The Parallax Brief

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Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

Mayor of Moscow the King Canute of Real Estate

I had an argument lively discussion with my landlord on Sunday. I was pitching for a rent reduction because (1) I pay in euros, meaning that in only a few months my rent has increased by 30% in ruble terms, and (2) this significant increase has happened in the face of a steep decline in Moscow real estate value; she was resisting in the strongest terms.

Her response to my forex argument was predictable:  something to the effect of, “It’s not my problem you agreed to pay in euros and the ruble has crashed.” But her second rebuttal was quite a shock (and I quote) “I know you think that property prices should go down with this economy, but it isn’t and won’t. This is Moscow.”

A-ha! So this is what happened to all those bankers who believed bets on sub-prime mortgages would pay a return because real estate values would appreciate in perpetuity.

But joking aside, what kind person would believe that real estate values will stay at current levels when this view flies in the face of common sense and a stack of cold, hard evidence that is telling us that Moscow real estate is, in fact, doing exactly what common sense tells us?

Why, Moscow Mayor Yuri Luzhkov, of course. “No matter how much we would like [for apartment prices to fall], we need to look truth and reality in the face. Right now, it is impossible,” Luzkov told ITAR-Tass, according to a story in the Moscow Times.

The argument Luzhkov and my landlady would probably make is that supply still has a long way to go to catch up with demand in a city simply not designed for its post-soviet population explosion.

But this ignores a salient fact: I might want to buy a new house, but if I can’t get a mortgage or don’t have a job, I can’t buy one. With the mortgage market frozen and jobs simply evaporating, supply and demand becomes irrelevant.

And sure enough, prices are plummeting.

According to Bloomberg:

“Moscow residential property prices fell 2.3 percent to $5,972 a square meter in November. By December 15, prices had dropped another 6.9 percent to $5,558 a square meter, according to data compiled by Bloomberg.”

The Moscow Times ran a story January 21 said:

“Rental prices have fallen off, with apartments plummeting in cost from 20 percent to 30 percent since July, depending on the class of apartment, according to Penny Lane Realty”

Apparently, prices fell by just under a 1% in the first week of January alone this year.

The market has passed its judgment on the conditions real estate firms are operating in, savaging their stock prices by 90% since last summer.

Of course, like my landlord, Luzhkov (allegedly) has a fairly large incentive for maintaining high property prices. Certainly, there must be some motivation for making such an absurd statement when evidence to the contrary is slapping him in the face, and for the asinine accusation made by two of Luzhkov’s deputies that media “disinformation about the fall in prices is inciting people not to buy apartments.”

As a deeply religious man, perhaps Luzhkov should learn the lesson of the pious king of Denmark, Norwary and much of the British Isles, Canute the Great, who, after failing to turn back the prevailing tide, said: “Let all men know how empty and worthless is the power of kings, for there is none worthy of the name, but He whom heaven, earth, and sea obey by eternal laws.”

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