Construction sector in St. Petersburg: On the verge of a crisis
Nikita Lisitsyn
Independent Expert
Construction sector of St. Petersburg in the last 5-year period accounted for almost 5% of the region’s economy. However, it was a basement for real estate services sector, which took nearly a 10% share of the City’s GRP and created demand for a large spectrum of construction-related sub-industries, e.g. production of bricks, concrete, metal constructions, etc. Its general impact on the economy of St. Petersburg might be assessed as almost one-fifth of the region’s total output.
Stagnation of Russian economy since 2014 influenced the construction sector of St. Petersburg, as all other industries within the country. Construction boom in the region observed in 2000-ies had been over by 2014. But some minor improvements took place prior to year 2018 with its sport events, and in 2020 due to state program of lowering mortgage rates aimed at boosting construction sales and supporting the real estate sector in general. This program helped many regional construction companies to survive during the pandemic, despite the reduction of consumer demand as potential buyers became less inclined to buy apartments and houses in more turbulent situation.
But this stagnant performance in construction and real estate sectors was broken down after the launch of military operation in Ukraine and the huge impact of sanctions, which were imposed immediately after February 2022. In January-October 2022 construction sector of St. Petersburg contracted by 4.7% year-on-year, as the regional statistical authority Petrostat has reported recently. However, this comparatively slight overall decrease hides the accelerating process of recession in construction, as the abovementioned statistics includes the first quarter of year 2022 which was quite successful for this sector of economy. In addition to that the construction sector (and the real estate market) seems to maintain a long-term reserve of inertia. Construction and real estate projects have long-term nature, and the present impact might become more visible in 2023.
Residential real estate market, being closer to the consumers, presently shows a dramatic 55% decline of consumer demand, if compared to its average approximated figure in 2021. This fall was, for instance, reported by Alexei Popov from analytical service of Russia’s biggest real estate marketplace CIAN. Representatives of construction companies draw a more moderate picture of this demand crisis, speaking about a demand decrease between 15% and 30%. However, construction companies usually tend to soften their assessment of negative trends in order to support the demand. Beside more optimistic rhetoric, many of these construction companies have launched incredibly aggressive marketing programs, including, for example, their “special” mortgages with 0.1% interest rate, which is far below the minimal interest rate set by Bank of Russia. These “special” mortgage programs have already attracted attention of the country’s main financial regulator, namely the Bank of Russia. Elvira Nabiullina, the chief of Russia’s Central Bank, has already expressed her concern about this type of mortgage programs, calling these support instruments “a delusion for consumers” due to hidden price manipulations and commissions initially installed in such “special” programs. For reference, the key rate announced by the Russia’s Central Bank for November 2022 was 7.5%.
Another market stimulating mechanism was installed in Russia much earlier, in the first half of the pandemic year of 2020. This mechanism offers state-subsidized “preferential” mortgages with the rate below 7% for certain categories of residential real estate (only primary market and low-cost apartments or houses). In other words, this state-driven mechanism was focused at mass-market, which suffered dramatically under the circumstances of pandemic and lowering consumer incomes. Despite its temporarily positive impact on construction sector in St. Petersburg and other cities of Russia, the result was an almost 20% real estate price jump, which devaluated its intended benefits for the consumers enjoying comparatively affordable mortgage rate (the market mortgage rates in Russia seldom fall below 10%).
All the aforementioned “special” and “preferential” mortgage programs failed to solve the two main problems of demand in construction and real estate sectors in Russia in general and in St. Petersburg in particular: constantly deteriorating consumer incomes and comparatively high costs of borrowing money in Russian economy. Thus, to prevent creation of a typical market bubble in the real estate sector, Bank of Russia as a chief financial regulator in the country announced its intention to terminate both types of mortgage programs by the end of year 2022. This would lead to further decreasing of solvent demand in this sector and to consequent fall of real estate prices in St. Petersburg. These prices have already started to decline in the second half of 2022: according to local experts, the average reduction of real estate prices in St. Petersburg already accounts for minus 10% compared to their maximum reached in the first quarter of 2022. However, the construction lobby at both regional and federal levels continues to seek for additional stimulus for the sector under review. Despite these attempts any new supportive programs can do nothing with the two basic trends in demand mentioned above: contraction of real disposable incomes and high actual price for loans.
The approaching crisis in the construction sector might have been compensated by non-residential construction. However, the long-term policy of relocating industrial enterprises out of St. Petersburg makes this option irrelevant today. Even infrastructural projects in regional economy mostly depend on residential needs and creation of new residential areas in St. Petersburg.
Expert article 3336
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