Financing Russian Real Estate

[Misha]

Oh yeah, there's going to be a major correction in the housing market at some point.. The only question is when..

True dat..

And, when it does it will happen quickly. When prices are rising quickly, people rush to buy because they say "if I don't buy now, I will never be able to afford to buy." Then when prices start falling, people rush to sell, because they fear losing more money. This of course causes a huge glut, desperate people selling for cheaper, more rush, more glut....

[possum]

And, when it does it will happen quickly. When prices are rising quickly, people rush to buy because they say "if I don't buy now, I will never be able to afford to buy." Then when prices start falling, people rush to sell, because they fear losing more money. This of course causes a huge glut, desperate people selling for cheaper, more rush, more glut....

That's exactly what's going to happen here.. You know it and I know it, but the problem is, 99.9% of Russians don't know it..

[Misha]

My wife saved a lot of money because I explained this to her. I sold her room for 1 million roubles a year ago, now it is probably worth 700,000 roubles.

[AnastassiaAsh]

That's exactly what's going to happen here.. You know it and I know it, but the problem is, 99.9% of Russians don't know it..

What's going to happen? Don't scare hardworking people!  Real Estate will only be rising, I know it, you know it, everybody knows it. 
Maybe prices are dropping somewhere else, but not in Moscow. I don't think they dropped here in Seattle or New York...

So, invest in a flat in Moscow, let your fiancee live there, live there sometimes too when you come for a visit. It is much profitable than in the US. It is the best to have some money in different 'pockets'. 

[Gator]

Anastassia,

I have been walking this earth for a long time.  Nothing is constant.

Real estate prices are determined by many factors.  I have not followed the Moscow market closely, yet I have observed huge and steady price increases over the six years I have been visiting there, relayed to me by my Moscow woman.

The prices have increased in response to population growth (new buyers), economic improvement (buyers having more money), inflation (it costs more to build new apartments, and institutional factors (e. g., bribes required to construct - the mayor is doing fine I understand).  Recently, the advent of another institutional change -mortgages - has added another wave of price increases as buyers could leverage their finite savings.   In addition to all of this, there seems to be much speculation (absentee owners - buyers owning apartments but not living in them - at night many of the apartments in the new high rises are not lighted).

Each of these taken alone would have increased prices.  Taken together, you see what happened. 

Will this continue?  There is too much that can go wrong in my opinion.  If the world enters a recession, price of oil will decline.  That will have an effect.  As seen in America, it does not take much for the pendulum to start swinging the other direstion.  How fast and how far it swings depends upon whether the factors that have propped up the market start to teeter.

Too risky for me.

[Misha]

I agree with Gator: the time to get into Russian real estate was 10 years ago. Now, it would not take much for the bubble to burst. Here is a nice analysis of Moscow real estate prices: http://www.russiaprofile.org/page.php?pageid=Business+New+Europe&articleid=Russian_Real_Estate%3A_Boom_or_Bubble%3F_1173264960. What will likely start the fall will be the speculators: a lot of property was bought in the hope of making a large profit quickly. If they sense a downturn, the speculators risk dumping their property and driving down prices quickly. As the article writes: "The big unknown is the number of speculators in the market. Estimates vary wildly, but analysts believe 4 to 6 percent of apartments are being bought on the expectation of rising prices. If these speculators loose their nerve and put these apartments up for sale, the bottom could drop out of the market overnight, says Trust Bank."

[Daveman]

I agree with Gator: the time to get into Russian real estate was 10 years ago. Now, it would not take much for the bubble to burst. Here is a nice analysis of Moscow real estate prices: http://www.russiaprofile.org/page.php?pageid=Business+New+Europe&articleid=Russian_Real_Estate%3A_Boom_or_Bubble%3F_1173264960. What will likely start the fall will be the speculators: a lot of property was bought in the hope of making a large profit quickly. If they sense a downturn, the speculators risk dumping their property and driving down prices quickly. As the article writes: "The big unknown is the number of speculators in the market. Estimates vary wildly, but analysts believe 4 to 6 percent of apartments are being bought on the expectation of rising prices. If these speculators loose their nerve and put these apartments up for sale, the bottom could drop out of the market overnight, says Trust Bank."

Yep, and that's when 'mortgages' rear their ugly side because the money owed instantly becomes considerable more than the revised valuation of the property.. bang, distressed properties begin to add to the flood (with financial institutions losing millions.... of whose money lent?) which can turn a profitable market into a tsunami of fear driven turnover and collapse of more than merely the housing market. 

The one good thing about the Moscow market is that the Government Rent for the privilege of owning property doesn't follow upward with the bubble like it does here, often forcing property out of the hands of working people and into the hands of speculators.

[vox11]

The average salary in Russia has increased and as of January 2007 has reached $550 per month (see http://www.kommersant.com/p847117/Statistics_2007_Salary/). If the average is $550 per month, what proportion of individuals in Russia will earn $2000 per month let alone $4000?

I don't know, but there on expat ru is a guy groaning over inability to find a decent driver ( doesnt drink, doesnt steal fuel etc )for office car for $1900 a month in Moscow.

[AnastassiaAsh]

Some interesting articles on Real Estate in Moscow

http://www.evans.ru/moscowrealestate/

http://nreionline.com/august_article1.htm

http://www.net-planet.org/moscow-real-estate-investment-why-you-should-consider-it.html

[Eduard]

One great thing that hasn't been mentioned here about investing in real estate in Russia is that there is no annual real estate tax like we have here in the US.
A home/condo owner has to shell out thousands every year in taxes in the US. In Russia once you own your property you have only utility bills to pay and they are very cheap compared to what we are paying here.
The reason real estate prices went through the roof in Moscow is because Moscow is considered "the place to be at" in Russia. I would say that pretty much anybody from anywhere in FSU who is able to make and keep any considerable amount of money buys a place in Moscow therefore consistently driving the prices up.
I belive that FSU's population was around 300 million (ahhh stats again...not my strong point) Even if only 2.5% of the population was able to get their hands on some serious cash that would be 7 million people exploring Moscow real estate market.
I understand that there are quite a few foreign investors who bought in Moscow as well...

[Phil dAmore]

One great thing that hasn't been mentioned here about investing in real estate in Russia is that there is no annual real estate tax like we have here in the US.

Not exactly.. There is an annual 'owner's tax' but it is so small as to be laughable.  Based on the size of the apartment (in sq. meters) it's payable twice a year.  Mine runs a whopping 350 rubles per year.  A far cry from the confiscatory levels imposed by the U.S. to be sure, but it is there.

FWIW Russia, for all of her problems and penchants to make things as complicated as possible actually has a very simple tax system.  (Reported) income has a flat 13% tax, everything you buy has an 18% VAT.  No 'excise' taxes, 'environmental fees', 'metering charges', etc.

W/R/T real estate they also have an interesting plan when comes to taxes on the sale of a property.  If you held the property for 5 years or more, you pay nothing on the proceeds of the sale (no 'capital gains' tax).  However, if you sell before the 5 year mark, then they sock you with a 40% penalty.  It's a good way to discourage 'flipping'.

Obviously there are ways around this, and it's common to see contracts written for far less than the actual sale price. 

Finally remember this:  A Russian contract generally isn't worth the paper it's printed on (for many reasons, much like the one above).  It is VERY easy to get screwed and as a foreigner you have absolutely NO recourse. Ownership rights as we know them in the West really don't exist and if you are dealing with a less-than-honest broker things can go bad very quickly. Proceed with EXTREME caution.

[chivo]

I belive that FSU's population was around 300 million (ahhh stats again...not my strong point) Even if only 2.5% of the population was able to get their hands on some serious cash that would be 7 million people exploring Moscow real estate market.
I understand that there are quite a few foreign investors who bought in Moscow as well...

Actually, the population is about half, somewhere around 145 million. Nevertheless, you're correct about the foreign investors.

Another to keep in mind is that not many people, everyday people, are buying Moscow real estate and taking mortgages (Russians still prefer to pay cash, and most who I know who bought paid this way). And although mortgages are increasing, one shouldn't compare to how it works in America, for instance.

The majority of the nouveau rich here are just people who already had an apartment provided to them free by the government only to see it appreciate beyond belief. Many families own more than one as well and usually they are passed on through the family after death.

Some sold, cashed out, and bought somewhere else, but most/many are holing up together in 1 apartment and renting out the others and living off that, or using it to supplement their existing salaries. My rent has gone up 30% in the last 4 months.

As far as getting into the real estate market 10 years ago, well yeah, who can't look back now and say that. Problem is/was who knew, and really who was going to invest in Russia right after the crash in 98. I think realistically, 2003-4 was the time when Russia seemed to stabilize and investors began to look favorably at Russia again. Housing has jumped 3-400% since then.

I have a client who runs a mortgage company here in Moscow and he believes prices are about to burst. He also predicts a recession in the coming year or so (Russians like to use the word default) and a falling in price of the housing market, yet according to him it has very little to do with the fallout from the subprime fiasco in America because the mortgage industry here doesn't work the same way and there's no connection between the 2.

I forgot his exact words, but I'll ask him the next time I see him if anyone is interested. He just returned from a board meeting for his company in the states and was relaying some of the information to me, but since I'm not directly involve, i paid little attention to the details.

Personally, I wouldn't invest in Moscow real estate at the moment, and anyone who thinks it will always continue to rise in value doesn't know what they're talking about. It might for the short term, but...

If there's anything predictable about Russia, it is its unpredictability. Good luck

chivo

[chivo]

How prevalent do you think it is that Russians do not declare their full income to the government and therefore do not pay the correct amount of tax on it?

Very.

chivo

[Gator]

America seems to be headed toward a recession, if such has not already started.  Because we account for one third of the world's economy, the world will also slow down.  Price of oil should decline.... (not collapse).

Reading Anastassia's article, the price per square foot for decent Moscow flats is almost $1000 per suare foot.  Those are Manhattan prices!  Is Moscow the same as New York?  I don't think so.

[Phil dAmore]

Reading Anastassia's article, the price per square foot for decent Moscow flats is almost $1000 per suare foot.  Those are Manhattan prices!  Is Moscow the same as New York?  I don't think so.

Some would argue Moscow is better than New York.

Remember the Russian mindset when it comes to the price of things:  The more something costs, the better it must be... because if it wasn't good it wouldn't cost so much!

As an example:

Nina's daughter and I have the same eyeglass prescription.  I buy my glasses off the rack at the rynook for 150 rubles.  Ira buys hers at the boutique and paid $600 for her latest pair. Obviously most of the price difference reflects the inflated cost of the frames.  She is swears that she can see better out of her glasses than mine.  It's the same damn 'script.!!!   

Russians don't understand the concept of value, either. 

[Eduard]

Some would argue Moscow is better than New York.

Remember the Russian mindset when it comes to the price of things:  The more something costs, the better it must be... because if it wasn't good it wouldn't cost so much!

As an example:

Nina's daughter and I have the same eyeglass prescription.  I buy my glasses off the rack at the rynook for 150 rubles.  Ira buys hers at the boutique and paid $600 for her latest pair. Obviously most of the price difference reflects the inflated cost of the frames.  She is swears that she can see better out of her glasses than mine.  It's the same damn 'script.!!!   

Russians don't understand the concept of value, either. 

it's the famous placebo effect...she believes that she can see better in those with a nice frame, therefore she actually does see better wearing them!

[Eduard]

America seems to be headed toward a recession, if such has not already started.  Because we account for one third of the world's economy, the world will also slow down.  Price of oil should decline.... (not collapse).

Reading Anastassia's article, the price per square foot for decent Moscow flats is almost $1000 per suare foot.  Those are Manhattan prices!  Is Moscow the same as New York?  I don't think so.

Gator, actually yes! Moscow reminds me of NYC now big time. Same energy, same traffic, same pollution, same stores and shopes, same prices...the only huge difference is - women!!! 
Honestly, if I was SINGLE and HAD to live in a big city I would definitly prefer Moscow to NY
But I'm married and love living the "dacha" lifestyle right here in Florida. Couldn't live without my beach volleyball every Sunday 

[AnastassiaAsh]

Ira buys hers at the boutique and paid $600 for her latest pair.

  :hairraising:

[possum]

Not exactly.. There is an annual 'owner's tax' but it is so small as to be laughable.  Based on the size of the apartment (in sq. meters) it's payable twice a year.

That's not exactly true.. The 'owner's tax' rate is determined based on value rather than square meterage.. it varies from 0.1% for property valued at 300000 RR or less to a 'whopping' 2% for newer property worth over 500000 RR or something like that..

[Phil dAmore]

That's not exactly true.. The 'owner's tax' rate is determined based on value rather than square meterage.. it varies from 0.1% for property valued at 300000 RR or less to a 'whopping' 2% for newer property worth over 500000 RR or something like that..

I'm wondering how they assess the value then.  My apartment has increased fivefold in the time that I've had it and my tax rates have remained constant. No one has ever come around to assess, nor have I received a form to return to the tax office.

Looking at my most recent tax bill the size of the place must be a factor.  Otherwise why would the rate be right next to the square meterage?

I've a buddy who has owned an apartment nearly as long as I and he has NEVER received a tax bill.  When he went to the tax office to inquire about it, they basically told him not to worry about it!

Try that with the IRS and see how far you get!!

[possum]

I'm wondering how they assess the value then.

Beats me.. All I know is that the value of recently acquired property is determined by the purchase price on the deed..

[chivo]

In Moscow, situation with mortgage is different from what possum wrote.

Much different

For instance, Vneshtorgbank (used by a few of my colleagues) offers tthe following: for a ready to live apartment, they demand interest from 9% for 5-7 years, from 10% for 8-15 years, from 11% for 16-25 years, from 11,25% for 26-30 years of credit repayment.
In the essence, the mortgage conditions depend from the individual's monthly income, and the size of downpayment.

This is consistent with what I have found out. You CAN get loans for 30 years, with the lowest interest rate i've heard at 10.5%. These loans are available to any Russian in the country who qualifies as long as they buy in the city where they live. On a side note, notice the word demand...so Russian  .

What would probably be more amazing is that about 80-90 percent of lenders do actually repay their mortgage during a few years only. Often they are repaid in a couple if years. I have not heard of anyone who used even a half of his mortgage allowable time, let alone the full 15 or more years.

This is normal too. While Russians are taking more chances with debt, its still considered to be a "dirty four letter word" to the vast majority and they want to do away with it asap.

Another thing that I found interesting regarding oil prices here was that even when the price of oil drops as it has in the past, gas prices have remained the same or even increased in some cases, unlike America for instance where it will fluctuate accordingly. Not sure what it means in the grand scheme of things, but interesting none the less. Russian capitalism at its best 

good luck.

chivo