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Moscow real estate goes from boom to bust

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Real estate in the capital of the Russian Federation has an expensive reputation but with growth stunted by an oil-pegged ruble, Moscow property prices are struggling to keep up appearances among the world’s leading cities.

Russia’s weak national currency has caused the value of real estate to fall

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 nineties 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% 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 last five years than in other major international cities like 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% while Hong Kong and Shanghai gained 20%, London and New York 40% and prices in São Paulo and Istanbul more than doubled.

Real estate price growth 2011–2015

City Annual price growth, % Aggregate
Moscow 6.3 1.6 −0.1 0.9 1.3 10.3
Hong Kong 16.1 0.3 2.4 −2.9 6.6 23.4
Shanghai 7.7 −8.7 17.5 4.8 7.3 29.9
London 8.3 10.5 6.9 8.1 2.0 41.0
New York 6.8 7.4 13.6 18.4 −6.7 43.9
São Paulo 28.7 19.9 13.9 12.3 5.1 107.3
Istanbul 13.6 13.1 16.5 21.4 29.1 134.3

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% as crude oil prices plummeted. When oil sprang back during the next three months, so did the price per square metre. 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 (i.e. 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 in Hong Kong, London, New York and Shanghai but more expensive than Istanbul or São Paulo. For example, apartments in the centre of the Russian capital are 4–4.5 times cheaper than in the centre of Hong Kong or London, but nearly 3 times more expensive than in the centre of Istanbul.

Price per square metre, USD

Uptown property Downtown property Premium property
Hong Kong 14,047 26,795 50,000
London 12,925 24,268 47,620
New York 10,377 21,133 29,412
Shanghai 4,600 11,104 20,833
Moscow 3,205 5,975 12,658
Istanbul 900 2,078 11,905
São Paulo 1,839 2,791 7,042

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

City Cost of
Living, 2015
cities, 2015
and Potential,
Quality of
Life, 2015
Report by Mercer Knight Frank A.T. Kearney EIU Numbeo
Hong Kong 2 3 5 4 n/a
London 12 1 2 2 72
Moscow 50 17 14 58 89
New York 16 2 1 1 76
São Paulo 40 31 n/a 62 94
Istanbul 99 29 n/a 74 71
Shanghai 6 5 21 43 78

Better price-to-income ratio

Expensive is a big word but it doesn’t really mean much out of context and 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.

Average saving time to buy property, years

Source: Numbeo

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 last 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% amid negative economic conditions and the unstable ruble exchange rate. The price per square metre 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 20–25%. 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 metre” 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 may be harder to revive.

This article by Tranio expert Yulia Kozhevnikova was originally published on Inman.com

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