Prices hitting demand

Ukrainian citizens haven’t seen the promised drop in housing prices. Both mortgage rescues and government programs have proved powerless against them. Zoia Nesterenko, the head of the Kanzas Consulting Company, recently told journalists that first house prices in Kyiv’s market have recently risen on average by 10 to 15 percent, with one square meter now selling for 1,700-5,000 dollars, depending on the district and type of housing. “But what is at issue here is not the government’s official forecasts but the real change in prices. I think it will be 15 percent. Clearly, the price increase rate has significantly fallen if you compare it to last year’s rate, which was 60 percent.”

However, the price race has not completely stopped, and Nesterenko warns that a price reduction in 2008 is hardly to be expected: the price increase rate on the first house market will at least correspond to the rate of inflation. However, a reduction of agreements in the market is already being observed, as well as a drop in builders’ profits in connection with emerging trends of prices for construction materials. Nesterenko considers that Kyiv’s housing market is in crisis.

“Housing prices in the capital have reached such a level that they are unrealistic for most buyers, even taking into account mortgage possibilities. The market has entered a phase where competition and the fight for buyers are becoming more acute,” the consultant says, adding that a considerable redistribution of the real estate market among players will be observed in the next three or four years.

Where mortgages are concerned, Nesterenko noted the tough conditions for obtaining loans at the end of 2007 as well as a certain increase in down payments. “The market situation will not improve as long as loan rates remain high,” she said.

Bankers, in their turn, are outraged by the current housing market situation. “It is practically impossible to buy an apartment even with a mortgage. One square meter in Kyiv already costs an average of 3,200 dollars. While builders’ profits are in the 20-30 percent range in Romania and Bulgaria, it is 300-500 percent in Ukraine’s big cities,” says Oleksii Pylypets, chief executive of the Ukrainian Mortgage Association. As a result, mortgages have remained stable lately, and the share of loans for purchasing furniture, doing repairs, etc., is increasing.

In Nesterenko’s opinion, as usual, other countries will help lead our domestic housing market out of this dead end. “Obviously, we should be expecting big foreign construction companies to come into the Ukrainian market. They will be ready to build a lot, and quickly, so their income will depend on the scale of construction, not on the price increase. They have access to cheaper financing,” she said, mentioning possible difficulties: “They have specific problems connected to the lack of transparency in the processes of allotting land to start construction and to certain differences in mentality.”

But the structure of changes in the housing market will not just depend on foreigners coming to Ukraine. Nesterenko thinks that in the next two or three years we will be seeing small and medium-sized domestic companies swallowed up by large enterprises, so consolidation and concentration will take place. “Big foreign players will bring their experience and new market standards. Buyers will gain an alternative from this, and domestic builders will have to reduce their profits and improve services.” All these factors will lead to a considerable loss of interest among private investors in putting money into housing real estate, and they will start transferring their money to other segments of the economy, including the land market. To some extent this is already happening.

INCIDENTALLY

In 2008 the Ukrainian government will start partially financing the purchase of houses by low-income people. The Accessible House Program was developed with this aim, as First Deputy Premier and Minister of Finance Mykola Azarov reported. The state’s first contribution will constitute nearly 30 percent of the program, and 70 percent will be paid by recipients of this subsidized housing over the next 20 years. According to the president’s decree of Nov. 8, 0.5 percent of the GDP will be allotted in the budget (four billion hryvnias) for this aim.

So far, mortgages are the most effective means of helping people in need of housing. As the press service of UkrSybBank (Kharkiv) has reported, a total of over 9.5 billion dollars’ worth of mortgage credits were issued between January and October 2007. Still, according to the bank’s data, less than one percent of Ukraine’s population buys real estate on credit. This index may rise in the near future. Oleksandr Kozlenko, the deputy head of the Mortgage Crediting Products Department at Rodovid Bank (Kyiv) believes that mortgage rates in hryvnias will fall by 0.5-1 percent by the end of 2008, while the price of currency credits is most likely to remain unchanged, in view of the situation in the international capital market. At the same time, this expert is convinced that “the mortgage crediting market in general and the loan market for second housing in particular will develop in the coming year and maintain a high rate of growth, but the amount of mortgage credits will hardly surpass this year’s indices.”