Russian buyers put the squeeze on realtors: what’s going on with apartment prices

Russians pay for preferential mortgages out of their own pockets

– Six months ago, most developers did not fundamentally reduce prices and did not treat colleagues who gave discounts to buyers very respectfully. But now the majority still “give up” and offer a discount on new housing up to 30%. How realistic is this discount? How not to run into a seller who initially overestimates the price per square meter?

Aprelev: – The discount is part of the developer’s marketing strategy, so it is impossible to say unequivocally that the seller is honest with the buyer, even with a complete systematic analysis of the market. The primary market is a rather hidden environment. The presence of a banner with a 30% discount does not mean at all that the buyer, firstly, will receive such an offer for the entire line of apartments. And secondly, the developer is likely to provide a discount only under certain conditions – for example, with full payment. But the main thing is that we do not know if the prices went up before the discount was announced. People who constantly monitor price changes in a particular new building can still understand whether the discount corresponds to the declared one. But in general, I think the promises of the sellers are not entirely true.

Mezentsev: “Purchasing power and the ability of banks to provide loans have changed a lot now, since there is a high risk of their non-repayment. We see that builders and developers are forced to discount. Previously, this was a marketing ploy, when prices were initially inflated, and the buyer was ready to overpay for an apartment with a view, for an apartment in an area that was interesting to him. There was no rush demand. There was competition between buyers and developers. Now the stagnation of the market of new buildings begins. Developers pay attention to areas near major cities. They want to engage in low-rise buildings, very promising. The suburban real estate market is now underestimated, there are not many mortgage programs on it. But it is the lack of mortgage programs that stops the rise in prices for suburban housing. We see a transitional moment between high-rise construction and the departure of entrepreneurs to the suburban market.

It is no longer a secret that real estate prices at one time were dispersed by preferential mortgages for multi-storey new buildings. The more the state supports it, the more advantageous situation developers and banks are in. In fact, money is taken from the state budget and put into the pocket of developers and entrepreneurs. And the resident of his own apartment ultimately pays for this.

Magilina: I would like to draw your attention to two points. First: large declared discounts are not some kind of news. For many years, city developers of a multi-storey format have traditionally announced discounts of tens of percent. In 2017, 2018 and 2019, this was a mass phenomenon. The exception is the second half of 2020, during the peak demand. The second point, which colleagues have already mentioned, is that most of the discounts are fake. The developer raises the price a little, then lowers it a little, while giving a significant discount on a very limited pool of apartments, which for one reason or another turned out to be illiquid. The real share of discounts in the fall of 2022 is about 1.5%.

Badgers: – The developer has a construction cycle, within which the price grows, there are opportunities for manipulation. Suppose the house has already been built, which means that the price can be raised. In 2022, banks issued fewer mortgage loans in units than in 2021, but the amount of money turned out to be greater. It is possible, of course, that the size of initial contributions has become smaller, while the average size and term of loans have increased. But in general, this is an indicator that developers have received more money than even during the hype period.

Why was the topic of discounts from developers closed for a long time? The fact is that the buyer of an apartment is most often mentally prepared to wait. And as soon as the developer announces a discount, the buyer thinks: yeah, so, maybe the price will drop again tomorrow, and more and more in the coming weeks? If the developer says directly that he “drops” the price, the demand is “killed”. The only reason why the developers taxied out was due to the misalignment of mortgage rates in the primary and secondary markets (not in favor of the latter).

“Most of all, the price of a house is affected by its location”

– Is it profitable to take a mortgage at a low interest rate from the developer? It is clear that the rate of 0.1% is a thing of the past, however, there are proposals in the region of 3-4%.

Aprelev: – First of all, you need to think about the absolute cost of the apartment, the timing of the delivery of the new building and the monthly payments. And the presence of programs with rates of 3% does not reflect the real cost of housing. In February-March last year, buyers were afraid of an increase in the preferential rate due to a sharp increase in the key rate, in December they expected the cancellation of preferential mortgages, which developers played on, not reducing prices.

Apartments in residential complexes, intended for delivery in the coming months, are mostly sold out. And now the biggest difficulty for developers is to raise money for the construction of houses that will be rented out in 3-4 years. Developers have always been guided by the fact that consumers will buy housing that is just beginning to be built and wait. But buyers are not willing to take the risk due to political and economic uncertainty. The financial flow has dried up.

It may be necessary to change the mechanism for attracting money: to think about the transformation of escrow accounts. In any case, you will have to abandon the 100% filling of the escrow account. 10-20% – this amount will be a sufficient guarantee for the buyer to confirm his solvency. Otherwise, demand cannot be restored.

– What is the best way to act if the apartment needs to be urgently sold or exchanged?

Mezentsev: – There is always an element of luck, but usually only a few are lucky. The main advice is that you do not need to make a long time interval between the sale of the old and the purchase of a new apartment. Otherwise, you can get into a surge in inflation. Developers need money, and they will lobby for any government programs to expand mortgage lending. Including, by the way, the secondary market. If a Russian sold an old apartment, and bought it with an additional payment in a new residential complex (most often such transactions occur), this is beneficial for the developer.

– What, in your opinion, is an adequate price per square meter?

Magilina: – The price per square meter is adequate if the exposition of the house or apartment (that is, the time from putting the house up for sale to the completion of the transaction) suits you. If the seller sets an overpriced price, the market will respond to this – for a long time there will simply be no calls, and as a result, you will have to make a discount. In the opposite direction, the market also responds very quickly. If you value your home too cheaply, the next day you will have a huge number of people who want to buy it, and they will race to incur money for you.

There is some difference in the average prices per square meter in the regions of Moscow. Naturally, the center is more expensive than the southeast. But again, the price of an apartment or house is made up of a huge number of factors. The most important of these is location. And this factor depends on a lot of sub-factors: transport accessibility, good road junctions, an abundance of shops, parks, schools, kindergartens… If the environment looks favorable, the price will certainly rise. Especially well the difference in the cost of housing is visible outside the Moscow Ring Road. In locations where infrastructure is actively developing, the average price per square meter starts to rise quite quickly.

“The housing market is very strange these days”

– It is clear that a discount of 10-30% is an illusion in some way. Nevertheless, they talk about it everywhere. How long will the fall in housing prices in Russia last? What circumstances can contribute to the continued decline in the cost of the “square”, and what, on the contrary, will stop it?

Badgers: I’m going to give a very unpopular opinion. In March, at a conference at MK, I also said an unpopular thing that prices would fall, and my colleagues argued that I was wrong. Now I will say that in Moscow, at least in the secondary housing market, prices will no longer fall. The only amendment to my statement is that we are talking about the real value of transactions. A lot of overvalued real estate, especially on the “secondary”. And the analysts who draw the charts come from the initial offers of home sellers. They will probably draw prices down for another 3-4 months. I’ll explain why. In December, sellers actively began to reduce the cost per square meter, trying to sell housing by the end of the year, while buyers reacted loyally and bargained moderately. A large pool of apartments appeared at a lower cost.

What was not sold in December moved into January. This housing is overvalued, so the cost per square meter has formally increased. In mid-February, sellers, realizing that nothing was being bought from them, began to reduce prices – and we again saw “falling” charts. As for real transactions, in January the discount for the “secondary market” was 15-20%.

If you look at Russia as a whole, everything is complicated here. Each region is unique. Major cities follow the metropolitan trend. Even the far suburbs of Moscow differ in dynamics from Moscow. In many towns we will not find a drop of 15-20%. Look: there are about a dozen apartments for sale in a small regional town. Their owners look at each other, they see that there are no buyers, but they continue to hold prices, no one wants to give in. At the same time, buyers tell them that for the same price, or even cheaper, you can buy housing much closer to Moscow. And sellers reduce prices only when they are convinced of this. Usually not fast.

The inertia of the Russian market has always been 2-3 months. And now she stretched out for six months. The housing market is very strange right now. We found the bottom. After that, the price will either remain the same or start to rise. I am convinced of this every week.

“Demand for new buildings depends on success in the military operation”

— What are your forecasts — what is the future of the market? Let’s look at different scenarios for the development of the situation, depending on socio-economic and political events.

Aprelev: – I fundamentally disagree with the position of Konstantin Barsukov – he considers the situation as the head of the office, based on psychological expectations from communicating with people. And we must look not at the consequence, but at the key causes. Why have prices and demand changed? Obviously, first of all, because of the preferential mortgage program (70-80% of transactions). And what in demand affects the mortgage? Bid. Has she started to go down? No. Has the key rate changed? No. Is it possible that the key rate will go down? No. Are people making more money? No. Prices increased by 35% during the pandemic? Yes. Effective demand decreased? Yes. Are jobs shrinking? Yes.

The offer price has gone up. The explanation for this is that in December they bought out all the more or less decent apartments, leaving illiquid ones that were stuck for the winter months.

The second indicator is mortgage. In February, compared to January, the number of loans issued decreased by 15%. If we compare 2022 and 2021, the number of loans also decreased by 15%. Basically, this decrease occurred in the 3rd–4th quarters, with the exception of December.

Now let’s look at the quality of loans issued by banks. The size of loans increased by 15%, the term of their issuance increased by 15-20%. This suggests that banks are choosing the latest opportunities to fulfill their financial plans.

Demand can only be stimulated by inflation and an increase in the size of state-subsidized mortgage programs. And even then, over the past year, the volume of subsidized programs was not chosen – despite the fact that they are very preferential compared to the market. It turns out that there is no potential growth for these programs either. Perhaps there will be special programs for young people. But while the military operation is going on, the population does not have stability. Therefore, it is necessary to forget about the investments of Russians in new buildings for 3-4 years. And the demand for apartments in new buildings will very much depend on crucial, significant successes in the military operation, including short-term ones. Until they happen, it will be very difficult to return the demand.

New buildings are mainly investment demand. And consumer demand, as it was, and is, 70% concerns the secondary market, transactions of an alternative nature. What difference does it make to me whether the price rises or falls, because if I sell a “one piece” and buy a “kopeck piece”, I will lose 2-3%, and this is a matter of bargaining in any transaction. It is clearly compensated. Therefore, 70% of the volume of transactions in the secondary market will remain, and prices will continue to decline – in my forecast, at least until autumn.