The Moscow Bubble

Friends of mine wanted to buy a house in Tarusa, an old town on the Oka River in the Kaluga region. They sold the husband’s apartment for much less than it had been valued before the crisis and set out for Tarusa confident that house prices would be lower there, too.

They found plenty of picturesque homes, but also discovered that prices in Tarusa had not come down at all. Even though they were the only buyers, homeowners were asking as much as during the recent boom. Tarusa has no real estate market, only individual buyers and sellers. The locals know that their town is fashionable and that Muscovites pay top ruble. Now, no one will take a kopek less, and if they don’t get their price, they will go on living in the same house for several more generations.

Unlike Tarusa, Moscow has a real estate market, and this makes it vulnerable to steep price declines. Even after coming down recently, in desirable neighborhoods prices start above $10,000 per square meter, making an ordinary Soviet-era three-room place worth close to a million bucks. Large apartments, comparable in size to traditional middle-class places in Paris, fetch over $2 million.

Two million bucks may no longer be what it used to, but a mere decade ago Moscow apartments sold for under $100,000. I have heard of a former Soviet citizen now living in Brooklyn who on a whim bought a Moscow pied-a-terre in the 1990s and recently sold it for seven figures even after the crisis hit.

Over the past 20 years, real estate prices have rocketed in many cities around the world, and New York in particular has plenty of stories of 10-fold real estate price increases. As in New York, the real estate boom in Moscow was partly justifiable. In both cities, there has been a tangible improvement in the quality of life and greater stability. But there is also more money. Huge bonuses on Wall Street and easy petrodollars flowing into Russia fed unsustainable bubbles in both cities.

Similarly, in both cities the high cost of construction stoked inflation in real estate prices. New York is notorious for the shady goings-on in its construction industry, where unions, civic leaders, organized crime and politicians all have been taking their cut since time immemorial. Kickbacks, bribery and corruption in Moscow may be of more recent vintage, but they are even more virulent.

Both cities are unique. New York is truly cosmopolitan, with thriving theater, music and the arts. Hollywood celebrities and retired physicians from across the United States have been buying both large New York lofts and small studio apartments. With the dollar extremely weak, investors from China, Latin America and elsewhere now purchase New York co-ops at bargain prices.

Similarly, there is nothing like Moscow in Russia. Most money flows into the capital, and migration has boosted its otherwise shrinking population by some 50 percent, to as much as 13 million, over the past decade, while also creating a vibrant rental market.

But few foreign investors take a chance on Moscow. A recent Bloomberg survey of world financial centers put New York, handily, at No. 1, but didn’t even feature the Russian capital. Meanwhile, the local population is relatively poor and mortgage rates are higher, reducing indigenous demand.

In any case, Moscow remains beholden to the Russian economic boom, which in turn directly depends on oil prices. If they fall again in coming months, the Moscow real estate bubble may burst spectacularly.

Alexei Bayer, a native Muscovite, is a New York-based economist.