A year ago, analysts came to the conclusion that Russia's real-estate market had reached a stage of steady growth, having finally bounced back from the August ‘98 crisis. In nearly every Russian city, growth on the market began as early as 2000, but it progressed in fits and starts: In the beginning of 2000, housing prices began to rise in Yekaterinburg and Perm, then in the middle of the year in Novosibirsk, Ulyanovsk, Omsk, Moscow and Tver and then, toward the end of the year, in St. Petersburg and Kaliningrad. Only in the middle of 2001 did prices rise in Nizhny Novgorod.

Price growth rates in Russia's cities are connected to the depth of their fall after the crisis: the lower (relative to their pre-crisis level) the price level at its lowest point, the earlier its growth began and the faster it grows. Local economic and political conditions lead to individual cities, such as Novosibirsk and Moscow, outpacing the rest, while others, including Kaliningrad and Nizhny Novgorod, lag behind. On the whole, by the end of 2001 price levels in cities amounted to 58 percent to 92 percent of December 1997 pre-crisis levels.

At the end of last year, the first signs of an end in price growth appeared in those cities that had come closest to their pre-crisis levels. In Yekaterinburg and Novosibirsk, and to a lesser extent Moscow, the growth rate of offering prices decreased, and real transaction prices even stopped increasing, according to experts and leaders of a number of Moscow real estate agencies.

For analysts and businessmen in Yekaterinburg, Perm, Novosibirsk and other cities, where such growth had rapidly taken place the year before, it was already obvious that 2001 would be a year of stable price growth in the real estate market. However, in Moscow and St. Petersburg, this prognosis was received with disbelief, and the sharp increase in prices that followed in the second half of the year was experienced as a crisis. Two major factors contributed to these dramatic changes in the market: growth in demand and decrease in supply volume.

In 2001 the government predicted a drop in the economic growth-rate compared to the previous year, with a simultaneous fall in the inflation rate and increase in the dollar exchange rate. However, record energy resource export prices and additional budget revenues toward summer provided an influx of money into the economy, and for want of other attractive opportunities for investment, money went into the real estate market. Russians' real incomes rose and solvent composite demand translated into a rush of customers at real estate agencies.

According to data provided by the Russian Public Opinion and Market Research (ROMIR — Gallup International) independent research center, a poll of 500 adult Muscovites revealed that in August 2001, the most popular form of keeping savings was the purchase of real estate. Realized demand (the volume of purchase and sale transactions) in the secondary housing market in the first half of 2001, compared to the same period the year before, grew in Moscow by 43 percent, in St. Petersburg by 35 percent and, within the first three quarters, 31 percent and 30 percent, respectively. The numbers of investment agreements in the secondary market in Moscow grew over the first six months by 40 percent, and over the first three quarters by 31 percent. As a result, the growth rates for housing in Moscow and other cities – with the exception of Kaliningrad and Nizhny Novgorod – exceeded expectations, and in June forecasts for a number of cities were revised, keeping in mind the expansion.

Taking into account the drop in energy-resources prices, the growth in volumes of external payments and the worsening worldwide economic situation, the authorities are projecting a decline in economic growth rates this year. Consequently, this factor (which this time will most likely be realized) will contribute to a deceleration of price increase rates in most Russian cities.

In 2002 the authorities anticipate ruble inflation of 12 percent to 14 percent, ruble devaluation (at an average annual exchange rate of 31.5 rubles per dollar) of 6 percent to 7 percent and a decrease in consumer buying power by 6 percent to 7 percent during the year. Although this factor might not have a noticeable influence on price movement in cities where housing prices are set in dollars, in cities with prices set in rubles, it will contribute to a price increase (in dollar terms) of 8 percent to 10 percent, all other things being equal.

In 2000 in Yekaterinburg and Perm, and in 2001 in Moscow, St. Petersburg and other cities, supply volumes of apartments sharply declined in the housing market, causing a panic among realtors and anticipation of a crisis in the market. In fact, this was a delayed reaction by the market to the price drop that occurred in 1999-2000. After the beginning of price growth with the same half-year/year delay, the volume of supply had to begin to grow. And really, by the end of 2001 in Perm, Yekaterinburg and Ulyanovsk it had already increased to the mid-2000 level. In Moscow and St. Petersburg, price growth began in the summer of 2000, and supply volumes have been increasing since August 2001. In Kaliningrad, where price increases are delayed, a decrease in supply volumes continues.

In 2002 in Moscow, St. Petersburg, Yekaterinburg and Novosibirsk a transition to stabilization "with an overrun" will be taking place (not completely homogeneously). At the beginning of the year supply price increase rates (in dollar terms) will slow down, but prices will briefly surpass pre-crisis levels (by 5 percent to 10 percent), and in the spring and summer, some recoil will occur, after which prices will stabilize at the December 2001 level by the end of the year. In Perm, Tver, Omsk and Ulyanovsk stabilization will occur according to a "creeping up" scenario: as early as January or February, price movement (in dollar terms) will consist of a slow increase to 80 percent to 95 percent of pre-crisis levels. In 2002 in some cities, including Kaliningrad and Nizhny Novgorod, a price increase of 20 percent to 25 percent will occur, at first with rising, and then falling rates, and stabilization is expected beyond the end of 2002.

Thus in the majority of Russia's cities, the housing market in 2002 will conclude its stage of growth and turn to a stage of lowering growth rates, and then to a mainly oscillatory stabilization of prices. In cities that still will not have realized the potential of their return to price levels close to pre-crisis ones, growth will continue and stabilization will occur beyond 2002.

(The author is the Chief Analyst of the Russian Guild of Realtors.)