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Research109 revealed that the deceleration of mortgage between the 3rd quarter 2005 and the 2nd quarter 2006 could be attributed primarily to a catastrophic scarcity of housing offer on the market and a consequent rapid price rise for housing. That resulted in sellers refusing to deal with mortgage buyers and opting to conduct of a kind of auctions for buyers with cash at hand instead.

The situation further fueled the propelled price rise, which started in the summer (at a pace of 810% a month in the early 2006), which in turn formed yet a Chinese Wall to those who wished to apply for a mortgage loan: while they were dealing with a bank, a seller would raise the price, and a mortgage loan would fall short of securing purchase money.

The federal and regional tiers of the government, as well as operators on the house construction and sales markets, were at great pains to improve the situation on the market, and they ultimately succeeded, as the fall in offer of newly built housing had stopped by mid-2006.

Meanwhile, there emerged factors that, since summer that year, began to fuel the volume of offer on the market the slowdown of price rise rates on the secondary market compelled sellers to get back to the market, while investors decided to fix their profits, etc.

As a result, the pace of the price rise dropped from 810% in February and March to 6% in June and further down to 4% in July and August, 2% in October and 0% in December, while the volume of offer on Moscows secondary market grew from 1516,000 apartments in the period between June and July up to 23,000 in October and further up 3031,000 in the period between November and December. By the late-2006 the market had entered the stabilization stage and prices had hit the level of USD4,828/sq.m. (up at 19%). Meanwhile, MHM saw the start of a new stage of growth, and the mortgage sales index soared to 12.5.

Thus the research demonstrated that the situation on a galloping real estate market has a substantial impact on the mortgage dynamic, volume and proportion of mortgage sales.

Fig. 4 shows that every stage of growth on the MHM market takes place during the stabilization stage on the housing market and, vice versa, at the beginning of the price rise stage the housing market sees discontinuation of growth in the number of mortgage sales.

Sternik G.M., Korobkova M.V. et al. Rynok zhilya Moskovskogo regiona v 2005 g. Analiz i prognoz. MIEL-Nedvizhimost, Moscow, 2005.

Section Institutional Problems Fig. 3. Dynamics of the Volume of Offer and Prices on the Moscow Housing Market in 2004Fig.4. The Apartment Offer Price Index in Moscow and the Index of Volume of Mortgage Sales (by the data of MIEL-Nedvizhimost) in 2002These processes, however, appear somewhat shifted in time: the start of growth in the volume of mortgage sales outpaces by 34 months the start of stability on the housing market.

RUSSIAN ECONOMY IN trends and outlooks That is why on Fig. 5 the curve of the volume of sales is biased forward for 3 months, and it is clear that the volume of mortgage sales changes in phase opposition to price changes on the housing market (the effect of some kind of mortgage swing).

Fig. 5. The Apartment Offer Price Index in Moscow and the Index of Volume of Mortgage Sales (with a 3-month lag) in 2002The study into statistical relation between monthly price increments on the housing market and monthly increments in the volume of mortgage sales allows one to build correlation as follows: in the period when the prices remain stable (monthly increment values account for +/1%), the monthly increments in the volume of mortgage sales account for 510% on average (the dispersion of points being great between 5% and 20%). When the pace of the price rise hits the level of 45% a month, the volume of mortgage sales discontinues to grow (the respective increment being in the range between 5% and 5%). Finally, under a price rise rate accounting for 78% and more, the volume of mortgage sales somewhat declines, with the monthly increment rates being within the range between 0 and 5%.

So, the main cause for MHMs behavior were changes in the situation on the housing market.

This regularity of the correlation between MHM and HM allows one to extrapolate forecasts of the price dynamics for housing calculated for Moscow since 1995 onto the mortgage sales market. The 200708 projection of the dynamic of housing prices in Moscow built in 2006 using the non-harmonic decomposition of the price trend110 implied stability of prices (with a possibility for a minor correction) in 2007 and transition towards a new stage of acceleration of the price rise rates in 2008. In conjunction with this, the analysts projected a rise in the volume of mortgage sales in 2007 and deceleration of their growth in 2008.

The year of 2007 showed that their projection was quite accurate for the first 10 months, with the renewal of the price rise noted only in the last 23 months of the year. As concerns accuracy of the forecast of the dynamic of MHM indicators, the results appeared ambiguous.

Sternik G/M/, Krasnopolskaya A.N. Metod negarmonicheskogo razlozheniya tsenovogo trenda-www. realtymarket.ru, July 2006.

Section Institutional Problems The proportion of mortgage sales was on the rise, as predicted, but the total number of mortgage sales in 2007 displayedposted practically no rise, albeit the proportion of mortgage sales in the overall number of transactions continued to surge. These results require a more detailed examination.

As shown on Fig. 3, in March 2005, the total monthly offer volume of apartments in Moscow accounted for 36,000. That was the moment when demand began to grow, and by July 2005 the number of apartments plunged to 17,000, due to contraction in the time of exposition and washing-out of offer. The offer volume had held on this level (17,00022,apartments) until August 2006, while falling down sometimes to 1215,000. Then demand fell and the market saw the process of accumulation of unsold apartments, and by March the offer volume skyrocketed to an unprecedented level of 57,000. The offer prices were on the rise until the late-2006 and stabilized since then. Since April there was noted a gradual rise in demand and a new washing out of offer, because of which the offer volume plunged to 40,000 and, during the next two months when prices renewed their rise, further to 3435,apartments.

So, the contraction in the volume of offer between mid-2005 and mid-2006, along with the acceleration of price rise rates, formed the main cause for the slowdown of growth in the number of mortgage sales. The consequent growth in the offer volume in the late-2006, even under the decline that started since the spring 2007, created conditions for an accelerated rise in the volume of mortgage sales. But such a such a rise did not take place in 2007.

Fig. 6 references data of the Moscow Division of the Federal Registration Service (DFRS) on the overall number of registered apartment sales on the local secondary market.

Fig. 6. Dynamic of the Number of Registered Apartment Sales on the Moscow Secondary Market for Housing in 2002The data evidence that the volume of sales began to decline since 2005. More specifically, between October 2004 and September 2005 the average monthly volume was 6,deals, while over the next 12 months it made up 6,300 deals (down at 9.4%), and in the months after that it plunged at another 9.2%. Underpinning the first fall (under a high demand) was scarcity (and even shortage) of offer, while demand dropped substantially in 2007, which fueled a further fall in the volume of sales. Now, basing on the same source, let us ex RUSSIAN ECONOMY IN trends and outlooks amine data on the volume of mortgage sales (Fig. 7). According to Moscows DFRS, between the spring 2005 and the spring 2006 the number of registered (legitimate111) mortgage sales was being stable (some 500 a month). Since March 2006 it began to grow and climbed up to its peak (1,800) in September 2006, after which it was holding at the level of 1,000 to 1,until June 2007. The volume of mortgage sales had grown to 1,500 by September 2007. Such a dynamic can be easily explained by the already identified causes, namely, the shortage of offer between 2005 and the early 2006; the rise in the offer volume at the end of the year; a growing demand for mortgage in 2007, despite the overall fall in demand on the market.

Fig. 7. The Number of Registered Legitimate Mortgage Sales and Their Proportion in the Aggregate Number of Housing Sales in Moscow in 2005-07.

Because of the above, the proportion of mortgage sales in Moscow was on the rise: in 2005 it accounted for 510% a month, in 2006 1517% (with the September peak of 33%), and in 2007 it hit the level of 1824%.

So, the mortgage markets behavior appeared closely related to the situation on the market for housing as a whole, and the mortgage swing is a steady regularity of MHM: under stable prices and a significant volume of offer on the market, even providing the general demand declines, the volume of mortgage sales and their proportion in particular are on the rise, while a growing demand, lower offer volume and high price rise rates entail deceleration in the growth of the respective indices.

Meaning the genuine mortgage sales, which differ from the simple usage of apartment as collateral against a loan, which can be spent on purposes other than a new apartment.

Section Institutional Problems 5. 4. 5. Forecast and Main Conclusions Since 1995 the annual forecasting of price trends on the Moscow city and other cities markets for housing implied employment of economico-mathematical models112. Until (including the post-crisis renewal stage) these models ensured a great accuracy of forecasting.

In the past 67 years all Russian cities witnessed a constant price rise for housing. At the beginning the fact was perceived only as an impediment to the building of economicomathematical models in the conditions of absence of market fluctuations. Experts conducted their forecasting (not always successfully, though) on the basis of analysis of individual factors and their effect on pricing. But the models failed to predict a non-stop price rise on the second stage of development of Russias housing market and the 2003 and 2005 explosive rise in particular, while we considered the consequences of the stages as prerequisites of the rise and collapse of a bubble on the Moscow city housing market. Interestingly, at the time, British analysts likewise discussed the bubble scenario as the most visible challenge facing the housing markets in UK, US, Canada, Australia, and some other countries worldwide.

In the summer 2006, Russian analysts laid a hypothesis that, trailing the general economic growth in Russia, growth in the housing market became sustained113.

Then they developed the non-harmonic price trend decomposition114, which enabled them to build, between December and January of the respective years, the medium-term forecast (for 2007 and 2008) of price dynamics in Moscow, Moscow oblast, and another 8 Russian cities115. They predicted that a price stabilization stage with possible price fluctuations at +/5% should have started since the early-2007. It would be lasting at least until the early2008, after which there should occur a new price rise stage.

The past 12 months allow us to compare the forecasts with the reality.

The final data on 2007 (Tables 16 and 23) show that as concerns the transition to stabilization of prices, the forecasts demonstrated a great deal of accuracy (albeit the half-year results across Perm, Novosibirsk, and St. Petersburg biased over 10%). As for Moscow, Moscow oblast, Yekaterinburg, and Tver, life was obediently following the forecasts, but just for the first 10 months of the year. However, the last 23 months of the year witnessed a new price rise, which overrun the forecasts, and this needs a further explanation.

The first, major cause for the new price rise lies in the political sphere: the countrys leadership has managed to avoid a pre-election clash between power groupings, as well as a conflict between power and business, particularly, after nomination of the most acceptable for the society candidates for presidency and the position of the government head. That prevented a possible capital outflow and encouraged the population to realize their pent-up demand, which was back-upped by a substantial rise in their real incomes and savings (in 2007, the real salaries and wages were up at 16% vs. 13.4% reported in 2006).

The second, macroeconomic cause became a drastic rise in the world oil prices by the end of the year (hitting figures a. USD 100/barrel) in the autumn 2007, unseen before invest Sternik G.M. Statistichesky podkhod k prognozitovaniyu tsen na zhilye. Journal of RAS Ekonomika i matematicheskiye metody, vol. 34, issue 1, 1998, p. 8590.

Sternik G.M. Est li tsikly na rynke nedvizhimosti www.realtymarket.ru, June 2006.

Sternik G.M., Krasnopolskaya A.N. Negarmonicheskoye razlozheniye tsenovoy dinamiki rynka zhilya Moskvy. www.realtymarket.ru, July 2006.

Sternik G.M. Tseny na rynke zhilya gorodov Rossii v 19902006 gjdakh: analiz i prognoz. Analiticheskaya gruppa G. M. Sternika. www. realtymarket.ru, January 2006.

RUSSIAN ECONOMY IN trends and outlooks ment inflow and capital inflow in the national economy (the net capital inflow renewed in the 4th quarter of the year, thus reversing the tendency that had been persisting a quarter earlier), with all their respective effects on the real estate market.

Hence the third cause, that is, the continuous depreciation of the US Dollar, some tightening of mortgage loan terms as a reaction to the US crisis on the subprime housing market, and the inflation hike in the fall of 2007 engendered a new wave of mistrust in the state of the national financial system, which formed an additional incentive for a higher-income-bracket strata to shop on the housing market.

As for other factors, they remained within the limits described in our 2006 paper116.

As a result, the stabilization stage in the city of Moscow and Moscow oblast proved to be at 34 months shorter than the forecasted one and accounted for 10 months vs. 48 months registered in other cities, and the respective ultimate increment by the end of the year proved to be somewhat greater (while the forecasts proved to be absolutely accurate, so far as the nature of the price dynamic is concerned).

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