Moscow: the auction mechanism of inflation in the real estate market

        Now the housing construction sphere in Russia is under influence of different tendencies. Such inconsistent processes are observed in many regions of the country, most highly concentrated in Moscow. Here we can see two main directions in development innovations of the building market. First is housing construction sphere is booming, with growing demand, other is very clear seeeing tendency for liquidation in this market of a natural competition and formation of monopoly.

        The most obvious consequence of monopolization of this market in Moscow is permanent rise in prices for the real estate. These days Moscow prices already appear among world leaders. Direct consequence is low availability of habitation in Russia and particular in Moscow.

        Let’s consider the main principles, how the competitions processes are blocked and why the prices are so high.

        Article 30.2 of the land code of the Russian Federation, in which the mechanism of operating is written: «The land for its complex development with the purposes of housing construction is given out at auction in an order established by article 38.2 of the present Code».

        In the article 38.2 of the Land code of the Russian Federation is written: «the Winner of auction is the participant who has offered the highest price for making contract or rent of land for its complex development». Thereby the price is a major principle of maintenance of the competitive mechanism in a market.

        This principle is confirmed by the Law of the city of Moscow №48 from December, 19th, 2007 «About land and building in the Moscow City». Item 5 of that law says: «Subject of the auctions is the right to the conclusion of the contract of rent of the land area which generated and has passed the state cadastral account according to requirements of the federal legislation. On conditions of tender the winner may pay the size of a payment for the right to the conclusion of the contract of rent or the annual rate of a rent».

        Another important principle is: all expenses for building of a social infrastructure are carried out by the city authorities, and the covering of these expenses are provided with cost selling land. Thereby the start auction price for the land is forming. This is a recent innovation, because earlier all "encumbrance" expenses were carried by a builder. At a first glance, such innovation is progressive and liberates the builders only for housing construction, kindergartens, schools, power units and other is under care of a city. However at more detailed consideration of the new mechanism we clear see that "encumbrance" expenses are remain, only now it changed into different form: from direct imposing of expenses it transformed into form of tax and start payment of a builder.

        The auction mechanism of the purchase-rent has been created for normalization of all contractual relations between a city and firm-builder. Moreover, it was supposed that such form will promote competitiveness in the market. Nobody can lobby nobody's interests; the tender is won by the party that offers the highest price at open public auction.

        The auction mechanism leads to direct collision in the market of applicants and as a result the price and demand suppose become counterbalanced. In fact such principle creates totally opposite. Maximization of the price as a result leads to formation not competitive but monopoly or the power of few in that segment of a market.

        The limit of price is defined by possibilities of the companies-participants of auction: the more large company is - the bigger price they can offer and, sustain without consequences of fatal. All average and not big engineering firms "are automatically squeezed out" from because they have no such financial resources which would allow them to compete effectively.

        Small and the average companies cannot afford to "freeze" such huge sums on a period building of housing objects. And if earlier these companies had to pay a price of land, solve, costs on "encumbrance" now they should "pay" all costs at once: expenses for "encumbrance" plus the extra charge for the land.  With such system of competitiveness only large and strong players are able to stay.

        Thus, instead of scale competitiveness in the housing construction market - arises the power of a few. The number of market participants is sharply reduced.

        Now shall consider how the high prices of auction mechanism and poor quality of build accommodations are tied. The high sale prices increase expenses of builders-winners. However they should return the expenditures, but also get the profit. This achieved by rising in price housing accommodation itself. As a result - the price for accommodations becomes so high that bargains with such objects can afford only very rich people or investors. Thereby the middle class is simply discharged and the market is serving only a small number of the economic agents-buyers with high financial possibilities.

        With the existing conditions the mortgage is getting blocked. The high prices and low profits of population create for credit organizations. As consequence – high interest rates on mortgage credits and short crediting periods. This starting another mechanism: construction firms save on everything, without thinking of how people will live in such houses. Savings goes on parking for motor vehicles, on children's playgrounds, etc. Moreover, wishing to sell and get profits ASAP, construction firms do not care at all to whom they sell housing accommodation.

        At first sight such approach does not carry in itself anything terrible, but in practice it destroying a social basis of housing construction system. To purchase super - expensive housing accommodation not inhabitants of the same region (city), but people "from outside", from other cities and the countries which are interested simply in fact of getting housing accommodation and, in general, do not care of a quality.

        If apartments are purchased by investors with the purposes of their further re-sale it leads many houses stay empty for a long time, and district around them. Another using of new property is: proprietor starts to "rent out" actively the apartments. Often in such apartments starts to live lot of people which by sharing the cost pay for the apartment.

        All the above leads to destruction of good social climate in districts of the capital. Meanwhile small civil engineering companies perfectly cope with these problems and appear more effective in the social relation compare with the companies-giants. However this category of companies leaving the market, that sharply reduces a stream of progressive innovations.

        Now briefing all told above, the present Russian legislation is extremely imperfect and needs in serious corrections in land code of the Russian Federation, and regional laws accepted by the legislators. otherwise the capital of the Russian Federation will continue degrading.

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