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. Last Updated: 07/27/2016

A More Constructive Approach to Building

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The pickup in housing construction has yet to have much effect on the availability of housing. In the first quarter of 2007, according to the State Statistics Service, the rate of residential construction was 9.5 million cubic meters, or 50 percent higher than for the same period last year. In all of 2006, 50.2 million square meters of new living space were built, which was 15 percent more than in 2005. At the same time, according to the Regional Development Ministry, apartments became less affordable. In January 2006, the average middle-income family could expect to take 4.7 years to save enough to buy a standard apartment. By the end of the year, this had grown to six years.

This means that housing prices grew much faster than average income. Housing prices grew by about one-third for the country as a whole, and from 60 percent to 100 percent in Moscow. Average nominal income rose by just 23.2 percent.

Growth in the housing stock is not keeping up with demand, which is being fueled by increasing access to mortgage programs. Part of the problem is that people with higher incomes are snapping up much of what is being built for investment purposes. This might be helping to fuel an investment boom in housing, but it's not helping people buy homes.

In these conditions, builders can count on high profits without having to worry at all about controlling costs. And Russia leads Europe in real estate transaction costs, according to a recently published study by Global Property Guide, which placed their value at 25 percent of the average purchase.

But this isn't the main factor fueling rising prices. It is difficult to get an idea of real construction costs. Besides the obvious expenses -- building materials, equipment, labor and taxes -- there are some that aren't so visible: bribes to officials to get access to land or to building inspectors, for example. There are also entirely standard expenses that could easily be reduced, including infrastructure and the actual cost of land itself.

State officials and real estate analysts have long discussed how to overcome the two main factors holding back construction -- a deficit in available land and underdeveloped infrastructure. Even if they manage to deal with these difficult problems, this still won't help deal with the corrupt, under-the-table nature of the market. What the market needs is competition. This would allow builders to reduce the amount they paid in bribes and reorient their business toward earning profits on higher volumes of middle-priced housing provided, and not just on the high profits earned from elite developments.

This appeared as an editorial in Vedomosti.