Introduction

With oil and gas prices shooting through the roof, Russia is ripping dividends from its natural resources. Moscow is traditionally not only the administrative, but also the financial capital of the Russian Federation. For decades it has been attracting people throughout the country, and in recent years - from all the world. With most of the income from energy market ending up in the city and the steady flow of migrants, it is not surprising, that the property prices go up as well.

The things in real estate have been going on so well, actually, that recently property speculation has become one of the most attractive ways to make money in Moscow. This and some other factors pushed Moscow to the top of the list of most expensive cities in the world.

An interesting article from stagirit.info (in Russian) tries to give an alternative view on what is going on in Moscow and suburbs. If you don't know Russian, please read on for a short review.

Still not exactly London

One of the main ideas, expressed in the article implicitly, is the fact, that Russian real estate market is still quite different from established and well-regulated European and American markets. There are two major factors, which one should keep in mind, when talking about property in Russia, especially "general purpose" properties, occupied by average working or middle class people.

Privatization

During the USSR era properties, as everything else excluding some personal possessions belonged to the state. To get a flat one had to "earn" it, but not by saving enough money or taking out a loan and then buying on the open market, but by working for some organization, which would provide him with dwelling. Distribution and eligibility rules were complicated and the whole system was, naturally, abused by those, who controlled it.

After the Soviet Union collapsed, the once state-owned real estate, as pretty much everything else, was privatized. However, not like with other valuable assets, such as factories, oil refineries and resources and so on, property was distributed more evenly among the population. Essentially, everyone got the flat in which he or his family lived before, with quite a few exceptions, of course (there is still no end to the stories of people being abducted, killed, turned into drug addictives or otherwise removed in order to get to their only valuable possession - the flat).

One can view it as only fare, because most of the people worked hard all their life to get a flat they lived in. (and some never got a decent one despite all their efforts). But, according to the abovementioned article, this created a large population of home owners without even slightest knowledge of financial markets in general and real estate in particular.

As a result, those people are prone to abuse and their decisions are ruled by emotions. The author describes how interested parties try to fuel the confidence of the players on the market by all sorts of rumors and psychological manipulation.

Swapping

Another result of the state control over property in the USSR was the fact, that it was very hard to get a new property, once you owned one. Since there was no free market, you couldn't sell your old home and then buy a new one. The only feasible option was to find someone else, who wanted your current flat, and had something which was suitable for you.

This system was not forbidden by the state, but was complicated and not very flexible, since finding a perfect match was never easy, especially in the era before Internet and mobile phones. Non the less, since it existed for years, it is still used even today. Now, one of the greatest revelations, at least for me, in the article is the fact that even today, 15 years after the Soviet Union collapsed, exchange deals are responsible for almost 80% of all property trades in Moscow. There is a bit of innovation as well - since now people in Moscow earn quite reasonable salaries, they are able to save, and they use their savings to swap their old property for a better one, with monetary compensation.

Margin trading

Here we come to the central point in the article. The author explains, that such deals bear all signs of classical margin trading, with leverage and so on. Most of the buyers on the market, therefore, are not exposed to the full change in property prices, but only to a certain percentage. Therefore they usually can keep up with the rising market, although for some of them it means reducing their requirements and compromising. And because they are responsible for most of the deals on the market, they move the price for the rest of the buyers, including first time buyers and investors.

Real price

However, the current property prices, according to author's calculations, are not in line with rent income, which can be received. With current interest rates around 10% and more, the actual return from letting a property is around 2-3%! And there is, apparently, not much room for its growth, since most of the population cannot afford it. Therefore, the author concludes, in some not very distant future the prices will drop and considerably.

My conclusion

Investment in the exUSSR countries, in Russia in particular, can be exceptionally profitable, but potential investors should study the local markets very carefully and understand the specifics of real estate trade there.

If you have any questions or comments, you are welcome to contact me, either by using the links below or my contact information.