Moscow's real estate market goes from boom to bust

Real estate in the capital of the Russian Federation has an expensive reputation. Moscow property prices skyrocketed after the country opened up to free market economics in the ’90s, and as the oil market went strong, it gained a name for big price tags.

Nevertheless, the value of the ruble has tumbled to a historic low with a devaluation of about 100 percent since late 2014 amid the oil market turmoil. With growth stunted by an oil-pegged ruble, short-term recovery is not on the cards.

Price growth slower than leading global cities

Real estate price growth has been slower in Moscow during the past five years than in other major international cities such as Hong Kong, London, New York, São Paulo, Istanbul and Shanghai, according to Tranio research. Between 2011 and 2015, aggregate real estate price growth in Moscow was just 10.3 percent, while Hong Kong and Shanghai gained 20 percent, London and New York 40 percent and prices in São Paulo and Istanbul more than doubled.

Real estate price growth 2011-2015

Source: Knight Frank, ZAP, Central Bank of Turkey

Property prices in Moscow are directly related to petroleum prices on the world commodities market. Between 2007 and 2009, Savills reported that apartment prices in Moscow fell 51 percent as crude oil prices plummeted.

When oil sprang back during the next three months, so did the price per square meter. Since late 2014, oil prices have remained stubbornly low, and it is reflected in the price of property.

Other markets are less dependent on oil. Real estate prices in London tend to be affected by changes to the tax regime (higher stamp duty) and political environment. For instance, talk of Labour replacing the Conservative government had investors worried ahead of the UK general elections in May this year.

The Shanghai market was limited by restrictions on by property buyers in 2011. Istanbul, on the contrary, pursued a policy of attracting investments and developing the construction industry. In Brazil, the property market in São Paulo was stimulated by lower interest rates on mortgages.

Developed economies have expensive property

A country’s stage of economic development has a direct effect on the price per square metre. Moscow is a lot less expensive than Hong Kong, London, New York and Shanghai, but it’s more expensive than Istanbul or São Paulo.

For example, apartments in the center of the Russian capital are four to four and-a-half  times cheaper than in the center of Hong Kong or London — but nearly three times more expensive than in the center of Istanbul.

Price per square metre, USD

Source: Knight Frank, Numbeo

The correlation between development and property prices is nothing new. Hong Kong, London and New York have the highest rating in Knight Frank’s UHNWI report, А. Т. Kearney’s Performance and Potential and the Global Competitiveness by EIU.

They also have the highest real estate prices. Moscow is way behind these three cities on the global competitiveness rating and ranks closer to São Paulo and Istanbul for price growth.

 Global city ratings

Better price-to-income ratio

Expensive is a big word, but it doesn’t really mean much out-of-context. According to the price-to-income ratio, property in Moscow for the average citizen is as affordable as in New York, more expensive than São Paulo and Istanbul but more affordable than Shanghai, London and Hong Kong.

Data by Numbeo, an interactive database on global cities, shows that in both Moscow and New York, a person earning the average wage would need to save 24 years to buy a 90 sq m apartment. In São Paulo and Istanbul, it would only take 20 and 10 years respectively. In Shanghai, London and Hong Kong, it would take about 30 years.

Market entry thresholds in the world’s most vibrant cities are often out of reach for the typical buyer. Low interest rates have stimulated buying in some of these destinations, but in turn, this has encouraged price growth.

Bleak future for growth

Not only did Moscow real estate prices display the slowest growth over the past five years out of these six cities, but it also displays the worst short-term price growth forecasts.

Experts predict that between 2015 and 2016 prices on the secondary real estate market might lose 10 percent amid negative economic conditions and the unstable ruble exchange rate.

The price per square meter is expected to return to levels last seen in 2011, short-term demand is not expected to grow and the market will remain sluggish. According to Savills, aggregate growth of property prices in London during the next five years will be 20 percent to 25 percent.

Knight Frank analysts forecast considerable price growth in 2015 in New York and Shanghai. In Hong Kong, however, real estate will get slightly less expensive while São Paulo and Istanbul markets will not fall noticeably during the next couple of years.

Moscow’s “golden square meter” seems little more than a myth now as Russia’s economy struggles to find its footing. While improvement on the oil market will herald recovery for the country’s ruble, the economy and its real estate market might be harder to revive.

Yulia Kozhevnikova is a real estate expert and journalist at Tranio. You can follow Yulia on Google+.

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