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* - the indices were computed basing on theaverage bid prices for residential property in Moscow in 2000-2001 according tothe old methodology.

The local economic and politicalenvironment imposed its specifics on the general regularity, provoking theacceleration (as in Novosibirsk or Moscow) or deceleration (as in Kaliningradand Nizhny Novgorod) of the above scenario.

The first signs of the slowing growthrates appeared at the end of 2001 in those cities where the real estate pricesmost closely reached the pre-crisis level, i.e. in Ekaterinburg, Novosibirsk,to a lesser extent in Moscow; the growth rates of the bid prices went down and,according to experts and heads of some Moscow real estate agencies, the actualtransaction prices came to a standstill.

Correlation betweendemand and supply in the real estate market against the overall economicbackground

The favorable results of the social andeconomic development of Russia in 2000 made it possible to conclude that thereal estate market in 2001 would be characterized by a steady growth ofresidential property prices. This forecast was supported by the upsurge ofresidential property prices in Ekaterinburg, Perm, Novosibirsk and othercities. In Moscow and St.-Petersburg, however, these projections were met witha fair share of skepticism, that is why the price boom in May 2001 was regardedas critical. The dramatic change in the real estate market was caused by thefollowing two factors: the growingdemand and the fallingsupply.

The rise of the market in 2000 wascontingent upon the continued economic growth, which started in 1999, as wellas the social, political and financial stabilization, which set in after thepresidential elections in the spring of 2000. In 2001, the government predictedthe deceleration of the economic growth rates as compared to the previous year,with a simultaneous reduction of the inflation rate and a growth of therouble-to-dollar exchange rate.

However, the record high world oil pricesduring the first nine months of 2001 had ensured an influx of funds in thenational economy, the growth of the people's real incomes and effective demand.The lack of other attractive investment targets had to inevitably affect thereal estate market. Real estate agencies registered the increasing number ofpotential property buyers that at times provoked further escalation of thedemand. For instance, according to the opinion poll of 500 adult Muscovitesthat was performed by the independent research center "The Russian publicopinion and market research" (ROMIR - Gallup International) in the August of2001, the purchase of real property remained the most popular personal savingsscheme (Picture 1).

Picture 13

Muscovites' favorite personal savingsschemes

Data source: ROMIR - Gallup International,August 2001

The satisfied demand (i.e. the number ofpurchase and sale transactions) in the secondary residential property marketduring the first six months of 2001, as compared to the same period a yearbefore, had grown in Moscow by 43% and in St.-Petersburg by 35%, and at the endof 9 months – by31% and 30% respectively. The number of investment contracts in the Moscowprimary market had grown during the first six months by 40%, and at the end of9 months – by 31%.As a result, the actual growth rates of the residential property prices inMoscow and in the other sample cities (except for Kaliningrad and NizhnyNovgorod) had exceeded the expected rates, and as a result in June theprojections for some cities were readjusted upward.

Starting from mid July 2001, the realestate markets of the two capitals demonstrated a steady increase of supply. InMoscow, supply almost regained the level of late 2000, while in St.-Petersburgit still fell short by 10-15%. At the same time, according to experts and headsof real estate and developing companies, the demand in the secondary andprimary real estate markets in Moscow stabilized in October-November 2001. InKaliningrad, where the prices are growing slowly, the supply continues toshrink (Picture 14).

Picture 14.

The dynamics of the supply index in thesecondary residential property markets of Moscow, St.-Petersburg andKaliningrad

The volume of supply in Perm, Ekaterinburgand Ulyanovsk had reached the level of mid 2000 even earlier (Picture15).

Picture 15.

The dynamics of the supply index in thesecondary residential property markets of Ekaterinburg, Perm andUlyanovsk

That became the turning point in thetendency for the supply reduction in the residential property market, whichstarted back in 1999 and at times caused confusion among the realtors (itclimaxed in 2000 in Ekaterinburg and Perm, and in 2001 - in Moscow andSt.-Petersburg). That was why quite a few experts were predicting anothercollapse of the real estate market.

A closer market analysis in Ekaterinburgrevealed that the supply began to decline in 1999 (when the prices were fallingslowly or remained stable) and continued to decline throughout 2000 (when theprices were growing fast), and in 2001 the supply turned upward and wasaccompanied by the ever growing prices (Picture 15).

The subsequent reaction of the real estatemarkets in most of the cities to the price escalation has confirmed theconclusions made in the autumn of 2000 (basing on the Ekaterinburg data) abouta correlation between demand and supply in the residential property market:

- the reductionof supply during the period of falling prices was caused by the sellers' reaction to themarket situation because they did not wish to sell their property at lowprices;

- the continued reduction of supply during the period of growing prices wascaused by the inertia of the marketplayers, which created a time lag (of almost oneyear) between the changed cause and the beginning changes of theeffect;

- thesubsequent growth of supply was causedby the sellers' reaction (albeit delayed) to thegrowing market prices;

- and, consequently, that reason (the increasing supply) will entailas effect the transitionof the market to the stage of slow price growth andstabilization (because according to themacroeconomic theory, the correlation between the changing supply and thechanging prices manifests itself only at this stage of market development);

- these developments will occur withapproximately the same time lag, i.e. from six months to one year from thestarting point of supply growth.

The macroeconomicparameters and residential property prices

The macroeconomic parameters areindubitably a meaningful factor that affects the behavior of prices in the realestate market.

Table 3 below shows data for the last twoyears in the form of indices (as compared to the baseline period of December1997) of the following parameters:

- The consumer price index (the rouble inflation rate);

- The rouble-to-dollar exchange rate index(the rouble devaluation against thedollar);

- The dollar inflation rate (the ratio of the rouble inflation rate to the roubledevaluation index);

The index of the dollar purchasingcapacity in Russia against the consumer goods basket(the ratio of the rouble devaluation index to the rouble inflationrate).

Table 19

The dynamics of annual and accumulatedmacroeconomic indices

Macroeconomic indices

Annual indices

Accumulated indices

















The rouble inflation rates









The rouble-to-dollar devaluationrate









The dollar inflation rate inRussia









The dollar purchasing capacity inRussia









Data source: the Goskomstat of Russia, theauthors' estimates.

Following the sharp increase inAugust-September 1998 of the dollar purchasing capacity in Russia as comparedto the consumer goods basket (by 82% in December 1998 as compared to December1997), that index had remained stable through 1999, starting to decline inMarch 2000. In 2000 that index dropped by 13%, and by another 9% in 2001. Thesedevelopments prompted the analysts to assume that the upsurge of theresidential property dollar-denominated prices had been provoked by the dollarinflation. Nevertheless, the data listed in Table 3 shows that the dollarpurchasing capacity, having grown in 1998 by 82%, at the end of 2001 stillexceeded the pre-crisis level by 41%.

Consequently, the expected strengtheningof the rouble position, similarly to the period of 2000-2001, will promote thegrowth of the dollar-denominated prices (but notnecessarily of the prices as such) for all goods andservices, including real estate. Basing on the macroeconomic parameters for2002 adopted by the Russian Government, i.e. with the rouble inflation rate setat 12-14% and the rouble devaluation rate being equal to the average annualexchange rate of 31.5 roubles/dollar, the dollar purchasing capacity index mayfall during the year by 3-5 p.p.

The reaction of the real estate markets tothe macroeconomic parameters is expected to differ in the cities withrouble-denominated residential property prices (Russia-2) and in the citieswith dollar-denominated residential property prices (Russia-1).

In the cities of Russia-2, the similar escalation ofresidential property prices was observed during the upsurge of consumer prices(the inflation rate) in the autumn of 1998. The dynamics of dollar-denominatedprices (as compared to the dynamics of rouble-denominated prices) in thosecities was fully contingent on the changes in the rouble-to-dollar exchangerate. Consequently, this factor, given the 12-14% growth of consumer prices in2002, will promote the increase of the residential property prices in thisgroup of Russian cities by 10-14%, with the dollar-denominated prices (giventhe 5-7% increase of the rouble-to-dollar exchange rate) growing by3-6%.

In the cities of Russia-1, the link between the pricedynamics and the macroeconomic parameters is not that obvious. The index ofdollar inflation in Russia is, to a certain extent, the driving force behindthe dollar-denominated prices, similarly to the impact of the rouble inflationon the rouble-denominated prices. However, when comparing the dynamics of thedollar-denominated prices in Moscow with the dollar inflation rate during thepast two years, it becomes obvious that between June 2000 and June 2001, whenthe dollar was weak, the residential property prices started to grow, albeitslowly, while during the second half of 2001, when the actual dollar exchangerate and purchasing capacity remained stable, the residential property pricessky-rocketed. With the dollar purchasing capacity declining at the ratestipulated in the official macroeconomic forecast for 2002, this factor shouldnot significantly affect the price dynamics in the cities with thedollar-denominated residential property prices. The possible deviation of theactual consumer price index from the budgetary estimates (which the January2002 inflation rate is indicative of) may promote the growth of thedollar-denominated residential property prices in both city groups.

The conversion of the indices of thechanging nominal dollar and rouble prices into the comparable prices of thebaseline period (with due account of the rouble as well as the dollar inflationrates) will help obtain the IGS43 index (i.e. the index ofthe changing residential property value as compared to December 1997) (Table20).

Table 20

Indices of changes in the nominal andrelative value of residential property (in comparable prices) in Russian citiesbetween 1997 and 2001


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