Photo: From personal archive.
Evgeny Vladimirovich, real estate prices have been growing at a rapid pace for four years. What is happening in the market?
Evgeny Vysotsky: Many experts, including the Central Bank of the Russian Federation, the Ministry of Finance of the Russian Federation, the Ministry of Construction, Housing and Communal Services, have repeatedly explained that an unreasonable increase in housing prices can be due to the desire of builders to increase their own profits. However, such statements are drowned out by the noise of general information. It is possible that it has been artificially created and supported by those seeking to convince the public: the cost per square meter is increasing due to the increase in the prices of construction materials.
But their prices are really going up…
Evgeny Vysotsky: In fact, the growth in the cost of construction materials lags far behind industrial inflation. In other words, business owners spend their resources to cushion the inflationary blow to consumers. The cost of production depends on many factors. For example, a significant part of the total costs is taken up by the costs of electricity, gas and railway tariffs, the price of which is regulated by the State. It grows every year, of course, and other prices increase.
It is also important that the demand for construction materials is highly seasonal. This results in a “death” of working capital, which forces companies to resort to credit funds. The Central Bank recently raised the key interest rate to 16 percent. This is another reason that influences the dynamics of price changes, including their growth, and does not depend on manufacturers.
In the case of cement or any other construction material with a high percentage of transportation costs, the following factor is also important: the manufacturer is responsible for its cost only “to the door” of his company. In addition, goods can be transported by rail, which adds the cost of renting wagons and paying the rail fare to the final price. The products are then refilled and stored in an intermediate warehouse and the consumer must pay for these services. After which the goods are delivered to the place by road: we add to the price the costs of organizing transportation and the cost of fuel.
Statements are made from time to time about possible price collusion between building materials manufacturers in the regions. How to evaluate them?
Evgeny Vysotsky: It seems that the authors of such statements either do not understand the situation well or are in principle not interested in its objective analysis. Perhaps they are driven by the desire to defend in this way the interests of the builders and promoters themselves. Perhaps they want to strengthen the mindset of government officials and the public: the cost of construction contracts must increase and be constantly reviewed. According to this logic, construction material manufacturers are considered the main culprits for the increase in prices. But if we look at it more broadly, then for the market to follow that strategy is, in essence, cutting off the branch that you are sitting on. After all, a decline in investment activity among building materials manufacturers today means there will be shortages of their products at construction sites tomorrow.
I will give as an example the situation that has been observed in recent years in the Republic of Tatarstan. In 2020-2022, the average price per square meter in the primary real estate market of the region increased by 73 percent: from 72.4 thousand to 125.2 thousand rubles, that is, an increase of 52.8 thousand rubles. Over the same period, the cost of construction and installation work, including the cost of building materials, increased by 12.8 percent: from 50.6 thousand to 57.1 thousand rubles per square meter, i.e. , plus 6.5 thousand rubles. And the indicators of profits and other expenses of developers during the same time increased more than three times – 46.3 thousand rubles. Thus, the increase in housing prices in new buildings was not due to the increase in the prices of construction materials…
Approximately the same situation has developed in other regions of the country. And this is natural: the proportion of the cost of construction materials in the purchase price of housing on the primary market is, in principle, insignificant. The entire construction component of the cost of the home may not exceed twenty percent.
At the same time, for the sake of objectivity, it is worth remembering: developers have the right to increase the contract price if construction materials have become more expensive, and every year the state expands this right. And here, returning to the aforementioned statements, one may think: are they not attempts to protect the established status quo in the market, when the profitability of developers and builders is, in fact, guaranteed by the aforementioned right? In this case, we can assume that the main goal of the authors and supporters of such statements is to earn trillions of rubles of additional profits, and not at all a reduction in the cost of housing.
How to stop the rapid increase in apartment prices?
Evgeny Vysotsky: It is necessary, first of all, to change the approaches to assessing the cost of building materials, from which conclusions and forecasts are drawn. First of all, the cost of construction resources and the costs of their transportation must be considered separately. Secondly, it would be worth eliminating intermediaries, because the price set by resellers can hardly be considered objective. It is also important to think about improving the price forecasting mechanism for construction materials using the deflator index established by the Ministry of Economic Development. All interested parties could sit at the negotiating table and jointly propose new evaluation criteria that are more precise than the deflator. These should be objective criteria that reflect the real picture of a particular industry at a given time and in a particular situation, and not the “average temperature in the hospital.”
