Residential real estate prices in Moscow skyrocketed in 2003, surpassing all the predictions made a year ago and beating the previous record set back in 1995 by a hefty margin. Gennady Sternik, a senior analyst at the Russian Guild of Realtors, estimates that the average per-square-meter price of a Moscow apartment reached an all-time high of $1,530 in November. This is 60 percent more than two years ago and 40 percent more than in December 2002. And in September 2003, Moscow prices surpassed the $1,360-per-square-meter record that was set in March 1995. One of the results of the escalating prices, analysts say, is that more and more people are looking for apartments in the areas bordering Moscow, where the prices are significantly cheaper. The same is true of the real estate market as a whole, as the construction of shopping centers and warehouses in the Moscow region has been particularly active this year. The growth in prices appears even more spectacular when put against the predictions of market watchers a year ago that prices would stabilize in 2003. This time around, they are more divided. "The prices in Moscow are not sky-high, as some claim they are," said Yevgeny Leonov, head of the future projects division of City Hall's investment program department, during a round-table discussion last week on the 2003 results for the capital's residential real estate, organized by the Moscow Guild of Realtors. "The prices are low, they will continue growing, and this growth will be fast." Leonov added that an average $10,000-per-square-meter price for an apartment in the city's historic center would be a "normal" price and would soon be reached. Currently, the price can be up to three or four times cheaper than $10,000 per square meter, even in the most prestigious parts of Moscow. Grigory Kulikov, chairman of the board at MIEL, one of Moscow's top realtors, agreed. "Moscow housing is really undervalued," he said. But Sternik said Moscow prices might have already reached their optimal level. "The current level appears about right, although it doesn't mean the prices will stop growing immediately. But this will be their baseline, to which they will return when the market stabilizes," he said. However, Sternik added that the market is not likely to stabilize before the presidential election in March, and that another important factor driving up residential property prices was high oil prices, income from which was being invested into real estate. "Once the cash flow from the electoral campaigns and oil decreases, the price growth will go down," he said. And dollar-to-euro exchange rate instability has been forcing some people to "flee from the dollar" and invest the U.S. currency, which has been losing value for months, into real estate, he said. A year ago the dollar roughly equaled the euro, but since then the European currency has strengthened and is currently at $1.24. But other market watchers saw no signs of a future stabilization. One of the factors that will be driving prices up is the emerging mortgage market, which will become a "locomotive" for growth, MIEL's Kulikov said. Sternik said 10.5 billion rubles ($350 million) worth of mortgages had been handed out since a law allowing mortgages was passed recently. This figure is expected to increase dramatically in the years to come, particularly in Moscow. One of the factors pushing prices ever higher is that Moscow real estate has become one of the most profitable forms of investment in the country. A lot of people are buying apartments not to live in long-term, but to resell six to 12 months later for a handsome profit, thus driving the demand -- and prices -- even higher, said Alexei Drobashin, general director of Krost, a residential investment and development company. "Prices will only drop when there appear to be opportunities to invest money for a better profit elsewhere," he said. Another aspect, experts said, is that the possession of a good Moscow apartment is viewed as almost mandatory by members of the regional business elite. Ilya Shershnev, development director at Swiss Realty Group, said that while supply was clearly not meeting demand, it was the "irrational boom" caused by this demand that was primarily to blame for the current situation. "The market is resembling a bubble that keeps growing only to burst later. Since a lot of people look at buying an apartment as a secure form of capital preservation, this attracts those whose actions are not brought about by vital necessity," he said. It is only when the "boom" dies down that the market will be regulated by more "rational" expectations, Shershnev added. But City Hall's Leonov remained skeptical that any predictions could be made at all. "In reality, there is no analysis of consumer demand going on like there is in America. Here people are trying to analyze the supply, but not the demand." And until demand starts to lag behind supply in Moscow, all predictions would remain just guesswork. "It is not until we have empty new houses standing around that the true demand analysis will emerge," Leonov said.

CEIW