BOFIT Viikkokatsaus / BOFIT Weekly 2018/30

Under a change in the law since July 1, construction firms may no longer finance their construction activity by selling unfinished apartments directly to consumers. This buy-early approach has long been popular in Russia because it lowered the sales price for the apartment-buyer while providing builders with a source of cheap financing. The drawback of this approach is that it has been very difficult for the buyers to recover their money if the apartment is never finished for some reason. Russia's ministry of construction, housing and utilities reports that there are currently over 80,000 such problem cases (the actual number may be more than double that according to some experts).

The amendment requires buyers to deposit the payment for the future apartment in a separate bank account linked to a specific building permit. The money can only be released to the construction company upon completion of the apartment, but the deposit makes it easier for companies to borrow to cover construction costs. Buyer deposits are covered by banks' deposit insurance up to 10 million rubles (140,000 euros). The law also tightens up e.g. other financing and solidity requirements for builders.

The change in the law is expected to improve the legal protection of apartment buyers and drive unscrupulous building companies out of the market. On the downside, the arrangement may reduce construction activity and drive up the apartment prices as financing becomes more expensive for many builders. The total volume of residential apartment production in Russia last year was about 80 million m2. One of the goals of president Putin's May Decree is to raise the volume of housing production to 120 million m2 a year.