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The prior moment of the reversing of the trend fell on June 2005, when after stagnation on the market, which had started in June 2004, the prices began to soar. Just a reminder, in the city of Moscow the price rise was spotted yet in the 1st half 2005, followed by its rapid acceleration (8 10% a month) in the 2nd half of the year. This tendency was in place through the end of the 1st half 2006, and the price rise consequently began to fade in the 2nd half of the year (until November, when it discontinued). In Moscow oblast, the price rise started between September and October 2005, followed by acceleration in its pace up to 12 14% through Septem ber 2006 and its discontinuation in December 2006.

The causes and factors underlying the renewal of the price rise on the capital market for real estate became evident yet between November and December 2005. The main cause behind a rapid price rise since 2005 was, on the one hand, the growth in the effective demand on the market fueled by a general rise in the ag gregate demand and an explosion of mortgage and other forms of housing fund ing, and the declining offer generated by contraction in the volume of house build ing, which in turn mirrored effects of the 2004 micro crisis on the construction market that were further intensified by the mess in the construction process in the wake of the enactment of Federal Act # 214 On share construction, on the other hand.

Experts projected a continuation of the price rise at an increasing pace in the 1st half 2006 and at a fading pace (down to zero) in the 2nd half of he year. Most ana lysts were unanimous in the assertion, but no one expected such dramatic growth rates (8 10% a month) which were noted in reality.

The growth rates began their gradual decline in the 2nd half of the year, though in Moscow oblast the process started only in the autumn. During the last two months of 2006 the absolute value of housing prices exceeded USD 4,800/ sq.m.

in Moscow and 2,500/sq.m. in Moscow oblast and stabilized at these levels.

The causes behind the decline in the prices for housing, which started be tween July and August 2006, and a gradual transition to their stabilization became:

- fall in the number of buyers who could afford purchasing apartments at such high prices;

- worsening mortgage terms caused by shortages of offer;

- declining rates of return on apartment lease, as apartment owners saw lower rates of growth of the respective rates vis vis purchase prices.

As well, since August the downfall in prices for energy sources has begun contributing to the process, too.

It was expected (and indeed occurred) that in autumn there manifested them selves effects from the fall in the price rise rates for housing, which at the same time could form causes for their possible stagnation and even adjustment:

- lower motivation to purchasing apartments for investment purposes, which pre viously was inspired by high price rise rates;

RUSSIAN ECONOMY IN trends and outlooks - possibility for capital outflow to more profitable sectors for the sake of invest ment;

- appearance on the market of apartments, which were purchased earlier for speculation or investment purposes;

- continuous impact of the downfall in prices for energy sources.

5.5.2. Housing as the priority national program.

The year 2006 has become the first full calendar year of implementation of the four national projects, one of which was entitled Affordable and comfortable housing to the citizens of Russia. Its first outcomes appear fairly positive.

In 2006, real estate developers put in operation 502.m. sq.m. of total area of housing, or more than 1% over the respective index of the prior year. The volume of placement of housing in operation by individual real estate developers posted somewhat more moderate growth (13.9%), i.e. just slightly differing from its index. In all, developers have built nearly 605,000 apartments, while individual de velopers nearly 140,000 individual houses. As many as nearly 22,000 young fami lies and some 13,000 families of veterans, or families with disabled (and particularly disabled children) family members have improved their housing conditions125. The volume of mortgage loans disbursed in the framework of implementation of the federal targeted program (FTP) Housing exceeded RUR 220 bln., or 4.4 times greater than its 2005 index, proceeding from the data contained in the Program of socio economic development of RF for the medium term (2006 2008) approved by the RF Government with its Resolution of January 19, 2006, # 38 p.Table Placement of Houses into Operation in 1999Growth rates, % Year Sq.m. of total area Vs. the prior year Vs. 2000 .

1999 32.0 104.2 105.2000 30.3 94.7 100.2001 31.7 104.6 104.2002 33.8 106.6 111.2003 36.4 107.7 120.2004 41.0 112.6 135.2005 43.6 106.3 143.2006 50.2 115.2 165.Source: Rosstat, authors calculations.

The 2006 increment in the volume of housing placed in operation, indeed, be came record breaking not only for the period since the early 2000s, but in a longer retrospective. Thus, in the Soviet time, the 9.6% growth in construction reported in 1986 against the background of an attempt to boost economic growth rates was quite noticeable vis the earlier performance. However, we should not forget vis the currently existing small starting base, as well as the fact that todays numerous Padenko O. Vspleska tsen ne ozhidayetsya. Kvartirny ryad, 15 21 Feb 2007, # 6 (629), p. The estimate of the rise in the volume of mortgage loans disbursed in 2006 might be more moder ate (2.9 times), as there are data on the volume of mortgage loans disbursed by banks, which ac counts for RUR 76.5 bln. See: Zhit stalo ipotechnee! Kvartirny ryad, 7 13 Dec 2006, # 49 (620), p.Section Institutional Problems construction projects in progress had been started prior to the launch of the na tional project.

At its meeting in Kazan in late January 2007, the State Council argued that, despite certain success stories, even such a notable increase in placement of housing in operation failed to compensate for the overall aging of the housing fund, while the situation with its capital refurbishment was aggravating. The advanced (relative to the dynamic of the populations incomes) price rise for housing leaves yet smaller chances for citizens with small and medium level incomes. Despite a great capacity of the national mort gage loan market, which by 2010 can account for some RUR 700 900 bln. (as estimated by the International Financial Corpora tion) or even 1.3 trln., according to Russian experts, only 10% of the population can afford using a mortgage loan. Presently, there are as many as 600 banks operating on the Russian mortgage market, but nearly a half of its volume is formed by 10 of them127. The number of families that should be granted with apartments at the expense of the federal budget by 2010 (133,000 individuals) accounts just for 18% of those before whom the government have such an obligation128.

The situation in the industry of construction materials is ambiguous. Despite a drastic increment in output of most kinds of construction materials, at its meeting on Nov. 24, 2006, the Presidium of the Council for Implementation of the Priority National Projects noted that by 2008 the country would face shortages of construc tion materials. Today, some regions have already faced occasional shortages of individual kinds of construction materials (bricks, wood, etc.), which resulted in price hikes for those129.

This, on the one hand, raise questions, as the volumes of house building, to say nothing of production investment, so far have failed to reach the pre reform level. On the other hand, the 2006 volumes of production of cement, module ferro concrete items and constructions, bricks, large wall panels, soft roofing, etc. were lower than in 1970, those of non ore construction materials lower than in 1975, while production of ceramic and sanitaryware exceeded the 1990 level130.

Apparently, underlying such a situation is retirement of numerous production capacities in the construction materials industry in the period of the transforma tional slump of the 1990s and the pressing problem of maintenance of an adequate quality of production. Of some 500 house building plants presently existing in the country less than one third is afloat, while many of them, as well as concrete pro ducers, have discontinued their operations and were re profiled over the past years, while the production base of the operating ones is outdated. That is why in pursuance of vertical integration many regions (Republic of Karelia, Leningrad, Kaluga, Tver, N.Novgorod, Ulyanovsk, Rostov, oblasts, Krasnodar krai, Bashkor Zhit stalo ipotechnee! Kvartirny ryad, 7 13 Dec 2006, # 49 (620), p. Domnin S. Skromnoye obayaniye natsionalnogo prioriteta. Kvartirny ryad, 14 20 Dec 2006, # (621), p. Novosti. Krupnymi mazkami//SNIP. Stroitelstvo. Nedvizhimost. Investitsii. Proekty, #2 (02). Dec.

2006, pp. 74 80, 88 Sotsialno ekonomicheskoye olozheniye Rossiii, 2006 god, M., Rosstat, p.21, 50 51; Rossiysky statistichesky sbornik. 2004: Sta.sb. m., Rosstat, 2004, p. RUSSIAN ECONOMY IN trends and outlooks tostan, Sverdlovsk, Novosibirsk oblasts) are going to launch new production facili ties, particularly at the expense of foreign investors and large real estate develop ers 131.

The introduction of such instruments of the national project as open auctions on sale of sites and government guarantees on development of urban engineering infrastructure caused grave problems. It is a common knowledge now that local au thorities are ignorant of legal requirements concerning allocation of sites only on the basis of competition, and numerous violations required a vigorous interference of the Federal Anti Monopoly Service. While since 2006 FTP Housing, the major vehicle of implementation of the national project, has been back upped by a new section entitled Provision of sites with the public utilities infrastructure for the pur pose of house building, the envisaged aid from the federal center to municipalities in the form of loans guarantees (worth a total of RUR 12.5 bln.) and subsidies (1.bln.) on the engineering development of the sites so far has failed to find consum ers. The tenders have resulted in picking 110 projects, but the RF Ministry of Fi nance has not concluded any agreements on provision of the guarantees, and there were just 5 pretenders for the subsidies. The hopes for the mechanism of government guarantees were futile, as municipalities accumulated huge debts and cannot assume the respective obligations. Budgetary problems on the local level do not allow counting on the required co financing of measures on preparation of the sites132.

The negative background for the expansion of the national project has been formed by the problem of the cheated co investors. According to Mr. Yu. Tyrty shev, the Deputy Minister of Regional Development, real estate developers failed to honor over 70,000 agreements on co financed construction and there were over 500 problematic objects in over 60 regions133. Over 80 actions were brought against legal entities and over 4,500 against private individuals on deception of the pri vate co investors134. However, even these impressive figures are unlikely to ade quately highlight the magnitude of the problem. Thus, the largest developer, Sot sialnaya Initsiativa partnership, whose top executives were detained in late 2006, failed to fulfill its obligations before more than 50,000 private investors in 71 re gions.

The work on solving this problem is still at the preliminary stage (creation of task forces, completing victim lists, etc.), but so far there have been no prospects for a governmental assistance to them, which can be largely explained by motiva tions of those who invested in such projects. Mr. Tyrtyshev asserts that just 10% of private co investors contributed with their savings to get the only housing, while 40% simply invested their free resources, while the rest were keen to improve their Novosti. Tsennye prutya. //SNIP. Stroitelstvo. Nedvizhimost. Investitsii. Proekty, #2 (02). Dec.

2006, pp. 74, 82 Nuzhny ne garantii, a dengi. Kvartirny ryad, 9 15 Nov. 2006, # 45 (616), p. Pomogut chem. mogut. Kvartirny ryad, 1 7 March 2007, # 9 (632) p. Pechalnye tsifry. Kvartirny ryad, 30 Nov 6 Dec 2007, # 48 (619) p.Section Institutional Problems housing conditions135. Should the government want to help the co investors, its in tents would face such obvious barriers as an additional unplanned pressure on the budgetary system (particularly in the case of regional and local budgets) and natu ral concerns that if the government assumes the private investors risks, it may give a negative signal to the market.

There are certain success stories nonetheless, but only providing there were already built houses and the only problem was registration of property rights. The recommendation to attract other investors in such situations and to compensate for their damages by allocating other sites conflicts with the legal provisions that set the tender based procedures of allocation of sites.

Regional and municipal administrations could help solve this situation, but in most cases they opt for the wait and see approach. The rare exceptions are the city of Moscow and Moscow oblast where the intensity of the problem has sub sided and most problematic objects are being completed by new developers. The Governor of N. Novgorod oblast has also expressed his readiness to help the de ceived co investors.

Today, new amendments to the bankruptcy law are designed, which would al low extension for a year of bankruptcy proceedings that concern the fraudulent de velopers. The amendments, perhaps, would help lower the intensity of the prob lem. The authors of the amendments believe that an additional year is enough for a bankrupt corporation to attempt to attract additional investments or undergo finan cial restructuring procedures136. The task force of the Public Chamber also laid down a bill on restructuring of construction companies, which provides for estab lishment of a government agency with a mission to restructure construction com panies that have failed to honor their obligations before private co investors.

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