Construction statistics or constructing statistics?

Development of Russian construction statistics

Written by Andrey Vakulenko – MACON Realty Group, EECFA Russia

Assessing the development of construction industry on national scale is practically impossible without high quality statistical data that allow us to draw conclusions on industry trends and create any forecast model. The quality of Russian official statistics and its reliability have increasingly been becoming the subject of public discussion and the work quality of statistical service has been questioned by independent experts and economists. To overcome the problems, at end 2018, a comprehensive plan was developed for the reform and modernization of the Russian Federal State Statistics Service (Rosstat).

Design by EECFA Central, source of original picture: nlomov-pnzreg-ru

In 2018 the Russian economy seemed to have registered the highest growth over the past 6 years. According to Rosstat, GDP grew from 1.6% in 2017 to 2.3% in 2018; the highest value since 2012 (+3.7%). Such pronounced growth came as a surprise since all official and unofficial forecasts were much less optimistic: an average of 1.5%-1.8%. To a large extent, the successes of the Russian economy in 2018 derived from artificial manipulations, i.e. Rosstat’s review of the growth rate of the construction sector in 2017-2018. The indicator of the volume of construction works completed over 12 months has drastically changed: 2018 was to amount to RUB 8.4 trillion, 5.3% higher, or RUB 422 billion higher (at current prices) than in 2017. It was astonishing as previously Rosstat estimated construction works for 11 months of 2018 to post a modest growth of 0.5%. The 2018 growth in construction was a record for the last 10 years: it was only in 2008 when the sector grew at a higher rate (by 12.8% per year). On the contrary, between 2014 and 2017, construction industry saw a steady decline, which, according to official statistical calculations, gave way to a rather sharp increase in 2018. The final contribution of the construction sector to Russian GDP in 2018 was 0.3pp, although in 2017 it was previously negative (-0.1 pp). Such drastic changes caused a wide discussion for the following reasons:

  • Weak argumentation for revising statistics. The Ministry of Economic Development and Rosstat recalculated construction data in late 2018 and early 2019 on grounds of clarifying previously submitted information by respondents at the end of the year. (This is due to the peculiarities of statistical accounting in construction in Russia: the peak of completions is at the very end of the year and then statistics are updated for a long time. Final data for the reporting year are published in spring and some figures may be adjusted retrospectively for a longer period). However, in this case, Rosstat adjusted the data by RUB 565bln, referring to only one project (Yamal LNG), which adds only RUB 241bln. The artificial increase in the indicator couldn’t be explained by only one project in one region, but Rosstat did not voice other official explanations.
  • Growth of indirect construction indicators. Volume of completed construction works posted a massive rise against the backdrop of a decline in many industries related to construction, for example, in the production and transportation of building materials. In 2018, rail transportation of building materials for the year decreased by 6.8%, cement transportation also fell by 6.5%, cement production shrank by 2%, brick production dropped by 4.8%, and the construction of metal structures saw a 1.5% slump. Thus, according to Rosstat, production and transportation of building materials dipped, while more construction works were carried out. An important indicator here is also growth in the volume of housing completion, the most capacious segment of the Russian construction industry, which at end 2018 showed a steady decline by more than 4% (and by 6% in the multi-unit segment).
  • Administrative reasons. In 2017, Rosstat, previously a fully independent agency under the Government, became subordinate to the Ministry of Economic Development. This created an internal conflict of interest since Rosstat data directly or indirectly indicate the effectiveness of the Ministry and the reliability of its forecasts.

EECFA’s Russia Construction Forecast Report with detailed analysis and forecast for the construction market of Russia can be ordered on http://eecfa.com/

Over the last year, official statistics was at the center of public discussion in the scientific community due to regular adjustments and revisions. And construction is not the only area of statistics affected by data manipulation, there are examples for other important macroeconomic indicators being revised:

  • At end December 2018, Rosstat significantly improved data on Russia’s GDP growth rate in 2015-2017. The new estimate showed that in 2016 the economy expanded by 0.3% despite the previous drop of 0.2%. GDP growth in 2017 also turned out to be adjusted, although less: +1.6% instead of +1.5%. Decline in 2015 was also less than originally indicated: -2.3% instead of -2.8% (the first estimate by Rosstat was -3.7%). The recalculation was associated with obtaining newly revised data.
  • In October 2018, public attention focused on published data on the real income of the population for January-June 2018, which, as per Rosstat, in the whole country rose by 2.4%. However, 6 out of 8 federal districts registered negative growth (from -1.6% to -0.4%), and the income growth of the population in the remaining 2 districts was +0.5% and +2.0%. The apparent contradiction in statistics was not explained in any way, and from early 2019, Rosstat switched to a new methodology for calculating population income and recalculated all data on this indicator from 2013. As a result, it turned out that in 2013-2018 real income decline was 8.3%, instead of 10.9% (previous estimate), and in 2018, the initial drop of 0.2% was replaced by a rise of 0.2%. Thus, growth rate of the real income indicator has been revised upward.
  • Rosstat’s recent upward revision of industrial production data for 2016–2018 also raised many questions. Instead of stagnation in the industry in recent years, new statistics began to show moderate growth. For example, at end 2017, Rosstat estimated growth in industry at +1.0%, but after the revision at the level of +2.1%. Similarly, data for 2016 were revised upward. It was an interesting coincidence that Rosstat was fully in line with the forecast of the Ministry of Economic Development published even before the final results of 2017 became known.

In 2019, Rosstat conducted a radical revision of macroeconomic statistics since 2014. The losses of the economy from the “sanction war” and the slump in world oil prices were exaggerated and the economic recession was slight and short-lived. According to newly recalculated data, there was neither a long economic downturn, nor a big recession in industry and construction, and 2015 was the only crisis year.

Large-scale revisions by Rosstat, the wide range of indicators that they affect, their upbeat nature (indicators are only revised upward) and the often insufficient or unconvincing argument behind raise doubts in all who use these data. Refinement of statistics and revision itself is a normal practice taking place in any country, any revision though should have a clear and understandable explanation, and if such adjustments frequently occur, the question of the quality of applied methodology for collecting and analyzing statistical data arises.

Periodic revisions of statistical data in construction and other sectors of the economy are not the only difficulties. There are weaknesses not only in the statistical office itself, but also in the whole system of collecting and publishing statistical information in Russia such as:

Continue reading Construction statistics or constructing statistics?

Russia’s mortgage boom

Written by Andrey Vakulenko – MACON Realty Group, EECFA Russia

The Russian residential market will long be the driving force behind the whole construction sector due to the continued high demand of most of the country’s population for improving their housing conditions. Mortgage loans, the most common means for purchasing homes in Russia in recent years, have finally strengthened, which compensates for the crisis years of 2015-2016 in Russia. As there has been a major drop in the population’s income, and it persists, mortgage lending is the only way to increase home purchases. The mortgage market easily overcame the crisis of 2015-2016 in Russia and already in 2017 exceeded the peak indicators of the pre-crisis year of 2014. During the first half of 2018, the trend towards growth further strengthened: the volume of issued mortgage loans rose by 68%, and its share in the total number of housing transactions reached a record 54% in the primary market. All this shows the current high demand for mortgage loans.

To explain the explosive growth in mortgage lending, the fundamental factors shaping the housing market need to be considered:

  1. Level of individuals’ living space provision (sqm/person);
  2. Demand for housing (how much more housing needs to be built, so that the level of living space provision can reach an acceptable value – about 30 sqm per person);
  3. Affordability of housing for purchase (the ratio of the income of buyers and the price of real estate).

As per the Federal State Statistics Service of the Russian Federation, to date, the total housing stock in Russia is about 3.4 billion sqm, only slightly more than 23 sq km in terms of the country’s permanent population (146.9 million as of January 1, 2018) per person. This level can be considered low compared to most developed foreign countries (39 sqm/person in France and Germany; 70 sqm/person in the USA, 76 sqm/person in Canada). Minimally comfortable living conditions are achieved with a security level of at least 30 sqm/person as per the social standards of the United Nations, and it is the target of public housing programs in Russia. To ensure that the population’s living space has reached this target, while maintaining the country’s population at the current level, another 1.0 billion sqm of living space should be built. Thus, the low level of housing provision is the guarantor of the preservation of demand for new housing projects for a long term.

The second factor ensuring long-term demand for housing is the quality of the existing housing stock, which has more than 33% (or about 1.2 billion sqm) of housing built before 1970. Even with the record volumes of housing construction registered in Russia in recent years (in 2014-2017 about 80 million sqm annually) and even if it stays at the current level, it will still take at least 28 years to reach the minimum acceptable security and to fully replace the old housing stock. In general, housing demand in Russia will not be Continue reading Russia’s mortgage boom

Housing market in Russia: Demand potential shaping future market dynamics

While in the EECFA Forecast Report Russia we estimate/forecast residential output, this article is looking at another angle of predicting housing market developments: demand potential in the Russian housing market (the number of households able to buy housing) as the main indicator of further market dynamics. Positive macroeconomic indicators in Russia currently are suggesting growth in real incomes and an increase in the population’s solvency, which in the near-term future is set to raise the number of households able to buy housing. This growth in demand potential will have a positive impact on residential output, yet, this is not something that will happen overnight: the Russian housing market is predicted to continue to slump for the time being. Nevertheless, the predicted growth in demand potential will play a major role in halting this drop, leading to an expansion in the housing market in 2019.

Written by Andrey Vakulenko – MACON Realty Group, EECFA Russia

‘North Valley’ Residential Complex in St. Petersburg – Source: http://www.severdol.ru

Having the largest share in total construction both in value and volume terms, the housing market is the engine of the whole Russian construction market. Any change – decline or growth – in the housing subsector may have a decisive effect on the Russian construction industry as a whole; as it was the case, in particular, during the crisis of the Russian economy in 2015-2016. In this period, the housing sector enjoyed an unprecedented level of state support (more details in the current/previous EECFA reports), which prevented the entire construction industry from collapsing.

The state of the housing market primarily depends on the ability of the population to purchase housing. Other market factors, such as the volume of supply in the market, the level of competition or the cost of housing are secondary. It is the ability of citizens to buy housing that ultimately determines the total volume of effective demand, which in turn regulates development activity and price trends in the local housing market. At the same time, the indicators of the population’s need for housing are also secondary in terms of the dynamics of the market situation; they are of an abstract nature and cannot be used to predict the situation in the market. The need for housing is a conditional market potential, which, without the ability to buy housing is never realized. The ability of the population to purchase housing is the real market potential, which – in most cases – is realized in transactions. The level of housing provision (need) affects only the nature of demand: investment purchase, purchase of a first home, improvement of housing conditions, among others. Continue reading Housing market in Russia: Demand potential shaping future market dynamics