Moscow Just Set A Record For Residential Construction: Is A Housing Bust On The Way?
As Russia’s economy first slowed and then entered a recession of indeterminate length and severity, the housing sector seemingly defied the laws of economic gravity. On a population-adjusted basis, 2014 saw Russia set a post-Soviet record for new housing construction. New construction in 2014 comfortably surpassed both the 2007-08 peak of the oil boom and the post-crisis years as well.
Why was housing performing so (relatively) well? Well, production volumes in the housing sector were boosted by modest overall growth in personal incomes, the gradual development of Russia’s mortgage industry, and, to a lesser extent, state programs such as the “maternal capital” program whose cash payments for the birth of a second or third child could be used as down payments on new apartments. This wasn’t a crazy China-style boom of “ghost cities” in Eastern Siberia, but there was a genuine, sustained growth in housing output that was easily visible in most of the larger cities. I remember traveling in Russia during the summer of 2014 and being downright astonished at the number of cranes dotting the sky of Yaroslavl, a rather sleepy provincial city of around 700,000.
It would be logical to expect that 2015 saw the beginnings of a sharp correction. Russians’ real, inflation-adjusted, incomes fell by around 10%, already high interest rates spiked dramatically, and unemployment started to creep higher. That’s a combination that really should substantially crimp output of new housing, or at least prevent it from rising. People had significantly less money to spend, expectations of future economic conditions were turning sour, and borrowing was much more expensive.
Vedomosti is careful to note that a lot of the new supply coming online is from projects that were started two or even three years ago, and that while developers would like to extend construction timelines or even mothball some of their developments their actual ability to do so is highly constrained. Rather, Vedemosti, citing an industry analyst, predicts that the developers will press ahead to completion and try to recoup at least some of their initial investment.
It’s true that the housing sector is not as exposed to commodity and currency movements as other parts of the Russian economy: the huge majority of developers’ costs and revenues are denominated in rubles. The collapse of the ruble versus the dollar certainly doesn’t help matters, it helps exacerbate uncertainty about the economy’s future course, but it’s not an insurmountable problem. The real issue is that even in ruble terms Russian consumers are going through one of the toughest stretches of the past decade and a half. Given inflation and wage trends, it stands to reason that not many Russians are going to be in a hurry to make huge real estate investments. In order to entice demand, developers are going to have to cut prices steeply, making their losses even bigger.
None of this means that “Russia is doomed” or that we’re on the precipice of a societal collapse. Housing is relatively modest as an overall share of Russian GDP, and “over-investment” in real estate has never approached the crazy scale seen in places like Spain or China. A housing bust would be painful, especially for developers, but it wouldn’t be fatal.
Nonetheless, housing was one of the few bright spots in the Russian economy. Continued high output in the construction sector helped prevent unemployment from heading even higher or the recession from being even deeper. During 2016, that is going to change.
MA/MBA candidate at the Lauder Institute and the Wharton School of Business