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Head of BRDO Construction sector Olena Shulyak comments: the housing market: when the “bubble” will burst


Will the prices in the primary housing market fall? What risks do rising prices of construction materials and the lack of effective demand from apartment buyers carry for real estate developers? Whether will there be slumping prices in the secondary housing market? The Construction Sector Head at the Better Regulation Delivery Office (BRDO) Olena Shulyak said about these and other issues in an exclusive interview to with the Minfin.

In January-September 2017, 6889.3 thousand square meters of total housing area, 58.6% of which are multi-apartment buildings, were commissioned in Ukraine. During these 3 quarters, 1093.4 thousand square meters of total housing area were commissioned in Kyiv due to the construction of new residential buildings and the reconstruction of the existing housing stock. This is 56.3% more than was commissioned in January-September 2016.

Was there any bubble?

Now the news that there is a “crisis bubble” in the market is everywhere. In my opinion, there is little reason to talk about such a phenomenon. The crisis supply glut in the real estate market occurs in most cases when large amounts of unsecured credit resources come into construction. Today, there is a different situation in Ukraine. For the period from 2013, a percentage of funds invested by citizens in real estate has increased more than threefold – from 0.42% to 1.49%. In terms of “ready” cash – from 6.6 billion hryvnas to 29.9 billion hryvnas. In dollar terms, the increase is not so significant – from $0.8 to $1.2 billion, but the trend is the same.

Problems related to the lack of inexpensive credit resources have reformatted the market. Now it has more own “ready” cash of citizens. Thus, there are not enough reasons to say that the housing “bubble” will burst in the near future. More likely – the market has reached the price setting line limited by the level of income.

What determines the price?

As for prices for primary housing, it can be noted that they almost reached a threshold of profitability. The growth rates of construction works and investments in the construction sector led to the increased demand for construction materials. First of all, for groups of basic materials: cement, concrete, metal constructions used in residential and infrastructure construction. In addition, due to the state policy, consumption of energy efficient materials and materials for thermo-modernization of buildings is increasing. Currency fluctuations also affect the price of construction materials.

It is absolutely logical that all these factors affect the prices of finished construction projects. However, sales of residential real estate and most segments of commercial facilities depend first and foremost on the level of incomes of the population and small and medium enterprises. But it remains extremely low. According to experts, only in Kyiv, about 60 thousand apartments in new buildings are still unsold and have little chance of being sold in the near future.

The low purchasing power factor does not allow to expect a significant increase in prices for primary residential property, and, in turn, the level of construction management costs does not help to reduce them.

The secondary market will not fall significantly

The secondary real estate market also depends on many factors. You should not expect that the prices for “secondary” homes in prestigious areas with well-developed infrastructure decrease in 2018. However, there can be fluctuations in prices for so-called middle class and economy class housing, that is, the most demanded in Ukraine at the moment. In this case, several factors will influence the final cost. For example, the demand growth will increase them, and the increase in payments for the maintenance of such real estate (the growth of utility costs and payments for energy), on the contrary, will push them down.

The average age of residential real estate in Ukraine is 42 years. This factor demonstrates the low energy efficiency of such buildings and high costs of their maintenance.

In such a way, high demand is somewhat offset by new customer requests.

So, we can sum up that fluctuations in prices in the “secondary” market are possible, but within 5% per annum.

In both cases, both in the primary and secondary markets, the investment attractiveness depends on the economic value added that risk-based investments will create. At this stage, the forecasting time-frame of future cash flows that real estate items can generate practically does not exceed the term of more than one year. Therefore, the attractiveness of the secondary market is largely determined by “low prices” of property items. In this context, “stressful” assets (for example, bankrupt property) are beyond any competition.

Property risks in the project constructions are more dependent on regulatory procedures than on construction technologies. The construction sector mostly affects the primary market. Now we have positive changes in the state regulatory policy regarding the construction process, and they will continue. This will clearly work well for the market.