The real estate market and its present and future growth has become the most important subject exciting the public. A certain conjuncture can be seen in the fact that this journal (Exclusive) is printing this material following the recently held session of the Security Council. Speaking frankly, the material was planned for release ahead of time, but it would be unreasonable to forgo its printing following the Security Council session.
Our source is a serious expert in the field of finance law. He prefers to remain anonymous as he is continuing his work on the story.
By Yerik Ablaev
- During the last session of the Security Council, the residential real estate market was touched upon quite unexpectedly. Many attending were surprised. Why is the Security Council considering housing issues, as these categories do not seem to fit one another?
- This issue should be taken not as unnatural, but rather as a sign of the times. This problem is now taking on a very large-scale. The growth in prices over the last three years has accelerated rapidly, and few are aware as to whether these prices have any basis from an economic or demand point of view.
Every one is in a fever now. But a fever cannot last forever. Real estate (just as any other product) does not have an absolutely eternal value able to guarantee its proprietor a permanent solution for all issues related to housing, capital or investments. It also has a tendency to depreciate, and has expenses for use and maintenance. Accordingly, consumer and market cost are not fixed, as they can change in any direction when influenced by a number of factors.
- In general, it sounds like a universal truth…
- Yes, but the question is how many of us remember it? However, some people have just begun to remember. The real estate market is also a market on which, if not regulated by the government, prices will be established through interaction between solvent demand and supply.
The volume of real estate sales in 2006 as compared to same period of the previous year have decreased by two times, which is related to current transactions connected with newly built and opened residential buildings and older housing on the secondary market. This testifies to the fact that owners are waiting for a price increase for residential buildings or dislike the idea of parting with their property (this is a more psychological, subjective factor that does not have an essential effect on the volume of transactions.)
The objective factor that causes a decrease in the volume of real estate transactions is a drop in solvent demand for housing. Those who wanted to buy and who were able to find money to purchase a house have already done so, and now, only those who have failed to find the proper house or the insolvent remain. The fact is that the purchase of newly built apartments testifies that the construction business now has a high level of income and is a most profitable one.
- But isn’t this a fact that should demonstrate the solid position of the industry?
- According to statistics, enterprising investors purchase apartments and houses during the first stage of construction, and later sell the same properties to final customers who live on these sites. The acquisitions are being done using the investors own capital and through loans (those hoping to succeed with other people’s money). Both of these two groups are caught up in the real estate game (a 100-200% return is a good incentive). In addition, the second group is always subject to a certain degree of risk.
The situation that has developed as of today on the real estate market has been sharpened by the fact that the population’s savings have been in US dollars until its recent decline. In post-Soviet states, which have experienced hyperinflation shocks, citizens had been converting currency into US dollars. At present, as the dollar has begun depreciating according to the principle of the financial pyramid, people have been once again forced sell dollars or transfer them into different assets. The US dollar, as the most popular currency, has failed badly to maintain peoples’ trust in currency as a whole. However, people did not panic and convert their money with an unfavorable rate. Instead, the chance to invest unprofitable funds into real estate, which is growing in price, has led to a natural flow of funds into the real estate sector. The favored place to put the universally-loved idol – the dollar became real estate. People simply did not have any other choice. This so-called natural process turned out to be advantageous for construction companies, who bravely and with good timing offered people to take part in participatory housing construction schemes. The situation then began to develop to the point where it stands today. The increase in the volume of construction was accompanied by unrestrained price growth for real estate.
- I agree with you on this analysis of the situation in which we have found ourselves. But now, analysis is not the most important thing, but rather forecasts for the future. Can you name primary trends to be expected in the future?
- The financial pyramid for the “Real Estate” project is already approaching its peak. Do you remember financial pyramids such as MMM? This experience has never left us. Suddenly, during the point of maximum turnover, the project (MMM) stopped bringing income, since new transactions ceased and the source for financing the growth disappeared. If we do not take adequate measures, the same situation could occur on the real estate market: the existing real estate supply, for which prices grow daily, could face problems with the ability of final consumers to pay. This threshold depends on the final consumer. If a point is reached when the final consumer is unable or unwilling to pay, the number of deals at high prices will drop sharply. Those sellers who cannot afford to wait will begin dropping their prices. This moment will be the start of a new trend for a decline in prices (a collapse of the pyramid).
The trend is becoming large-scale, because no one would want to lose more than he had invested, or lose everything thanks to the uncertainty of tomorrow. Elite real estate located in a prestigious district will always command a high price, but it is not affordable for the majority of the population. Land in rich districts will always be offered at a high price, as the basis of all structures depends on this. General plans for town-building and the realization of these plans financed by taxpayers via municipal agencies will also contribute to the development of the real estate market. Those who had a house or apartment and purchased it as a final consumer for living, etc., should not be upset, because no matter how much it cost, it will provide the buyer with the most important benefit, which is living in one’s own home.
Proud investors who did not want to part with their property in the hope of the notorious “best-case scenario,” could take consolation in the fact that the possibility that they will obtain a high price for the property has not vanished, and will at least have the same value as they had paid for it. This is possibly the real difference between real estate and securities, which have a low cost for the consumer, and which serves as the main reason for direct non-interference in the real estate market.
- You mean, you are forecasting rapid and fundamental changes in basic trends on the market?
- Nowadays, those who have bought a great deal of real estate with the purpose of reselling it, are having trouble locating solvent buyers and are required to freeze their capital in immovable property until they can obtain top prices. Everyone has seen empty windows with the lights on in buildings which, according to advertising “85-90% of the apartments have been sold. Such players could engage in either a rapid sell-off of assets that have turned doubtful at unprofitable prices or transfer them onto a different market such as the rental sector.
But one circumstance that should be considered is that many such players on the real estate market do not put their own money on the market but rather take out loans from financial institutions (banks, mortgage companies and others). Unless their share is no less than 60%, there is not much opportunity for such players to earn living on the real estate market, as they would have to give all their earnings to the banks to extinguish their debt, which will be compiling interest, and will be in a constant state of risk in that prices could decrease suddenly.
In market conditions financial institutes unintentionally contribute to a rapid drop in prices as they have their own business, interests and ideas for real estate. In two or three years, it will be the time to repay those loans taken out by investors with real estate as collateral. The banks will not assume the risk and wait for their debtors to sell their properties at a maximum price. The banks will start to sell-off this collateral at a price that allows them to cover their costs, including interest and penalties. The idea embraced by businesspeople is: “Buy cheap and sell expensive”. A bank would never consider the opinion of investors that view real estate as a reliable objective for long-term investments.
- But aren’t we observing a durable alliance between financial institutes, construction companies and investors? Doesn’t this alliance take into account these processes?
- This alliance existed in the past. But, during the threshold of the financial crisis, banking capital was immense in the country but all of a sudden no one wanted it at the available prices for loans, as big-time developers had their own resources. Then banks then started to convulsively seek out places for their capital. The consumer market was clean, young, and naïve and the real estate market as well as the construction business was open.
The banks then deliberately enabled the majority of the naïve consumers to realize their dreams. The first and the bravest were amply awarded for their risk. Their businesses succeeded and became highly profitable. They not only resolved residential problems, paid all their dues to banks but also began earning money on the real estate market. As always, the expectations of the pioneers were not disappointed: they skimmed the fat off the cream thanks to their initiative and will never suffer a loss under any circumstances from now on. The issue applies rather with another group of late-comers, who have turned out to be losers.
- The main question is most likely: how do you view forecasted prices on the market?
- Prices for real estate have already reached their peak, even by world standards. The trend for an increase in prices has slowed down rapidly. Real estate prices have limits that can be calculated very easily, and very ordinary factors influence this calculation. Firstly, real estate, just as everything else in the world, is not eternal and is subject to depreciation and finally, to demolition after being recognized as such. Secondly, there is a market for money earned that owners will not give away easily by buying real estate at astronomical prices.
Prices for real estate could continue to grow indefinitely and maintain their levels, but if no deals are closed at these prices, they cannot be considered to be market prices. Excessive prices and an absence of deals at such prices testify to one thing only - market stagnation and a possible trend for price dropping in the near future. In addition, some more serious players, the so-called “bears” will join the game and start breaking prices down to earn money taking advantage of the new market trend. It will be high time for auctions, mortgage companies, second-hand dealers, and debt companies to start their business as well.
- But realtor agencies say that there is growth, it has been and will always be… They say that there is no better alternative to investing into real estate in Kazakhstan.
- Today, the myths of expected growth are being stirred-up only by those that are profiting from it, and it is profitable for only two categories of players on the real estate market. Those are construction companies and investors (participatory sharers) who have placed their assets in properties. The problem and despair of both of these groups is that they depend on the final consumer and his payment abilities. Without them, they lose any reason for running their business.
Realtors, which are stimulating this impetuous activity, help their customers considerably, but they only offer psychological support, which does not strongly influence the state of the market. Their articles, reports, analysis, and forecasts can be often read in publications, but if you pay attention, they only talk of prices and the number of offers and they never mention the number of transactions that they have closed. The information they provide is scanty and deliberately targets the minds of buyers and new sellers who are just putting together prices for their proposals. The banks and financial institutions who have their own business and who get along with construction companies and investors prior to the loan repayment deadlines; will have to neglect those people holding onto high prices in the near future.
Separately, it should be noted that any information that comes out on the activity of realtors seems to influence the market excessively. Realtors would also understand that with advancing time, the level of their income depends not on high prices for the available supply, but on the number of deals closed on the market with their participation and the quality of service that they render. So far, the work of realtors has only caused disappointment and sometimes even annoyance on the part of both the sellers and buyers of real estate. An opinion exists that even housewives, who have never managed to find a job in their profession but never forgot their dreams of getting rich as fast as possible on one lucky strike, are becoming realtors.