Ben Aris in Moscow -

Victoria Sherbakova needed to move house. A doctor at a private liposuction clinic in Moscow, she lived outside the city in the Moscow region and commuted everyday to work on the elektriska train. The problem was that her three-year-old daughter Sasha is going blind and because the family doesn't live in the city itself, the capital's hospitals wouldn't treat her.

"The hospitals in Moscow are the best in the country, but you have to have a Moscow city registration to be admitted," says the 36-year-old Sherbakova. "So we decided to give up our place in the region and move into the city."

Sherbakova is a member of Russia's emerging middle class who are increasingly on the hunt for a new home. Born in the Belgorodskaya region in the south of the European part of Russia, she moved to Moscow several years ago to find work.

Her husband also works in the clinic where they make some €4,000 a month between them - nearly four times the national average. Like many Muscovites, they plumped for a house in the Moscow Region rather than the city as, "you get more for less." But technically the region has its own administration, because Moscow city is one of only two cities in the country to count as a region in its own right (St Petersburg is the other). And that is where the problems started, as medical services are supposed to be provided by the regional authorities so Sasha was not eligible for the hospitals in the capital.

So the family decided to move. Finding an apartment was easy. Raising the money to pay for it was more complicated.

Bureaucratic challenge

Russia's mortgage market appeared in about 2003 and has grown rapidly, but the process of borrowing to buy a home remains bureaucratic and is still far from being a mass-market product. The first challenge is the paper chase involved to convince the bank to lend to you.

Sherbakova is lucky as her clinic is "white" and was prepared to give her all the documents that prove her income; many companies still operate in the grey economy and officially pay only a small part of their employees' salary through the bank, with the rest paid in cash to avoid taxes. It makes problems for would-be apartment buyers, as they can't prove their full income.

Next, after searching for a mortgage lender for a month, Sherbakova stumbled across Kredtmart, Russia's only mortgage broker. The company was founded by James Cook, an American who pioneered the mortgage business at the start of the last decade as CEO of Delta Credit, a mortgage specialist backed by US government money. Kreditmart resells mortgages for the dozen commercial banks in the business and because it gets a discount, it can offer punters better interest rates than the banks themselves.

The demand for new housing is huge and eight out of 10 Russians want to move house, says Cook. But the crisis hurt the mortgage business badly. Previously, there were a dozen commercial banks making loans, but most put their mortgage programmes on ice in 2009, leaving the two massive state-owned banks - Sberbank and VTB Bank - with some 80% of the business. However, the market is picking up fast now. "The number of loans made has gone up dramatically in the last two months," says Cook. "We are still expecting a wobbly six months, but most people in Russia believe the worst of the crisis is behind them. Europe is the wildcard that will determine what happens in the rest of the year."

Russia's state-owned Mortgage Agency (AIZhK) forecasts that mortgage lending in Russia will increase to RUB70bn-85bn ($2.3bn-2.8bn) between April and June from RUB28bn-34bn in the same period of 2009. Still, the market has some way to go to recover all the ground lost in 2009: the mortgage business reached a peak volume of RUB685bn in 2008 (including the last quarter where almost no business was done at all), but the volume of deals expected this year is about RUB220bn.

Thanks to her job and the fact her family had built up significant savings, Sherbakova is the ideal customer for a Russian bank and she sailed through the process relatively easily. "It all went very quickly. We got the documents from the clinic in a week and the bank loan was approved even faster."

The most onerous part of buying an apartment in Russia is that the banks ask for very big down-payments; in Sherbakova's case, the state-owned lender was asking for a 40% down-payment on a RUB6m loan. "We had already saved up about half of the down payment and because we work in the medical business, you have the opportunity to make extra money on the side, so it didn't prove a problem to raise the rest," says Sherbakova.

Then Sherbakova hit a real snag: the owner of the apartment was willing to sell, but only wanted to put the sum of RUB2m on the contract. The state offers tax breaks on the first RUB2m, but taxes the rest. Cook says it is a very common problem and many sellers insist on only declaring part of the sale to the authorities and the rest is done on trust - off the books. As everyone in Russia was given their apartment after the collapse of the Soviet Union and most people sell their communist-era home to finance the purchase of a new one, few people need to borrow and, as a result, the bulk of private real estate deals are done in cash.

But the Sherbakov's needed to borrow the money and so needed the whole sum on the contract. In this case, the seller often demands that the buyer also pay the taxes on top of the asking price. The haggling went on for several weeks, but eventually a compromise was found and the family moved into their apartment in the Zhulebino micro-region of Moscow city in June. "The house was built in 1970 and we have a concierge and a kindergarten next door, which is perfect for Sasha," says Sherbakova. "Of course, the apartment is only two rooms and much smaller than our old place. And my commute to work is longer, but Sasha is now getting the treatment she needs and we are happy with our new home."

Residential construction blitz

Russia's real estate sector was on fire prior to the crisis and construction had become the most important economic driver as developers indulged in a building frenzy. The crisis put most projects on ice for the past year, but as the Central Bank of Russia has been aggressively driving down interest rates, the market is now starting to revive quickly.

Much of the growth is being driven by the massive pent-up demand for housing. The transfer of apartments to the occupants in the early 1990s was one of the biggest transfers of wealth by any government worth hundreds of billions of dollars on paper, but until the emergence of the mortgage market homeowners had no way to tap the value of their bricks and mortar.

There is a desperate lack of housing - especially new housing, as few Russians want to move into a Soviet-era apartment block. With a population of about 12m Moscow, is by far the largest city in Europe, but Roland Nash, head of research at Renaissance Capital, says that to meet the demand for new housing another Moscow would have to be built along side the existing one.

Even at its peak, Russia's mortgage business was clearly in the early stages of development. The peak volume was equivalent to 3% of GDP, whereas Polish mortgages are already equivalent of 10% and in the UK mortgages are equivalent of 60% of GDP.

And prices have recovered fast. Buyers were expecting prices to fall sharply last year in the midst of the crisis, but what actually happened is most sellers simply took their properties off the market. The result was a moderate fall in prices, which have already recovered to their pre-crisis levels and are now growing again: a typical two-room apartment in a newly built building costs $2,000 per square metre in Moscow and some 30% less in the regions.

The development of the mortgage market in Russia has been held back by high interest rates that were kept up in an effort to combat inflation. Punters wanting to buy a home were looking to pay 14-16% on a 20-year loan. But the silver lining in the crisis is it has reduced inflation, which has fallen to around 6%. But because no one wants to live in the old Soviet buildings, the developers are having a field day - and would be homeowners are financing the business. "One of the quirks of Russia's mortgage business is that the first loan is not actually a mortgage at all, but a contract where the buyer borrows money from the bank that is given to a developer, who then uses the money to finish the building. Only once the construction is completed, is the loan converted to a traditional mortgage," says Cook.

This sounds like a hair-raising way of buying a home, but Cook says that demand is so high that if the buyer changes their mind, it is easy to sell on the contract on what is a very liquid secondary market. And Russians like this deal, as developers offer big discounts if the buyer is willing to pay for an unfinished property sight unseen.

Despite the unusual nature of the deals, they are considered to be pretty safe for the consumer. A few years ago, a few developers scammed millions of dollars from hundreds of would-be buyers, selling apartments in a property that was never even started. The jipped buyers occupied the offices of the local authorities and refused to move until something was done. "The Kremlin is always nervous of anything that smacks of popular protest and has since beefed up the property laws, so buyers are now well protected in the event of a developer going bust," says Cook.