Real Estate 'Arms Race' Hits Yekaterinburg

Housing prices in Yekaterinburg have been rising by 2 percent per week since the start of August, while supply levels have fallen.

While market players give a variety of reasons for why prices are rising from undervalued real estate to rumors that free privatization are to be canceled all agree that prices will go on rising until the end of the year.

Free privatization refers to citizens rights to privatize state-owned apartments that they live in at no cost.

"The real estate market is on the up to varying degrees throughout Russia, but in Yekaterinburg the tendency is more marked," said Gennady Sternik, head specialist for analyzing the real estate market with the Russian Guild of Realtors.

According to the State Statistics Committee, about 1.3 million people live in Yekaterinburg with the total housing area comprising about 25 million square meters. If the method employed by Moscow estate agents is used to estimate property construction, then over the first nine months of this year about 2,000 apartments were built in Yekaterinburg 1.54 apartments per 1,000 residents. By comparison, 3.71 apartments were built for every 1,000 residents over the same period in Moscow.

Mikhail Khorkov, head of analysis with the Urals real estate chamber, said the first signs of increased demand in Yekaterinburg appeared at the end of last year, when the market began to right itself after the crisis.

However, Vladimir Grechin, head of the NEK real estate agency, said that from January to June the level of supply was at average levels and fully coped with demand.

"In August the situation changed fundamentally; demand exceeded supply by several times," he said.

According to the Urals real estate chamber, as of August real estate prices increased astronomically. Apartments increased in value by about 2 percent per week. Over nine months the volume of supply on the secondary market fell by 38 percent; in September this indicator was 6.7 percent.

"In October the tendency for prices to rise increased. The prices rose against a backdrop of falling supply; many potential buyers are unable to find the housing they require," Khorkov said.

Between Sept. 25 and Oct. 23 the average price per square meter of floor space rose by 8.3 percent for a final price of $294.10, Khorkov said.

Grechin points to even higher growth rate. In his words a one-room low-quality khrushchyovka in the center of town cost $8,000 in January, $9,000 in August and $11,300 as of Oct. 24.

"In such [boom] conditions only those who need to sell urgently are employing realtors or even putting their properties onto the market independently. The others bide their time," Grechin said.

Cheaper properties are snapped up by professional market players, while what is left over sells at a higher price range. A seller who finds a buyer for his or her apartment recognizes that during the negotiation period the price of the apartment he wants to buy will have risen. Sellers, therefore, finding the price they sought for their own apartment is no longer enough to buy a new apartment, are forced to dissolve the contract and put their properties on sale again, but at a higher price.

"You get a real estate arms race on the market," Grechin said.

Some reasons for the boom date back to the 1998 financial crisis, after which the prices of many properties fell and there was a lack of new building work.

Tatyana Golisheva, head of the Yekaterinburg state statistics department, said that 119,700 square meters of housing were commissioned in Yekaterineburg over the first nine months of this year.

"This is 7.9 percent more than last year," she said.

However, Andrei Ozornin, head of the real estate sales department with the construction company Nash Dom, said a sharp increase in construction work is not in the cards.

He said that although there is demand for new housing, the main interest from buyers is for finished apartments. In Yekaterinburg there are not many people ready to invest in construction normally a person sells one apartment and buys another simultaneously.

New housing is also becoming more expensive, though prices are controlled by the local administration.

Ozornin said the city governments interdepartmental committee constantly adjusts the cost index for construction materials on the basis of which prices are formed. On average, this index increases by 3 percent to 5 percent per month. The cost of panel apartments is about $280 per square meter and $400 for brick buildings. In general the prices are $200 to $950 per square meter.

Ozornin also said that the start of the boom coincided with rumors that free privatizations would gradually be phased out.

"Its rubbish, of course, but people think that the apartments theyve bought on the market wont be taken back from them," he said.