How much could new building prices fall
New buildings will become cheaper in the next two years or even earlier by 40%, said the head of the State Duma Committee on Financial Markets, Anatoly Aksakov. Among the arguments of those who predict a decrease in prices is a decrease in demand after the cancellation of preferential mortgages for new buildings, as well as the fact that the end of the program heated up prices, and now developers are preparing for discounts.
In advertisements for the sale of new apartments, you can already see crossed out prices and 20% discounts. However, so far these are isolated offers that look like a marketing ploy.
Over the past three months, prices have artificially increased, and now the market must form a market value for an apartment without a preferential mortgage, notes Viktor Zubik, founder of the Smarent management company. There are a number of premises on the primary housing market that are sold at inflated prices, and there may even be isolated cases with discounts of 30-40 percent, but not on the entire market at once, he believes. In addition, there is always a drop in sales in the summer, so prices will most likely decrease in the next two months. But this does not mean that the market will collapse before the end of the year, the expert says. There are no reasons for a massive reduction in prices for new buildings by 40%, because now, upon assignment from an individual, an apartment in a new building is sold with a discount of about 10% compared to the developer’s price, and this is their market value.
Prices on the secondary market, which grew following the “primary” market, are already being adjusted, although sellers have only just begun to seriously consider increasing discounts to attract buyers, says Artem Tsogoev, member of the board of directors of Simple Estate.The real estate market may go down the path of supply rather than prices
“The dynamics of the price on the primary market depends on whether the Bank of Russia will prohibit developers from using such an important tool for working with demand in the new conditions as a tranche mortgage with a grace period for the first two to four years. This issue is still being discussed,” the expert said.
The reality of a 15-20% price reduction in the next couple of years can be believed, especially if the new-build market is pressured by loud statements from government officials, says Irina Radchenko, president of the International Academy of Mortgage and Real Estate. She recalled how in 1999, the capital’s mayor Yuri Luzhkov literally ordered apartments to become cheaper.
“Then Luzhkov publicly demanded that housing prices in the city be reduced to $200 per square meter. Prices did indeed fall a little after that, but not everywhere and not for long. If a long-term and large-scale reduction in prices is required, then verbal interventions alone will clearly not be enough. In addition, if prices fall by 20%, this will put the entire Russian banking system at risk,” she warned.
The fact is that for a long time banks
have been issuing preferential mortgages with a down payment of 15-20%, which means that a more significant reduction in price could devalue the subject of their collateral.
“If we imagine that a new building has become 40% cheaper, and the borrower has refused to pay for it, the bank will receive an asset that costs less on the secondary market than the remaining debt. Potentially, this is a very serious threat, and not only to banks, but also to the construction industry, which is one of the driving forces of the Russian economy. Therefore, I think that the Central Bank and the government will simply not allow such a situation. When prices reach the minus 20% mark, they will start saving builders and bankers,” said Irina Radchenko.
Both banks and developers will survive a moderate price reduction of 10-15% relatively easily due to the large profits received during the years of high demand during the period of mass preferential mortgages, the expert added.
The price reduction for new buildings in the second half of the year will be moderate and insignificant, believes Irina Dobrokhotova, founder of BEST-Novostroy and bnMAP.pro. Demand will not fall to zero, since it will be supported by current preferential programs – “Family Mortgage”, IT mortgage, mortgage for military personnel, etc.
Developers are already responding to the changes and offering subsidized mortgage programs and flexible installment terms – for example, a program at 8% with a subsidized rate from the developer for five years with subsequent transition to the market rate and the possibility of refinancing is already available. This is a completely viable option, especially for those who expect to pay off the mortgage earlier, the expert believes. Smaller developers, including regional ones, have fewer opportunities to significantly reduce prices within the framework of agreed financial models.
Buyers are really hoping for a quick reduction in the cost of new apartments. Photo: Tatyana Andreeva
With the cancellation of mass preferential mortgages, the new building market is expecting serious changes, but it is too early to predict a drop in prices, says Rifat Garipov, head of the project financing commission of the Public Council under the Ministry of Construction.
“Yes, developers are revising their sales plans, but mainly in order to offer buyers their own installment plans. Today we are not seeing a decrease, but a correction in prices for new buildings, which by the end of the year could fall by a maximum of 5%. This is an objective figure, given the constant growth in prices for building materials and work,” he says.
At the same time, the most likely scenario is price stagnation adjusted for inflation expectations and the degree of project readiness, since in the new-build segment the primary influence on pricing is the cost of construction, inflation and the cost of project financing for developers.
According to the Union of Cost Engineers, the average cost of housing construction in Russia has increased by 8.06% since the beginning of the year. At the same time, the gap between the cost and market prices for housing on average in the country is only 5 thousand rubles (88.3 thousand versus 83.3 thousand rubles of the cost). However, in some regions the difference is quite significant – for example, in Sakhalin the cost of construction is 113 thousand rubles “per square”, and market prices are 170 thousand rubles. In Moscow – 161 thousand and 246 thousand rubles, respectively. In other regions – for example, in the North Caucasus – the difference is even negative: the average cost of a “square” in a new apartment for sale is lower than the cost of construction (for houses that are being built now). It would seem that in regions with a strong excess of prices, developers can quite afford to reduce profits, which will lower prices by the same conditional 40%. But the builders themselves assure that this is not so.
It is very difficult to calculate the cost price of a square meter in a linear manner, says Anton Glushkov, president of the National Association of Builders (NOSTROY). Projects were launched at different times and, accordingly, any developer includes a certain delta for the increase in cost price in the short term. Over the past year and a half, the cost price of construction in Russia as a whole has increased by more than 30%. Information from the Union of Estimating Engineers is quite objective with one exception, notes Glushkov.
“Today, a significant portion of state programs related to the demolition of dilapidated and hazardous housing, construction of social and cultural facilities with the participation of the federal budget have been suspended. This is becoming a burden on regional budgets, which at the moment cannot fully cope with it. Most regions are looking for various ways to build social and transport infrastructure at the expense of construction companies: some intend to do this as part of the integrated development of territories, others – by establishing an infrastructure fee. Due to such fees, the additional burden on the construction cost in large cities is about 25-30 thousand rubles per square meter,” he explains.
A 40% drop in prices would mean that a large number of developers
would default and go bankrupt, because developers do not have such margins, says Igor Galuzin, founder and CEO of the investment flipping company Todayprice.
“I don’t believe that developers are going to start cutting prices by 40% just to make sales,” he says.
Of course, developers can reduce the marginality or at some point take it into a small minus, but at the same time there will be no mass price reduction to get sales. Now almost all developers work through bank project financing. Therefore, they have certain funding receipts for construction, and from here there is an opportunity to wait out hard times without sales. This will affect the interest rate, but it will not be a stop factor for starting to sell off all the remains. Discounts and promotions may be, but as an exception.
In general, there are three factors working against price reduction. Firstly, these are banks with which developers have agreements on project marginality, sales schedules, prices, etc. If the developer does not comply with them, credit funds will become more expensive for him. Deputy Minister of Construction and Housing and Public Utilities Nikita Stasishin at the real estate forum “Movement” called on banks to be more loyal to developers, not to force them to increase the volume of their own funds, and also to allow non-strict compliance with sales schedules.
Secondly, this is, in fact, support from the authorities. There are about 10 million people working in construction. And they simply won’t let the industry collapse (and a significant reduction in prices could theoretically lead to this).
In mid-June, Stasishin reported that in China, over the past four months, the price per square meter of housing under construction has fallen by 30%, and that developers there may actually have problems.
“We will be watching very carefully so that we do not have the same problem – unfortunately, as is happening now in some cities in China,” said the deputy minister. “Yes, the market will hold out, yes, everything will be fine, but yes – there will also be bankruptcies. We will watch this very carefully. I promise you that.”
At the same time, addressing developers, he emphasized that housing should be affordable.
Finally, the third factor is market self-regulation.
“The reaction of developers will most likely be reduced to a reduction in the output of new facilities,” says NOTIM President Mikhail Viktorov. “And such trends exist, including instances where the largest systemically important developers are slowly starting to sell off their land bank.”
Photo: Alexander Korolkov/RG
By the way, this is the scheme that was followed in China – as Stasishin noted, the authorities there began to slow down the issuance of construction permits.
In order to make housing in Russia more affordable, the authorities and representatives of the construction industry need to carefully work out measures to reduce costs, Sergey Zaitsev, sales director of the federal company Etazhi, told RG. While demand was high, no one was particularly careful about this.
“The current project financing scheme is quite expensive for developers. They receive money only at the very end of construction, which means they are forced to factor inflation risks, sometimes inflated, into the price of an apartment. Otherwise, they will not be able to build the next project. The cost of land has also increased. All this and much more prevents them from making really big discounts for home buyers. Plus, the end of mortgages with state support will force developers to increase budgets to stimulate demand,” the expert listed.
According to Sergei Zaitsev, developers could reduce prices if they were given easier access to public utilities or if the burden on construction of social facilities were reduced, but only local authorities can make this decision.