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Price dynamics in the late 2002 proved forecast estimates with regard to the group of regional centers, which cannot be argued about St. Petersburg and Moscow that demonstrated an unexpected growth over the period in question. The results of the 9 months of the year allowed conclusion about contrast price dynamics on different housing markets. All the cities of the sample can be divided into three different groups:

regional centers, with stabilization being steady there;

St. Petersburg, with the ongoing price rise; and the city of Moscow and Moscow oblast that experienced a new price rise in the late 2002.

The state of housing markets in the groups and single cities Let us depict the situation in each of the aforementioned groups.

As for the group of regional centers, the strengthening trend to stabilization allowed various scenarios of development of the situation (see Fig. 1) INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru 1,1,Ekaterinburg Novosibirsk 1,Perm Irkutsk N. Novgorod Ulyanovsk 0,Tver Regional Centers 0,Fig. 13. Housing offer price indices in Russian cities regional centers, 2002.

It was Perm, Novosibirsk and Ulyanovsk where the price rise was the greatest one in 2001; consequently, as expected, in 2002 stabilization overshot an original scenario: given that in winter offers were growing for some time, they dropped between spring to summer, while autumn saw a slight seasonal price rise. It was just Ulyanovsk where prices grew over the year (at 20%). The activity on the market fell, too. For instance, in Novosibrsk the Department of Justice of the oblast reported a 17% decrease in the average monthly volume of real estate transactions vs. 2001 and a 22% one compared with its respective rate of 2000.

In 2002, for the first time ever there has been no autumn intensification of operations on the Ekaterinburg market. Traditionally, it led to a decrease in the volume of offer and acceleration of the price rise. Last autumn, the number of flats for sale was growing, which is not typical for this particular season. The cause for such a situation lies with the lowering demand, because a considerable part of potential buyers had to postpone the purchase of a new flat due to a rapid price rise for them. The time period between the moment the flat is put on the market for sale and until its actual purchase remains stable, which testifies to a low activity on the market, and so far there have been no prerequisites for the market resurgence in the short run.

y t.

c Apr Jan.

O Jul Dec.

Feb.

Dec.

May Nov.

Aug.

June Sept.

March RUSSIAN ECONOMY in trends and outlooks As last year the N. Novgorod, Tver and Irkutsk markets were slow with the price rise and rebound to the pre-crisis level, the transition to stabilization has followed the crawl-up scenario (asymptotically): offer prices continued to grow between winter to spring with a gradual slowdown and transition to a stable level followed by some rise in autumn (with the overall increment rate accounting for 1621%).

In 2001 the average increment in nominal USD-denominated prices across regional centers accounted for 41%, while in 2002 9%.

The situation in St. Petersburg appeared radically contrast to the above (see Fig.2) The price rise in Moscow and St. Petersburg was taking practically synchronous pace from the lowest point of the post-crisis period (May-June 2000) through the late 2001. Last year, the latter city experienced a non-stop offer price rise, with the respective increment accounting for 31% vs. December 2001. Thus St. Petersburg has become the only city (of all those included in the sample in question) where the offer price level has exceeded the precrisis one.

1,1,1,2 Moscow 1,Moscow oblast St. Petersburg 0,XII I II III IV V VI VII VIII IX X XI XII Fig. 14. Housing offer price indices in the city of Moscow, Moscow oblast and St. Petersburg, There is every reason to believe that such developments in the Northern Russian capital are related to the upcoming celebration of its 300th anniversary. The jubilee and the highest offices focus on the city (more specifically, by increasingly making it the main arena for various summits and forums) have boosted tourism and ensured more frequent visits of representatives of political and business elites. The opportunity to capitalize on satisfying the increased rise in demand for goods and services generated a trade capital inflow, primarily on the part of foreign and Moscow-based net retail companies (supermarkets). As a result, there arose a very high market demand for trade facilities and offices for lease, which then outspreaded over investment projects on the market for commercial real estate and housing where the ongoing price rise has overrun any expectations.

INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru Notably, the price rise took place chiefly downtown where vigorous efforts are undertaken to transform the so-called communal apartments located in the pre-Revolution buildings into attractive objects for representatives of the noted corporations. By contrast, other citys districts, with their mostly modern standard blocs of flats experienced just a minimal price rise.

Once the celebration and the governor elections are over, one can expect the investment inflow in the city to contract, followed by stabilization and even downfall of housing prices.

As concerns Moscow, stabilization there was attained by summer under the crawl-up scenario (a gradual discontinuation of the rise in offer prices). However, there has been no decline in prices and they have been climbing up since August, with the total annual increment accounting for 17% (see Fig.3) 1,1,1,prices 1,volume of sales 0,USD 0,turnover 0,0, Fig.15 Nominal housing market indices in Moscow in The pattern of the Moscow oblasts housing markets development was analogous to that of the city of Moscow (with a regular half-year time lag vs. the latters schedule, though) the annual increment rate in nominal prices in USD equivalent made up 28% (see Fig.4), with a notable rise in operations on the housing market for real estate in the towns around Moscow.

RUSSIAN ECONOMY in trends and outlooks 1,1,1,prices volume of 0,sales 0,USD turnover 0,0, Fig.16 Nominal housing market indices in Moscow oblast in There are different views on the causes for a new price rise in both regions.

Some experts attribute the autumn growth to an insufficient volume of housing offer on the secondary market, which in turn is related to an accelerated disappearance of flats off the market in the wake of a price stabilization noted between spring to summer 2002. Indeed, according to Miel agency, in April 2002 the volume of offer across the city of Moscow as a whole dropped notably, and until the end of the year it did not exceed the respective level of May 2002. At the same time, since May 2002 the share of flats withdrawn from the market relative to the number of offers was growing practically non-stop.

It is clear that the volume of offer of housing on the market depends on two factors:

first, the sellers eagerness to put their objects on sale and, second, on the volume of sales, i.e.

the pace of washing the offer away. It can be assumed that rather a sharp transition from high growth rates on the market in 2001 towards their decline up to stabilization in the first half 2002 has lowered sellers activity, and the inflow of objects to the market fell accordingly.

At the same time, as noted above, the monthly volumes of apartment sales in the city of Moscow and around it showed a fairly considerable growth.

According to the Moscow City Real Estate Transaction Registration Department, the dynamics of the volume of deals registered in the city appeared different from previous years.

The seasonal, January decline in the volume of deals (this time by nearly 40%) was followed by a regular increase, with the July index breaking the December record rate at a margin of 30%, while at the end of the year the rate was back to the level reported in December 2001.

Overall, during 2002 the volume of registered purchase/sale transactions covered 76,000 flats, thus beating the respective index of the prior year at 9% and the level of 2000 INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru at 34%. At the same time, the share of real estate deals stricken in the second half of made up 57%.

However, these data needs some adjustment, because since 2000, in compliance with newly adopted Law on registration of property rights for real estate and transactions involving it of July 21, 1997 # 122-FZ (as amended on March 5, 200135), the RF Ministry of Justice was keen to alter procedures of registration of deals involving purchase of flats in newly erected houses: more specifically, they insisted on the transition from the so-called reassignment of the claim right from the developer to the buyer36 towards a normal registration of the developers property rights for the houses to be put into operation and registration of a purchase/sale deal between the developer and the buyer identical to the ones stricken on the secondary market for housing. At that point, some confusing of purchase/sale volumes in the secondary market with those in the primary markets occurs.

In practice, however, changes in the procedures were taking a slow pace, and sales of most of newly built flats were still being registered according to the said re-assignment of the claim right procedure. In reality, in 2002, according to some experts dealing with sales of flats on the primary market, it was just some to 1/3 of them that was registered as purchase/sale deals. In other words, basing on their investment contract with the city, developers fixed the property rights with themselves and would consequently sell such flats to private buyers, and those were reported as transactions.

Notwithstanding, if we want to expose the dynamics of the volume of deals on the secondary market only and exclude the double count, this relatively small share of purchase/sale transactions (some 7,000 to 10,000 flats in 2002 and 3-5,000 in 2001 in absolute terms) should be ignored by the official statistics.

The table below highlights on the dynamics of the volume of purchase/sale deals on the secondary market in the city of Moscow between 1994 through 2002.

Table Annual volume of apartment sales on the secondary market of the city of Moscow as % as % to year As Thos. units to the prior year (1997 = 100%) 1994 70,817 83,1995 79,664 112,5 94,1996 71,068 89,2 83,1997 84,748 119,2 100,1998 77,526 91,5 91,1999 76,093 98,2 89,2000 63,726 83,7 75,2001* 67,0 105,1 79,2002* 68,0 101,5 80, In Moscow, the law was put in effect since early This specific procedure implies the developer-investor signing an Agreement on re-assignment of the claim right for the given apartment with a buyer who appeals to the Moscow City Real Estate Transaction Registration Department and obtains the property right for the flat. Once registered the agreement is qualified for the Registration of Newly Rights section, rather than Purchase/Sale Transactions one.

RUSSIAN ECONOMY in trends and outlooks *the data for 2001-02 were computed with account of exclusion of the double count caused by mixing of deals on the secondary and primary markets because of the transition from the sales of newly built housing basing on re-assignment of the claim right from the developer to the buyer to the procedures of registration of the developer right for houses put into operation and the consequent registration of a purchase/sale deal between the developer and the buyer.

The data of Table 2 show that the intensity of operations on the secondary Moscow market began to rise between 2001-02, however, it has not yet hit the pre-crisis level of when it had reached its peak over the whole period between 1994 to 2002.

The intensity of operations on the Moscow market was as follows: given that in there were 44,414 registered deals involving purchases/sales of flats, in 2001 47,903 (up at 11.4%) and in 2002 49,471 (another 3.3% up), of which 56% was stricken over the second half year.

Thus, the rise in the monthly volume of sales over the year could form one of the reasons for contraction in the volume of offer on the market and the consequent price rise. At the same time, this process should have some grounds more specifically, a rising demand for housing. According to some experts, such a rise, indeed, has taken place since last July and been underway until February 2003. That was noted both by the Moscow and St. Petersburg analysts, as well as those from Novosibirsk, Vladivostok, and Voronezh. This gives a rise to a natural question about the causes of such a change.

The interrelation between macroeconomic parameters and prices for housing in the nations capital in 2002 and price forecast options for 2003.

It is the contraction in the increment rate in retail goods turnover noted for the first time over recent years that should be considered a major reason for the rise in demand for housing in Moscow. According to Goskomstat of RF, after 3 quarters of 2002 the respective index for Moscow accounted just for 3.5% vs. 7.6% reported over the respective period of 2001. That took place against a continuous rise in the populations real incomes. All that in turn puts an additional pressure onto the market and generates the price rise.

Another reason of the buying rush on the real estate market in January may well be an attempt to escape from the USD caused by the fear of its depreciation due to the potential military conflict with Iraq, the state of the US market, and the strengthening Euro. The lack of clarity may urge holders of USD-denominated assets to invest them in a more stable real estate.

It is well known that Russias macroeconomic situation is highly dependent on world oil prices. While the price for Russian oil slid to USD 18.8/barrel in the aftermath of 09/11, Russia economic growth rate immediately dropped to 2.5%.

In the 4th quarter 2001 the output of goods and services of the five basic sectors (industrial, construction, agrarian, transport, and retail trade) fell by 5.5% in comparable prices vs.

the 3rd quarter, while in the latter it was at 13.5% higher than in the 2nd one. The decline further intensified in the 1st quarter 2002 (by 11.5% vs. the 4th quarter 2001).

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