubious about the reaction of the neighbours to the traffic. That said, these flats do exist in great numbers, and people tend not to lose sleep over their neighbours’ opinions.

Speculation

Russia has one of the world’s highest rates of home ownership, since residents received the rights to their homes at privatisation in the early 1990s. This has led to the general attitude that ownership is a fundamental right and a lot of public ire against those who are accused of driving prices up: speculators. It is said that 40% of new homes here are empty, in spite of the massive demand for housing. Developers are rumoured to hold back choice properties to sell later (one entire building in my neighbourhood seems to fall into this category) and sell parts of their buildings wholesale to businessmen who are also in no hurry to sell them on.

Well, it’s not as though they have mortgages to pay off.

Political pressure against this phenomenon is slowly building. The Governor of a Siberian province recently dragged local builders and estate agents into a meeting to fulminate aginst the problem, and the requirement to be registered locally before selling has been introduced. There has also been a lot of talk about increasing taxes on second home owners.

The sunny side of this for investors is that the President, who has rarely tried to rock the boat, is due to stand down next year and so probably, in my view, won’t start making waves at the end of a successful period in office.

Then again, his successor might need a campaign to get himself off to a punchy start. The tax rise would be difficult to implement, as would any similar measure, because the entire system relies on the registration of local residents. You can register anyone, and who’s going to argue with the kind son who’s registered his grannies to live in his spare flats?

Construction

I said that affordability was a factor in the current price plateau, but there is a second: the volume of construction. Speculation may be soaking up an overlarge share, but the sheer area must be having some effect. The government is committed to having 100 million square metres released every year until 2010. The volume of new property in my and many other cities is at four times its 2005 level, and still nobody is talking about oversupply. The government is itself cofinancing a lot of projects to provide discounted housing for young families, teachers and the like.