Property Prices Seen Down 60% Next Year

VedomostiSberbank said that prices could fall by up to 60 percent in Moscow and up to 40 percent in the rest of the country.
Falling personal incomes, capital flight and tightening credit markets could lead to a drop of up to 60 percent in property prices by the end of next year, a report released by Sberbank on Monday warned.

The report, which was posted on the bank's web site, outlines the effect several economic scenarios could have on real estate prices. The first scenario, labeled "base line," assumes GDP growth of 2.5 percent to 3.5 percent, 11 percent inflation and an exchange rate of 30 rubles to the dollar. Under these economic conditions, the study says, property prices in the primary market could fall by 34.3 percent in ruble and by 46.6 percent in foreign currency terms, while those in the secondary market could fall by 23.1 percent in rubles and 37.4 percent in foreign currency.

A second variant, called the "stress" scenario, assumes stagnant GDP growth, "slightly higher" inflation and a "significantly weaker" ruble. Under this scenario, property prices would plunge on the primary markets by 38.1 percent in rubles and 59.6 percent in dollars, and by 25.1 percent in rubles and 50.6 percent in dollars on the secondary market.

Prices will fall less sharply outside of major centers like Moscow, St. Petersburg and Nizhny Novgorod because these areas of the country have not seen the development of a significant real estate bubble, the report said.

Under the "base line" scenario, prices in these areas would fall by 7.5 percent in rubles and 24.9 percent in dollar terms on the primary market, and by 7.6 percent in ruble and 24.9 percent in dollar terms on the secondary market.

The "stress" scenario has prices outside of the major cities falling by 11.8 percent and 41.8 percent on the primary market and 9.7 percent and 40.4 percent on the secondary market.

Prices for apartments in dollars have already fallen by 8.1 percent since the beginning of October, according to statistics compiled by the Internet real estate portal

Konstantin Aprelyov, vice president of the Russian Realtors Guild, said that he expects property prices to be cut in half next year, and added that he thought prices in the regions would suffer more than those in the capital.

"After [the default crisis in] August 1998, property prices in Moscow fell by 32 percent," Aprelyov said. "But they dropped by much more in the regions, by 59 percent in Perm, for example."

Not all industry players agree, however, with the report's conclusions.

Andrei Pankovsky, deputy general director of developer DSK-1, said that it is unlikely that prices [in rubles] would fall even by one-third.

"At that point, any sort of construction will be unprofitable and the sector will completely freeze," he said.

State Duma Deputy Alexander Kogan predicted that in a year, the market would face a deficit of residential property, as a result of developers freezing their construction projects.

Konstantin Popov, CEO of Inkom Group, said that more than 80 percent of existing construction projects have already been put on hold.

The Sberbank study said that falling prices could have negative repercussions on the mortgage market, as well as other credit markets that relied on real estate as collateral.

"Although mortgages account for less than 10 percent of GDP, the current situation could lead to a further destabilization of the market for residential real estate and the real estate market as a whole," the study said.

Lower prices could also spell trouble for those who have already bought property on credit, experts said.

"As a rule, most credit agreements say that a drop in the value of collateral gives the bank the right to demand early repayment of the loan," said Dmitry Solovyov, a senior attorney at the firm Avakyan, Tuktarov and Partners.

The government has promised a variety of measures to help struggling homeowners avoid defaulting on their mortgages.

Finance Minister Alexei Kudrin said earlier this month that the government plans to work out criteria by which people can get receive extensions of as long as several years on their mortgage payments if they have lost jobs or received a substantial cut in their salaries.

Prime Minister Vladimir Putin said around the same time that banks should restructure homeowners' mortgage payments next year.

Kogan said that the government is also looking out for the rights of homeowners, and promised to step in if banks begin demanding early payments on loans.

"We warned the banks that if they start demanding prepayments, the State Duma will make corresponding amendments and pass legislation regulating their activities," Kogan said.

Sberbank representatives, however, said the bank had no intention of demanding that borrowers repay early.

"We don't plan to ask buyers to pre-pay loans or raise rates on loans that have already been given," said Irina Kibina, a spokesperson for the bank. "The bank plays a major social role, and we need to give people a feeling of stability."