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Influences exerted by the macroeconomic parameters on the realty market as well as prerequisites for respective changes in the price trend in between the two halves of the year The dynamics of the respective macroeconomic parameters in the year of 2004 can be characterized by the following indicators. The January burst of inflation (1.8 %) which took place on the eve of the presidential elections, was suppressed down to 1 % a month accompanied with simultaneous bringing to a stop of the rouble strengthening with regard to the US dollar which had earlier caused devaluation of the populations savings. How ever, already by November, this support of the dollar resulted in a new speed up of inflation (1.3 %) so the financial authorities let its rate float free. Nevertheless, the annual growth of inflation comprised 11.57 % (having exceeded the predicted value of the RF Government more than by 1.5 %).

The average nominal dollar rate comprised 27.92 roubles in December whereas it was 29.44 roubles only a year before. Hence, the inflation rate index of the rou ble to the dollar comprised 0.948 roubles in 2004. Thus, the dollar in Russia kept its creeping devaluation in the course of the past year, like that in the year of 2003, and its purchasing power during one year went down by 15.1 %.

For purposes of evaluating the index of the real (both the rouble and the dollar infla tion rectified) realty prices (the IGS index)116, below are the macroeconomic dynamics indi cators in Russia for the recent three years (2002 2004) relative to the December of as well as for certain periods (Table 9).

Table Dynamics of the macroeconomic parameters in 2002 2004:

(December 2001 the datum period) Index of con Rate of Average Index of Index of dollar Index of sumer prices inflation monthly infla purchasing Month, devaluation (relative to (relative to exchange tion of power relative Year (rouble to the datum preceding rate rou dollar in to the consumer dollar) period) period) % ble/dollar Russia basket 12.2001 1,0 18,6 30,09 1,000 1,000 1,2002 1,151 15,1 1,058 1,088 0,12.2002 1,151 15,1 31,84 1,058 1,088 0,2003* 1,120 12,0 0,925 1,211 0,12.2003 1,289 12,0 29,44 0,978 1,318 0,1st half year 1,061 6,1 0,986 1,076 0,2004* 06.2004 1,368 6,1 29,03 0,965 1,418 0,2004* 1,117 11,7 0,948 1,178 0,12.2004 1,44 11,7 27,92 0,928 1,552 0,* Indicators for the period (year, half year).

The IGS index was calculated according to the following formula:

IGS = HPIR/CPI = HPID/IID, where HIPR housing price index, as Rb.; CPI Consumer Price Index, I HPID housing price index, as USD.; IID = CPI/ DIIR index of USD inflation in Russia (vs. the dynamics of consumer price); DIIR index of Rb. depreciation vis vis USD.

Section 4.

Institutional and Macroeconomic Challenges Calculations with regard to the data given in Tables 8 and 9, clearly show that growth of the IGS index in Moscow, which went 14 points up during the first half year, comprised in 2004 on the whole no more than 4.0 % (due to the respective lowering during the following months). However, as compared against the said datum period (December of the year of 2001), the growth in question comprised 34 %. In the Moscow Region, the index of real prices during the year of 2004 went 3 % up while that for the three years (2002 2004) 24 % (Table 10).

Table Dynamics of the average level of realty supply in the Moscow Region in 2002 Indexes of realty nominal values Indexes of realty real value (IGS) Period Moscow Moscow Region Moscow Moscow Region 12.2001 1,0 1,0 1,0 1,12.2002/2001 1,166 1,187 1,07 1,12.2003/2002 1,454 1,338 1,20 1,12.2003/2001 1,696 1,588 1,29 1,1 2 3 4 06.2004/ 1,223 1,201 1,14 1,12.06.2004/ 2,074 1,906 1,46 1,12.12.2004/2003 1,225 1,214 1,04 1,12.2004/2001 2,078 1,928 1,34 1,It obviously follows from the above said that the true realty value was growing faster in the capital of Russia than in the Moscow Region. However, such an impressive result was achieved much due to the previous 2003 results when the annual IGS index in Moscow was twice the similar indicator for the Moscow Region. Nevertheless, in the years of and 2003 the growth rates of the true realty value in both subjects of the Russian Federa tion were approximately the same.

On the whole, volatility of the said macroeconomic parameters did not exert any sig nificant influence on the dollar realty market in the Moscow Region although should this trend continue there is always a possibility for the running of the population away from the dollar to realty scenario to come to life again.

The sequence of events which led to the change of trends on the realty market in Moscow was as follows.

The first alarming signs appeared already in February March of 2004 during the preparation period for the presidential elections as well as right after such. In March, for instance, many Heads of the respective sales departments in a number of developer and broker companies noted lessening of their customer flows while in April even large compa nies recorded some 20 to 40 % lower sales in newly erected living constructions and 10 to 20 % more in May and June. Moreover, under conditions of high and steadily growing oil prices on the world markets, possible causes of such events on the realty market in Mos cow (similarly in the Moscow Region and St. Petersburg as well) remained rather un clear. The banking crisis which started in June July, 2004, seemed to the respective analysts both quite unexpected and rather hard to explain.

Early in July, the RF Central Bank made an official statement about the outflow of for eign currency from the RF to other countries (5.5 bln US dollars during the half year), start ing from February, as caused by the worsening investment climate which was traditionally attributed to the well known events developing around the Yukos oil company as well as RUSSIAN ECONOMY in trends and outlooks to the efforts of the state to cut the inflation rates down. A direct consequence of this was the attendant liquidity crisis both in the banking system and as regards individual enter prises. It was from this particular moment that it was quite clear that nothing else but this very fact became the fundamental cause for the said negative processes in the banking sector and on the real estate markets117.

Both these processes were chain like strengthening each other. The lower inflow of investments from private buyers of realty in newly erected buildings obstacled financing of the housing construction, servicing the bank credits and redemption of the earlier issued promissory notes. This, along with the general liquidity crisis in the country, made it much more difficult for the banks to issue new credits to developers thus only further aggravating their respective (already existing) problems. There followed lesser profitability levels of the housing construction (according to the available official data, the net profits in the housing construction industry went 20 % down during the said half year), the construction rates slowed (in some cases even up to freezing of certain objects), some larger developers became unable to fulfill their obligations to their contractors, creditors and, whats more important, to their respective private investors. Hence, lower attractiveness of living apartments in the buildings still under construction and even the money withdrawn from the problematic banks (about 2 bln US dollars overall), did not at all hurry to start over flowing into the realty market. Plus careless (or, may be, quite purposefully targeted) statements made by certain functionaries (who obviously were in a rush to report to the RF President on fulfilling the task set up by him) about 10 15 % decreases of realty prices in Moscow as well as about availability of lists containing the so called unfair developers, problematic banks, etc.

Thus, the above chain of negative events started not at all with the falling prices on energy carriers, as had been assumed in the 2004 forecast, but rather with pure foreign currency outflow from the country due to reasons within the Russian economy itself. Fur ther on, lower activity of the realty market accompanied with the crisis in the banking sec tor started both to strengthen and to support each other in a sort of mutual way.

Accordingly, growth of realty prices in Moscow in June was sort of minimum and quite indicative of the turning point in the three year long price trend. It became finally clear in July that the said turning point in the realty market trend had been caused by re spective events in the macroeconomic sphere. It took place simultaneously in different in dustries of economy and was supported by efforts of the authorities in sterilizing the money mass (in order to decrease the ensuing inflation).

At first, the full of confidence declaration by Sergei Ignatiev, Chairman of the RF Cen tral Bank (made on July 3), that the foreign currency outflow and the liquidity crisis had al ready been overcome, gave certain hopes for quick enough restoring growth of demand and prices on the realty market in Moscow. However, later on, as clearly shown by con crete results in July, such foreign currency outflow reached the record mark (up to 1.1 bln US dollars), nor did it any slow down in August. Taking capitals out of the country became the business of not only our own countrymen but that of foreign investors as well finding themselves under conditions of pressing political instability, they, after all, were not yet quite ready to invest money in the Russian economy.

However, there are, indeed, some other factors to hinder the price growth process.

Primarily so with regard to lowering the accessibility factor for the average income group buyers. In 2002 2003, significant price growth was ensured mainly by exceeding the Sternik, G.M. Influence of the banking crisis on the realty market (report at the conference). www.realtymarket.org.

Section 4.

Institutional and Macroeconomic Challenges purchasing capacity over the supply price level which resulted in a record growth of the respective sales. The sales volume sharply fell down in early 2004 and such cut down in the demand involved not only high income population groups (as a direct/indirect result of the foreign currency outflow) but much less well to do citizens as well. Which, in its turn, demonstrated that the realty price growth started to outstrip real possibilities of the popu lation on the whole. Quite a large number of buyers just couldnt keep up on the par with the price race andand simply had to leave the market. Developing of the respective mortgage crediting system is normally happening somewhat late with regard to these very processes. The realty renting rates, at that, were growing much slower than those of the sales with the resulting lower investment attractiveness of such living apartments buying.

Because of these reasons, prices on the realty market just stopped growing. Even though during five months running, the said events were developing rather according to the prick the bubble scenario, this June saw the practical implementation of the gradual stabilization scenario. Moreover, this stabilization had started about half a year before and at the level of something like 90 % of the earlier forecasted level. As of the present day, the realty market is being so far kept from a serious avalanche mainly due to high world oil prices accompanied at that with the record volumes of exports.

Fully in connection with this, the earlier growth of prices forecast in the second half of the year of 2004, was then duly corrected (see Fig. 25). Which can be described as mod erately optimistic: slowly increasing business volumes under stabilized prices On the whole, some fluctuating stability was expected to be preserved for the year of 2005 (aver age price level fluctuations within the 1900 to 2000 US dollars per sq. m range). In certain realty segments (elite dwelling, cottages, land) however, a possibility still remained for continuing the price growth accompanied with the respective transition to stabilization just within a half year period. While, at the same time, as regards other objects (low quality housing facilities, newly constructed housing buildings in certain areas of Moscow, cot tages in some so called unfavourable cottage settlements), lower prices were fore casted but not of the landslide nature at all. Because the de facto price dynamics in the 2 nd half year quite corresponded to the above forecast.

Trends of the second half year As was shown above (see Table 8), the realty prices in both Moscow and the Moscow Region were rather stable during the second half of the year with only certain segments of the primary and secondary markets demonstrating some insignificant increase or de crease of such prices. As to their respective turnovers and activities, then, according to the data on the profile units of the MIEL Realty company, the quantity dynamics of the deals registered by them, was as follows (see Fig. 23).

According to the management data of this company, the sales volume in this seg ment of the Moscow realty market (which reached its minimum in June) kept increasing till the end of the year and finally returned to the level of April 2.92, relative to the December 2002. The sales volume of the living apartments on the secondary market of Moscow (ac cording to the data of the respective department of the MIEL Realty company) were first slightly decreasing after April but then they got sort of stabilized at the 1.25 level and, al ready by the end of the year, grew up to 2.0, relative to the same datum period. According to the same source, the sales volumes of cottages were steadily going down from April till August (from 1.43 to 0.45 by the December 2002) but during the last months they grew up to the June 1.10 level. As to the rent segment, its activity was much higher than such in the preceding year; the maximum turnover level (as compared against the December 2002) RUSSIAN ECONOMY in trends and outlooks was achieved in November 2004 3.10, but then it went down to 2.3 in December, al though comprising only 1.5 in December 2003.

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