Russian Government Hopes To Jump Start Housing Market

On May 13 the Russian government approved a packet of 27 laws that are intended to double new house-building by 2010. The proposed laws include a new housing construction code, changes to the civil code and new legal protection for mortgage lending. The government plans to rush the laws through the State Duma, so that they can take effect by January 1, 2005. (Vedomosti, Gazeta.ru, May 14)

As yet only eight of the proposed laws have been worked up as full drafts. What, then, is the big hurry? In part, the government is responding to the bubble in the real estate market. House prices across Russia rose 26% in 2003, including an astonishing 45% in Moscow. In the capital, the average sale price is now US$1,493 per square meter, which means an average 80 square meter apartment costs US$120,000 – this in a city where average monthly wages are 9,473 rubles, or US$330, as of February. (Vedomosti, 14 May, www.gks.ru) Moreover, in Moscow new apartments are typically bought with bare walls, without flooring, wiring, bathroom and kitchen fittings, all of which require substantial additional spending.

President Putin has promised to double GDP and halve poverty. That may or may not be realistic. More to the point, the economic growth which Russia is experiencing is not trickling down to the majority of the population. Putin needs to create a substantial middle class, which can serve as the durable social backbone of the new Russia. In the mid-1990s, most tenants got the chance to become owners at nominal cost of the municipal apartments they were occupying. That one-time radical distribution of wealth is now over, and radical reforms are required to meet the needs of new buyers entering the housing market.

Energy and Industry Minister Viktor Khristenko said that the plan is to boost the proportion of the population able to buy their own housing to 25% from the current 10%. The latter estimate is confirmed by a recent Levada Center poll, which found that only 9% of respondents reported that their income was sufficient for them to meet their housing needs. (For comparison, in the survey 18% said they don’t have enough money to buy food, 41% have problems buying clothing, and another 32% reported shortage of cash for durable goods.) (Gazeta.ru, May 12.) At the bottom of the income scale, some five million families are in queues for state rental housing. At current rates of construction, those joining the list will have to wait 15-20 years.

In order to increase house ownership, the government plans to increase the amount of available mortgage loans from the current 10.5 billion rubles (US$300 million) to 344 billion rubles (US$10 billion) by 2010. Currently, mortgage borrowers have to pay 30% of the sale price up front, and banks are wary of issuing loans because of lack of a reliable procedure for repossession in the event of non-payment. This should be fixed by the proposed new legislation.

However, the most challenging problems are on the supply side. The government wants to streamline procedures for issuing new building permits. Specialists such as Nadezhda Kosaerva (Gazeta.ru, May 13) note that local markets are typically dominated by a single construction monopoly – often acting in collusion with corrupt municipal politicians to restrict new building and pocket the profits from the boom in real estate prices. Coincidentally, the list of Russian billionaires which Forbes magazine released last week includes a woman for the first time: Elena Baturin, wife of Moscow mayor Yurii Luzhkov. She heads the Inteko construction business, and is worth an estimated US$1.1 billion.

Added to the lack of competitive markets in construction is the lack of utility infrastructure for new housing, and the glacial progress of introducing market pricing and competitive supply in the utilities sector. Social protests make regional governors very wary of approving utility price increases. Typically, residents pay less than half the cost of utilities, with the gap being covered from the municipal budget. This makes it very difficult for profit-seeking businesses to enter the sector.

In May 2003 Gazprom and United Energy Systems created a new company, Russian Communal Systems, whose purpose is to lease municipal housing and provide utilities at a profit through efficient management and investment in energy conservation. However, the company got a hostile reception from most regional governors and from the State Construction Committee (now renamed the Federal Agency for Housing Construction). (Vedomosti, 24 June 2003.)

The government is worried that the oligarchs are not investing enough in Russia for fear of political persecution. So pouring state money into house-building may be one way to promote the 7-8% annual growth in GDP that Putin is demanding. However, there is no point taking money away from the oil oligarchs only to see it pocketed by local construction bosses.