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Cablegate: Russian Construction Sector Ngo Explains High

VZCZCXRO7204
RR RUEHLN RUEHVK RUEHYG
DE RUEHMO #1536/01 1511352
ZNR UUUUU ZZH
R 301352Z MAY 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 8317
INFO RUEHLN/AMCONSUL ST PETERSBURG 4965
RUEHVK/AMCONSUL VLADIVOSTOK 2842
RUEHYG/AMCONSUL YEKATERINBURG 3189
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 MOSCOW 001536

SENSITIVE
SIPDIS

STATE FOR EUR/RUS

E.O. 12958: N/A
TAGS: ECON EIND PGOV RS SOCI
SUBJECT: RUSSIAN CONSTRUCTION SECTOR NGO EXPLAINS HIGH
HOUSING PRICES

REF: A. MOSCOW 1450
B. MOSCOW 1501

-------
Summary
-------

1. (SBU) Numerous reasons have been cited for Russia's lack
of affordable housing, an issue of increasing importance for
the country's new government. Continuing our series of
cables on the topic, Econoffs met with Vladimir Ponomarev,
Vice President and Head of Housing and Mortgage Finance at
the Russian Builders' Association (ASR). Ponomarev told us
that the construction industry had failed to meet rising
demand for affordable housing because of the lack of
construction materials and labor, excessive profit margins,
barriers to new entrants to the sector, and limited financing
options for infrastructure development. Ponomarev argued
that the sector would take a long time to self-adjust and
that government action was needed. End Summary.

------------------------------------------
Housing Prices Beyond Most Russians' Reach
------------------------------------------

2. (SBU) Ponomarev said the ASR is a non-profit NGO aimed at
solving a range of issues in Russia's construction industry.
It represents more than 500 members working in construction,
insurance, real estate, banking, and mass media and also
maintains close links with relevant governmental committees.
The ASR's latest efforts have focused on the construction
industry's underdevelopment, and in particular the lack of
housing stock and sky-rocketing home prices.

3. (SBU) According to Ponomarev, there are a number of
factors that account for rising housing prices. On the
demand side, many Russians received homes for free during
privatization in the early 1990's. However, much of this
housing was poorly constructed and has further deteriorated
with time and neglect. He agreed with statistics we cited
that approximately two-thirds of Russia's total housing stock
needs renovation and that nearly the same percentage (60
percent) of Russians are in need of better housing.

4. (SBU) Ponomarev said that in the face of this rising
demand, the supply response from the industry has been
inadequate. Last year, total housing construction was only
700,000 units, enough for only 1-2 percent of Russian
families. Ponomarev said that the supply response has been
inhibited by a limited supply of construction materials and
qualified labor. These shortages have increased construction
costs, limiting new construction and driving up housing
prices.

5. (SBU) Ponomarev told us that the limited supply and high
cost of construction materials and labor were especially
problematic for new businesses to overcome. Add to these
impediments the usual bureaucratic and costly obstacles
associated with starting a new business in Russia, and it is
clear why new housing construction has lagged behind demand.

6. (U) Ponomarev told us that the imbalance between housing
supply and demand has led to an average real estate price
increase of 26 percent annually nationwide since 1999.
However, another contributing factor to rising home prices,
according to Ponomarev, is the excessive profit margins
charged to the home buyer, ranging from 60-150 percent in
Moscow and 30 percent in the regions for the residential
construction business as a whole ) including investors,
developers and construction companies.

7. (SBU) In addition, Ponomarev said the lack of long-term
financing options available to developers to cover their
increasing costs further contributes to the lack of supply of
new housing. In particular, he noted that lack of available
land near city centers was driving new developments further
out into the countryside where basic infrastructure, roads,
sewers and the like was non-existent. Developers had to
create the infrastructure from scratch. While they
ultimately passed the costs on to the home buyers, further
driving up prices, the lack of financing options to build
this infrastructure significantly raised the amount of start
up capital needed.

MOSCOW 00001536 002 OF 002

------------------
What is to be Done
------------------

8. (SBU) Ponomarev said he expected the problem of rising
prices to worsen with continued economic growth and rising
incomes, which would further stoke demand. While market
solutions were preferable, the sector clearly needed a
jump-start from the government to respond to this demand.

9. (SBU) Ponomarev said the government should intervene to
bring down costs, for instance by making long-term financing
and land more available and by developing needed
infrastructure. Absent this intervention, it was difficult
to predict how long it would take for market forces to
correct the imbalance between housing supply and demand, and
thus to bring housing prices into the range that the average
Russian could afford.
RUSSELL

© Scoop Media

 
 
 
 
 
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