Last year will go down in the history of Moscow's real-estate market for its outstanding price hikes. After growing 11 percent in rubles (8 percent in dollar terms) during the first half of the year, Moscow's real estate prices climbed again by 24 percent (in rubles) or 19 percent (in dollars) during the year's second half. As of December 2001, the average price of 1 sq. meter of residential floor space exceeded the December 2000 level by approximately 35 percent (in rubles) or 27 percent (in dollars). By comparison, during the year 2000, apartment prices in Moscow had increased by only 2.5 percent (in rubles) or 3 percent (in dollars) – the reverse ruble/dollar figures were thanks to the Central Bank's successful efforts to strengthen the ruble. In 2000, the increase in Moscow's apartment prices was far behind the rate of inflation, which edged up to 18.6 percent.

The period from May 2000 to August 2001 was the best time to purchase an apartment in Moscow. Corrected for inflation, prices went down substantially down. This brought a new group of buyers to the market who could now afford to buy an apartment, as prices were 10 percent to 15 percent lower than in January 2000. Seeking to keep up their profits, secondary market dealers made a number of attempts at propping the market up, but the only result was some minor price oscillations. Having failed to heat up the market, many dealers chose to withdraw their offers.

Moscow's secondary market of real estate is a huge segment, much bigger than the market for newly built apartments. The monthly average composite supply volume on Moscow's real estate secondary market is equal to approximately one million sq. meters of residential floor space. By comparison, the year volume of newly built apartments equaled approximately 3.5 million sq. m. of floor space (including stairways and entrance halls) in 2001.

In November 2001, secondary market dealers offered apartments worth a total of $0.75-$0.8 billion. By comparison, the Central Bank's foreign currency reserve equals $38 billion and Russia's foreign-debt repayment rate is around $1 billion a month.

The secondary market covers a vast area of Moscow and its outskirts – from the South Butovo to the Severny districts, which are almost 100 km apart. Apartments offered on the secondary market range from elite residences in Stalin highrises overlooking the Kremlin to modest apartments in shabby pre-Khrushchev buildings with kitchens as small as three sq. m. As a result, prices vary from $250 to $5,000 per sq. m. of floor space.

The secondary market is more stable than the primary and is less susceptible to fluctuations. After all, a secondary market dealer can easily recall his offer and wait for a "better time." Meanwhile, he may offer apartments for rent.

By August 2001, Moscow's secondary real-estate market had shrunk by nearly 50 percent from the August 2000 level, which automatically resulted in a relative increase in the primary market's share. Taking advantage of the situation, primary market dealers decided to increase their prices.

In the fall of 2001, the Moscow Department of Investments in Construction increased the prices of apartments in the development area of Kurkino by 20 percent. This marked a trend reversal on the market – prices have rapidly increased since then on both the primary and secondary segments.

A specific feature of Moscow's real-estate market in 2001 was that the rate of price increases was inversely proportional to the quality of the apartments. A probable explanation is that those who decided to buy an apartment were reluctant to change their minds, but had to reconsider their choice in favor of a lower-quality apartment that would match their financial status. Therefore, I would not agree with those analysts who say that "the growing well-being of the people" is the main driving force for real estate price increases this year.

The last year saw noticeable "rearrangements" in the ranks of potential real estate buyers, especially among those seeking to buy inexpensive apartments. Increasing prices forced some potential buyers to postpone their plans until a later date, while others scraped together some cash and managed to find something suitable. In any case, the ranks of potential apartment buyers have shrunk, which will inevitably affect the market as a whole. Sooner or later, the market will feel a deficit of buyers.

The uneven distribution of price growth figures by administrative districts reaffirms the conclusion that no increase occurred in the purchasing power of potential apartment buyers in 2001. The biggest growth (in excess of the average figure) occurred in the Southeastern District (+7 percent), the Southern District (+6 percent), the Zelenograd District (+4 percent) and the Eastern District (+1 percent). In the Western and Northeastern Districts, the growth was equal to the average figure of 25 percent; in the Northern District it was one percent less than the average; and in the Central, Southwestern and Northwestern Districts it was two percent less than the average. The biggest price increases occurred in the districts which had traditionally been among the "outsiders" in terms of real-estate prices. This did not make them leaders, but temporarily made real-estate prices less dependent on location.

According to the Moscow government's plans, the rate of residential space commissioning will reach 4.2 million sq. meters in 2002, up 20 percent from last year's figure. While the Moscow City Duma is considering mortgage crediting and rent-with-an-option-to-buy schemes, Moscow Mayor Yury Luzhkov is expressing concern that 30 percent of newly built apartments in the city are not finding buyers. Some sort of legislation may be adopted in 2002 that would affect the real-estate market and its prices.

In January and February 2002, Moscow's real estate prices went on climbing. Partly, this can be explained by inflationary expectations (inflation in January exceeded three percent instead of the planned rate of one percent) and partly by the stubborn unwillingness of the sellers to reduce prices. Fron January to February, real estate prices in Moscow increased 1.7 percent (in dollar terms) and 3 percent (in ruble terms). But if one looks at the price dynamics from December 2001 to February 2002, the growth of real estate prices did not exceed the rate of inflation, and February's growth was mostly accounted for by the price hikes in the Central Administrative District, while in the other districts the prices have not changed. By and large, the market is unstable.

The real-estate market represents an important segment of economy and its situation will affect the country's economy as a whole. Preliminary assessments show that prices of apartments in Moscow will continue to increase (in ruble terms) and will climb 12-15 percent toward the year's end. In dollar terms, they will probably remain unchanged, especially now that the Central Bank's new policy calls for tying the ruble's devaluation to the rate of inflation.

Summer will be the most risky period for investors, when the market is traditionally dormant. As things stand today, prices are at the upper limit of the supply/demand balance, and if they begin to go down, the fall may be substantial.

(The author is an independent expert (http://www.arn.ru). )