Global Economics

The New Russian Dream, One Home at a Time


The Soviet Union collapsed nearly two decades ago, yet in Moscow the habit of central planning dies hard. Russian President Dmitry Medvedev, in a speech two years ago, bemoaned the fact that 77 percent of the country's 142 million citizens live "cooped up" in apartment blocks. Now his government has a plan to liberate them, amassing almost 2.5 million acres to seed the land with single-family homes. "Call it the Russian dream," says Alexander A. Braverman, who runs the Federal Fund for the Promotion of Housing Construction Development, which Medvedev created. "I think we can make this dream come true."

As the U.S. struggles to recover from the housing bust, some economists are reconsidering the soundness of policies that promote homeownership. Russia's leaders aren't worried. After visiting a newly completed development of prefabricated houses on the outskirts of St. Petersburg in November, Prime Minister Vladimir Putin said he hoped homeownership will inspire Russians "to have more babies."

Developers, including Mospromstroy and National Housing, are lining up to profit from the coming boom in housing construction. At least 14 million square meters of housing are expected be under construction by next year on land owned by the federal fund. That will rise to 20 million square meters in 2012, or about 30 percent of all residential construction in Russia. "We think that people who have their own homes, driveways, and careers are fundamentally different than those who don't have these things," says Braverman. "The person who has something to defend is a different kind of person."

To convert Russians to the joys of property ownership, the fund plans a marketing blitz, including billboards and TV and print advertising. "In the U.S. in the 1960s, the demand for homes came first and the government provided the rest," says Nadezhda Kosareva, president of the Institute of Urban Economics, a research group in Moscow. "In Russia the government is trying to push the idea from above."

One obstacle to realizing Medvedev's goal of transforming Russians from apartment-dwellers into homeowners is an underdeveloped home-loan market. Mortgages are somewhat of a novelty, with the total portfolio of outstanding residential loans totaling just $32.5 billion, according to central bank data. Interest rates averaged 13.8 percent in the first four months of the year. To spur borrowing, the government plans to channel $8 billion through the federal mortgage agency, which offers subsidized loans at 11 percent interest. Nuri Katz, chief executive officer of Century 21 Russia, doubts this will be enough: "It's a simple real estate rule. Without the widespread availability of affordable mortgages, there will be no widespread availability of affordable housing."

Braverman's fund has auctioned off the rights to develop 29 parcels of land nationwide and plans to bid out 46 more this year. Officials insist that homes built under the program will be affordable—costing around 30,000 rubles (less than $1,000) per square meter. By comparison, residential prices in Moscow's secondary market averaged $4,406 per square meter in May, according to a local index.

To attract developers, the government is guaranteeing it will buy up to 35 percent of the homes built. "We strive to reduce risks on our properties," says Braverman, "so investors are interested." Mospromstroy, which has renovated many government buildings in the capital, won bidding on around 90 acres near Moscow in February, offering to pay $44 million for a five-year lease to develop the property. Braverman says he is "absolutely open" to allowing foreign investors to take part in the auctions, but none have so far.

Some prospective Russian developers think the government should foot part of the construction bill. Alexander Lebedev, whose National Housing can churn out 20,000 prefabricated housing units a year, says he wants to make his product affordable but "can't do it alone." On this point, Braverman stands firm: "Our basic position is that we don't build."

The bottom line: The government has launched a program to move Russians out of apartments and into homes. Financing may prove to be an obstacle.

Ustinova is a reporter for Bloomberg News in Chicago.

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