Russia sows the seeds for overseas property boom

The Russian government is to undertake a series of measures aimed at promoting home ownership.

Although the policies aim to encourage property purchasing within Russia; if the British experience is anything to go by, a likely side effect will be a rise in the number of Russians buying overseas.

Russian President Dmitry Medvedev is aiming to help the 77 percent of the country’s 142 million people who are “cooped up” in apartment blocks by building single family homes around the outskirts of major cities, according to Business Week.

A huge increase in construction over the next few years will be accompanied by television and billboard advertising selling what Alexander A. Braverman, director of the Federal Fund for the Promotion of Housing Construction Development, calls the “Russian dream” of home ownership.

The government has been buying up huge tracts of land to help realise the vision. Around 14 million square meters of housing are expected be under construction by next year on land owned by the federal fund, rising to 20 million square meters in 2012, or about 30 percent of all residential construction in Russia.

Social and cultural change

Braverman believes the push towards home ownership will have social and cultural implications:

"We think that people who have their own homes, driveways, and careers are fundamentally different than those who don't have these things…The person who has something to defend is a different kind of person."

The seeds of the next overseas property boom?

One of the reasons the British led demand for overseas property in the late nineties and early noughties is culture. Margaret Thatcher’s policies in the eighties helped make home ownership a central aspiration in a way that it never has been in our richer neighbours, France and Germany.

Owning one home became the default, owning a second a status symbol, to which most aspired.

So will Medvedev's vision of transforming Russians from apartment-dwellers into homeowners have a similar effect?

It all depends on whether the policy succeeds. For it to do so requires the liberalization of the fledgling mortgage market. There are just $32.5 billion of outstanding residential real estate loans in Russia and interest rates currently average 13.8%.

Medvedev's plan includes $8 billion of funding to be channeled through the federal mortgage agency, which offers subsidized loans at 11 percent. However, this on its own is unlikely to be enough.

A Russian property agent told me last week that the culture of not taking mortgage finance is beginning to change. However, it is a slow process and it is unlikely to be catalysed by offering interest rates as high as 11%.

Building and advertising cheap family homes is a start but it won’t be enough if people cannot afford them.

Russian’s are already significant buyers of property overseas but the volumes we see now could pale in comparison with future demand if home ownership culture becomes widespread.

Source: www.globaledge.co.uk