FT REPORT - HOUSE & HOME - FRONT PAGE: A Thawing Market

By Daina Lawrence, Tom Masters and Greg McIvor, Financial Times, Dec 01, 2007

At a latitude of 66.6° north of the equator, the Arctic Circle marks the southern boundary of one of the most inhospitable regions in the world, a place covered in snow and ice, where temperatures are regularly well below freezing and, at least once every year, there is 24 hours of night. Not surprisingly, it is sparsely inhabited. But people have lived there for centuries. And now, thanks to global warming, which may open access to huge gas and oil reserves under the melting ice, many of their cities, towns and villages could be set for significant growth.

Of the eight countries with land in the Arctic, five - Russia, Canada, Norway, Denmark (with the self-governing Greenland) and the US (with Alaska) - are staking a claim on the region, with high-profile flag-planting, pronouncements and exploratory missions, most notably this past summer. As a result, in many communities, business is increasing, development is accelerating and house prices are rising, with both long-time residents and newcomers eager to capitalise on the coming prosperity. In other places, especially those not tied to the energy industry, increasing attention on the region has had a different effect, highlighting chronic, perhaps insurmountable, problems.

Russia has the largest presence in the Arctic, with a northern coastline running across seven time zones, from Lapland in the west next to Finland to the Chukotka Peninsula in the east, facing Alaska across the Bering Strait. The population includes a mix of indigenous peoples - Evens, Evenks, Komis, Nenets, Yakuts, Chukots - but the Russian presence increased greatly in the past century thanks to Soviet indust-rial development of the north. And, although vast areas remain a total wilderness, there are a few cities powered by oil, fishing or the military, including the three largest settlements in the Arctic, Murmansk, Norilsk and Vorkuta.

None is an easy place to live, of course. Most are closed to casual foreign visitors, since the Russian government requires permission and a propusk (travel pass) for most destinations; supplies arrive by helicopter or aircraft; and prices for goods are often twice as high as on the "mainland", which is how locals describe the rest of the country. But, in part because of the recent Arctic fever, these locations are starting to defy stereotypes about the cold and barren north.
Murmansk is, for example, a huge port and military base with a population of 325,000. Big and prosperous enough to feel like the centre of its own world, in spite of its location on the northern edge of the Kola Peninsula's nearly roadless 10m hectares of forest, swamp and lake, it has coffee shops, restaurants and US and European brand shops along its major thoroughfare, Prospekt Lenina. The architecture is an unsightly hang-over from the Soviet era, with five-storey khrushchevki and nine-storey brezhnevki - shoddy apartment blocks built under Nikita Khrushchev and Leonid Brezhnev respectively - surrounding a faded -Stalinist core. But prices are expensive by Russian standards and they continue to rise.

"Even old flats in Soviet blocks are selling fast," says Konstantin Venzovsky of Rielt, a local estate agency. "You're looking at a minimum of 1m roubles ($41,000) for an unmodernised, one-bedroom apartment, while for new builds you're looking at between $1,800 and $2,300 per sq metre." (Prices in Russia are typically quoted in either roubles or dollars.)

With huge sums of cash flowing into the country and the local economy booming, a new market for vast kottezhi , or cottages, in gated villages far from the dilapidated city centre, is also opening up. "These large, detached houses with gardens go for about $1,500 per sq metre. Some cost as little as $200,000 but the larger ones regularly sell for more than $1m," Venzovsky says.

Life is a bit bleaker in Salekhard, the only city in the world located directly on the Arctic Circle. Settled more than 1,000 years ago, when it was a permanent base for Nenets reindeer herders who lived in subterranean ice caves, it is now home to gas industry workers. But many of their families prefer to live in the warmer regional capital Tyumen or even in Moscow, 1,514 miles away, rather than coping with the harsh year-round climate, the long winter darkness and the clouds of mosquitoes that plague the city as soon as the snow melts. As in Murmansk, housing consists of squat apartment blocks and stand-alone wooden properties. But, even here, there are signs of the coming thaw.

A frenzy of development has resulted in a number of new, large houses and modern apartment blocks. And "prices are out of control," says Kirill Olenchenko, of local agency Nash Dom. "[They] have risen 100 per cent over the past two years alone due to the huge amount of investment in the gas industry and the stream of arrivals coming from other cities in Russia to work here. At the moment demand is outstripping supply."

A one-bedroom flat now costs $100,000 on averge, while houses go for about $600,000.
The towns in Arctic Russia not benefiting from the rush to claim the region are those without oil fields or diamond mines. Young people leave to find work in Moscow or Siberian boom-towns such as Krasnoyarsk or Novosibirsk, so only the old, the ill and the chronically alcoholic remain. A good example is the tiny settlement of Shoyna, 400km north-east of Arkhangelsk. Once a prosperous fishing port during Soviet times, it was largely abandoned in the 1990s and is now all but covered in sand. Amazingly, people continue to live there, though, often climbing in and out of their first-storey windows over the dunes blocking their front doors. Poverty, alcoholism, unemployment and hunger blight their lives but they can't afford to leave and have nowhere to go if they could.
It is a similar story in the Canadian town of Grise Fiord, on the coast of Ellesmere Island in the Nunavut territory. Created five-and-a-half decades ago as part of a government relocation programme aimed at asserting the country's presence in the Arctic, it was populated by Inuit families from more southern locales who were given incentives to relocate. Today there are about 140 residents, many of whom struggle to live comfortably since the frozen waters and snowy land making hunting and fishing difficult.

"In 1953 it was going to nowhere, to nothing, like going camping," says Larry Audlaluk who moved there with his parents. Now, although he is one of the only original settlers left, he says it is more of a community. "We have water storage tanks, we have fuel storage tanks, we have a school, which goes up to grade 12, we have a one-person health station and we have the Co-op general store."

Still, removed from the industries that will most benefit the Arctic, there are no prospects for growth. "There's absolutely no [property] market in Grise Fiord," says Peter Scott, president of the Nunavut Housing Corporation. "In the past 15 years I cannot think of a single house going up for sale."

Elsewhere in Canada, which has an Arctic coastline stretching from Ellesmere Island in the east to the Yukon-Alaskan border in the west, are larger towns better positioned to benefit from the oil, gas and mining booms. The city of Yellowknife, just south of the Circle at 62° north latitude, has, for example, made a name for itself as the main producer of high-value Canadian arctic diamonds. The capital of the Northwest Territories, it has seen an influx of craftsmen and workers in recent years, boosting its population from about 16,500 in 2001 to nearly 19,000 today.

Iqaluit, the main hub of Nunavut, at 63° north latitude, also seems to be faring well. Its population is only 6,000 but demand for homes is now so great that many renters and owners are only able to afford them with subsidies from the government or their employers. "You are looking at a minimum of C$350,000 ($353,000) and you're talking nothing spectacular, maybe 1,400 sq ft, no basement and usually no garages," Scott says.

As with all Arctic towns, Iqaluit's climate makes new construction difficult. Supplies are delivered by sea lift and must arrive no later than June so work can be completed over the summer; in other months, temperatures dip below -50°C and daylight is virtually non-existent, making such work impossible. "It's a rough place to live if you are not prepared for it," acknowledges Bill Riddell, rental officer for the Nunavut government. "I know that if I do retire I won't be able to live up here."

Transience is a common problem among North America's Arctic population. Take Barrow, Alaska, one of three US towns in the region, located more than 300 miles north of the Arctic Circle and recently depicted in Hollywood horror film 30 Days of Night. Although it has 4,600 residents, many of whom work in nearby oil fields, most are on short-term assignments, planning to earn their money then leave, not relocators looking to settle down. As a result, property sales volumes are low - "the most I have ever seen are five to six houses up for sale at any given time," says Wendy Knight, executive director of the local housing authority - but rents are relatively high for a place so remote. One-bedroom flats cost an average of $730 per month, while family homes might go for $1,500. The cost of living is meanwhile well above the national average, with a gallon of milk priced at $9.

The Scandinavian portion of the Arctic offers more diversity, though not quite on the level of Russia's. A large area by European standards, about the same size as England and Scotland, it is the traditional homeland of the reindeer-herding Sami people, though only a small minority of them make their living that way nowadays. The region's broader population is small and spread out but there are a few big towns.

One of the most interesting is Haparanda, on the north Swedish border with Finland, just south of the Arctic Circle. But this isn't because of its proximity to potential oil reserves; it's due to Ikea, the homeware chain, which opened a store there in November of last year, its first in the northern half of the country. And the effect has been stunning.

Before, the town had been struggling with 15 per cent unemployment, a stagnant property market and a steady drift of its 10,000 residents to larger, more southern locales. Now it is welcoming not only "shopping tourists" from across northern Sweden, Finland, Norway and even Russia - the new Ikea had 1m customers in its first six months - but also new companies and residents. Haparanda's economy grew by 10.8 per cent last year, more than anywhere else in Sweden; unemployment has dropped to less than 4 per cent; and house prices have climbed 40 per cent in two years.

As one of the town's oldest residents told a Swedish radio station: "You just couldn't wish for anything better. Ikea coming here is the best thing that's happened to Haparanda in the 90 years I've lived here."

A similar but more predictable story is being played out in Hammerfest, Norway, which claims to be the world's northernmost city. Until recently it was a hard-up fishing town coping with economic decline, joblessness and emigration. But a big oil find just offshore and the discovery of an even larger natural gas field a little further out in the Barents Sea have transformed its fortunes. In the past five years 200 new companies have been set up, the population has started to grow and house prices have doubled.

"People who left in search of jobs and better opportunities are actually coming back," says local photographer and journalist Allan Klo. "Everything has been turned upside down [by the boom]. Today we have more or less no unemployment."

The expansion is not without growing pains. The construction sector is overheated and there aren't enough electricians and carpenters to satisfy demand (though the local authority is hoping to solve this problem with a recruitment drive in the Baltic states, offering housing to workers who will relocate). Wages have also lagged behind the surging property prices. One development aimed at young people came to market recently with flats starting at Nkr1.6m ($296,000) and, says Klo: "It goes without saying that it's impossible for the average young person to afford such prices."

One town likely to continue to thrive with or without further exploration of the Arctic is Rovaniemi in Finnish Lapland. Over the past two decades the town of 58,000 has established itself as "the home of Santa Claus" and, each winter, its tiny airport welcomes 500,000 lucrative tourists from around Europe keen to ride on reindeer-drawn sleighs. Though its unemployment rate is double the national average at about 14 per cent, the Santa industry has brought considerable prosperity.
Although many settlements in the Arctic are stagnating, with economies as cold as the climate, such success stories are becoming increasingly common. The region is no longer a polar desert but a new frontier, attracting a raft of businesses, workers and residents as its temperatures rise and its resources are slowly revealed.