February 01, 2007

Kiev, Ukraine: The biggest and most obvious housing bubble in the world?

Here's a winning post I found over at the confused"Carnival of Real Estate" or something like that, which looks to be a group love-in for out of work real estate clerks like Greg Swann. No doubt this post got a lot of real estate clerks and their clients all into a lather, and on planes to Kiev:

Best investments in Ukraine 2006
2006 for private investors, having free funds, was successful. Since 1998, when prices for residential real estate were twice dropped, there was possible to purchase one-room apartment for $5K. Now this apartment costs about $80K.

There is 1600% for 8 years and aprox. 60% for 2006 income for real estate deals.

Talking about real estate pricing I have to say about enourmous growth - from $1350/sq.m at February to $2300 at December (at Kiev for sure). Make note, that is not only income from arbitrage. Most of them using for rent business. So potential income about 70% for 1 year.

So, in short-term conditions, real estate investments are most profitable and reliable asset in Ukraine.

So, I decided to dig a bit about this obvious Ukraine Housing Bubble:

From CIA Fact Book:

Ukraine:
GDP - per capita (PPP): $7,600 (2006 est.)

Net migration rate:
-0.43 migrant(s)/1,000 population (2006 est.)

Population growth rate:
-0.6% (2006 est.)

Birth rate:
8.82 births/1,000 population (2006 est.)

Death rate:
14.39 deaths/1,000 population (2006 est.)

Inflation rate (consumer prices):
8.5% (2006 est.)

Average Income (2005): $1,520 / year

And then this article on the impending collapse:

What Kiev's Property Boom and Dot-Coms Have in Common

Property prices in the UK rose by just under 10% last year, according to the Nationwide building society, while many analysts expect a similar figure this year.

But that pales into insignificance compared with Kiev, where the BBC reports, prices have risen by 10-25% in the last two months of 2006 alone…

Kiev, the capital of Ukraine, is now apparently the “most expensive city in Eastern Europe” in terms of property, says the BBC. Prices at one development start at $1m for a three-bedroom flat, while the cheapest one-bedroom flats start at around $100,000.

But of course, the Kiev property boom couldn’t all be down to supply and demand and a small group of hugely wealthy business people, could it? There must be a pretty wealthy population to support a city where the cheapest one-bedroom flat costs in the region of £55,000, surely? After all, that may not be London prices, but there are certainly a few far-flung parts of the UK where you might just be able to get a one-bedroom place that cheaply.

So what’s the typical inhabitant of Kiev earn? $25,000 a year? Maybe $15,000?

No. Ukraine is one of Europe’s poorest countries - apparently the typical salary is around $2,400 a year. So the average Kievite would need to pay just over 40 times their annual salary to buy the cheapest property in the region.

As the BBC concludes, “the main driver for the property boom is speculation.

“It could be a bubble - and if so, there is no way of knowing when it might be burst,” concludes the Beeb ominously.

Could be a bubble? Of course it’s a bubble! Who is buying these places? Why on earth would you choose to live in Ukraine unless you had family or a job there? Not that there’s anything wrong with Ukraine particularly, but has it turned into the world’s financial centre over night? No. Have the streets recently been repaved with gold?

There is no public register in Ukraine, so the honest truth is that no one’s really sure how much prices have risen.

One estate agent in the BBC piece says that she bought a flat for $30,000 three years ago, and it’s now worth “up to $200,000”.

It’s these kind of stories that show the unsustainable hysteria that lies beneath the global property boom. When you hear of properties in Kiev going for 100 times average earnings, that’s when you start to think about the triple-digit p/es of the dotcom bubble era.

And then there was this article on rents (but hey, who cares about fundamentals and the P/E ratio - we're all getting rich!!!)

Real estate rental prices falling
Some good news for renters in Ukraine's capital. On Tuesday, 5 Kanal's Kyivskey Chas news program reported that rent prices have started to fall in Kyiv.

Real estate experts explained that the demand for apartments in Kyiv has recently fallen by more than 30%.

29 comments:

Anonymous said...

So how do you say "Ponzi Scheme" in Ukrainian?

Stuck in So Pa said...

God! This housing bubble is just like Prune Nog, you know, the gift that keeps on giving! LMAO!

christiangustafson said...

You missed the point on this one, Keith. It's a Casey Serin nation! Sweet deals for everyone! I'd say that another 70% is in the bag for Kiev in 2007.

Anonymous said...

The Zimbabwe dollar is like the only currency the U.S. dollar has appreciated against. It it's been by a lot. If Zimbabwe ever gets it's feet under itself, their market will reverse and huge gains will be made. This where the REIC should relocate to, and play the rebound. Of course that will mean they'll be talking up huts, grass for letting your farm animals graze, etc.

Anonymous said...

Hurray!
Another pot of free money. Glad I don't have to get a job and actually do some work. You know, actually contribute to society. That's hard.

Anonymous said...

Absolutely insane!
The Ukraine government can take ownership of all these properties anytime it chooses to.
No need for Eminent Domain, do they even have the concept of private property?
Kinda like investing in oil in Russia or Venezuela.
a little to risky for me.

Anonymous said...

What happened to Richard's blog?

Anonymous said...

Ponzischemenesh!

RayNLA

shterenta said...

Hi Keith. I read your blog regluarly but rarely post unless it is something I feel I can really contribute in. Interesting post re Ukraine, and I am an expert on this topic as I own 2 real estate companies there 1 in Kiev and 1 in Odessa. www.kievapts.com & www.odessaapts.com so if anyone ever wishes to visit please do not hesitate! Firstly, I make money irregardless of whether prices for real estate go up or down, as we deal with rentals and for sales we charge a flat fee so I have no conflicts of any sort to disclose my personal opinion.

While I do not dispute the notion there may be a bubble in the making, the western press largely misleads the public with the statistics on Ukraine, particularly items such as average income. For example, the thesis around this article is that the average income is $2400 per year. This figure is flat out WRONG. It comes from the CIA world book, or other inaccurate census sources which are simply incapable of tracking accurate average salary in Ukraine. The reason for that is because it is simply impossible to measure. In North America, most transactions are done electronically whereas in Ukraine it is almost an entirely cash based economy. It is not unusual at all even for semi large national corporations to pay their employees a certain salary 'on the books' and the rest 'off the books'. In fact, having lived in Ukraine for over 15 years I would say 85% or more of all workers here get paid on these basis. So what happens is these statisticians track the 'on the books' salary which in many cases is actually a fraction of what gets paid 'under the table'.

Further, the $2400 number is more pertinent to all of Ukraine, which includes many rural areas where you can actually sustain a normal Ukrainian lifestyle for about $150 per month. Large cities, such as Kiev, Odessa, Donetsk, etc have SIGNIFICANTLY higher salaries than the rural areas. For example, in Kiev currently an average salary is around $1000 per month, with many specialty professionals such as skilled web designers, programmers, etc earning up to $1500 per month and in some cases even more. Again, the person who earns $1000 per month is reporting only about 20% of that income to the 'census' gatherers and as a result as they say "sh*t in results in sh*t out".

Also, the 'tiny' group of wealthy elite in city such as Kiev is actually not so tiny at all. Without actual statistics, I would venture and say that about 10% - 15% of the city have net worth of over $1M. The remainder is poor but this 10% of the population is completely fine with investing their money in real estate, and in the event of a crash they will not have any sleepless nights at all since they view real estate as a much better investment than any stocks or savings account. This traces back to a number of financial crashes that have occurred in Russia/Ukraine in the late 90s. The other principal difference is also from the fact that most real estate in US is bought using a mortgage. In Ukraine, (this is a real stat) 90% of real estate transactions are done in pure cash. Meaning that the person, once they have paid for the apartment has no monthly payments of any sort.

So unlike US, when the asset prices plunge and put a psychological drain on the homeowner who is now $50K upside down, plus has to continue making $2.5K mortgage payments per month, in Ukraine since virtually everything is bought in cash, once the transaction is complete the owner looks at it as simply a shell which holds its money on long term basis better than any other financial instrument out there. What about maintained payment, insurance, property taxes, etc you say? Well, here is another interesting tid bit that the authors left out. In Ukraine, there is no property tax at all. Zero. Maintenance payments exist for some of the newly constructed buildings, but even for those which have doorman, security etc the typical monthly fee is about $50 - $100 per month. Older buildings, without those amenities have no maintenance fee at all, which is evident from the entry ways that anyone who's ever been to Ukraine or Russia has seen. Property insurance is also virtually non existent so again, once people purchase a property in Ukraine for cash, they have no income drain of any sort.

Final item - while the prices may seem high in places like Kiev and Odessa, keep the following item in mind that a western renovated apartment in the center of Kiev or Odessa can be rented out to western tourists year around for western prices. Currently, the rents in Kiev for a one bedroom unit in the center of the city on short term basis are $80 per night. Depending on the managing company which looks after the property, the average occupancy rate is about 25 days out of the month. So the gross cash flow is about $2000 per month - so even if you take out 20% for various expenses, you are receiving $1600 per month on a property that cost $150K to $200K which is actually more rental income than you would receive for an equivalent property in North America.

I know this post may be seen by others as posted by someone denying a bubble in Ukraine but please do not take it this way since that is not the way it is intended. I simply wanted to post an opinion of an insider, who has US education and has spent the last 15 years working in both Ukraine and US, with understanding of this country's dynamics beyond the BS numbers which the CIA book provides. Will the crash in Ukraine occur? Possibly, but it will not be nearly as drastic as what you will see in US for a wide variety of reasons. Even now, people are still discovering that Ukraine (many calling it Spain of eastern Europe) is home to the most beautiful women on earth, fantastic food, great nightlife and totally different approach to life than in US/Canada or even parts of Western Europe. Inflow of tourists has been growing at about 30% rate per year since they abolished visa requirements 2 years ago and many Americans and Europeans have come to buy properties for retirement purposes or have moved to startup business which had been impossible to start in their native countries. All I am saying is when reading such articles, look beneath the surface.

Kalinin said...

Great post, no doubt. Most of all it's true. And thanks for using my post as well :) But! You've describing Ukraine as "one of Europe’s poorest countries - apparently the typical salary is around $2,400 a year. So the average Kievite would need to pay just over 40 times their annual salary to buy the cheapest property in the region"
This official statistic. And everyone here know that this just "top of the roof". In Kiev most of people get salary not less USD 350-400 and some of them get much more. So, where is the answer? It's simple. There is "unofficial" part. And any bank does ask you nothing when you get the mortgage lending. I know the story, when the family bought the K150 flat with K5 down payment only. So I have to tell you guys, that Ukraine not poorest country in Ukraine obviously. And there is one big reason for high prices as well. If you wanna that point of view I'll post it later.

Mikhail said...

The scary thing about the Ukraine real-estate bubble is that it shows how extreme bubbles can get. I suppose it's possible the bubble in American real-estate could get much worse before it collapses...

keith said...

Anyone want to bet on a 50%+ decline in prices in the next 12 months?

Anonymous said...

I'll take a bet against the 50% crash next month anyday in Ukraine. The main issue is that a lot of people are focused on the % growth that has occured in the last 10 years, which is over 1000% BUT the main problem is that those properties which were selling for $200 per square meter for years were GROSSLY underpriced. For example, apartments in Moscow and Kiev if bought just a few years ago, renovated to fit western expectations would pay for themselves in most cases in just 1 - 2 years.

So the point is that the starting point was so incredibly off, and if anyone had the foresight to see that they are incredibly well off right now.

Nice one bedroom in Kiev, Moscow or Odessa in the center of the city currently rents at $1200 - $2000 per month. So even using a standard P/E approach, $300K spent on such an apartment is not necesserily out of whach with the fundementals.

Don't forget, in these cities there is a finite number of western quality apartments, in the entire city it is maybe 5% - 10% of all units. The rest are sh*tty soviet style flats which no westerner would want to live in.

The likely scenerio for Ukraine is about 20% reduction in prices which would bring it to a baseline level and from a rental standpoint would generate the owners about a 12% - 20% net return a year.

Anonymous said...

The same craziness is happening in Brazil, where properties are more expensive than in Miami. However, it's for different reasons since there's a lot of organized crime laundering money with real estate over there. For instance, there's a small Brazilian city (no beach resort) where one Italian guy from Milan bought 42 apartments at once and build an entire building. He got killed last month, inside his luxurious penthouse. Last year, another three rich guys (always in social columns) where busted for being involved with the Juarez drug cartel from Mexico. These guys were laundering money for the Cartel by opening construction companies, real estate offices, building expensive beach front condos, investing in luxurious nightclubs. This week, Brazilian feds just arrested a couple of Lebanese drug dealers who were bringing cocaine from Bolivia into Brazil in small prop planes, and then shipping it to the US and Europe on ships. Both of them were building mansions and investing heavily in Brazilian real estate. Just to give you an idea, a small apartment that cost US$60,000 in 2001 in a beach resort in Brazil now costs US$200,000. And the Realtor whores are going mad, telling everyone to buy, buy, buy. May I remind you that average annual income in Brazil is just US$ 5,000, taxes are 40%, interest rate is 4% / month, a new Mitsubishi Eclipse costs US$60,000, and gas and electricity are more expensive than in the US. It seems that every international crook came out of the woods to launder money with real estate over there: Italians, Spaniards, Russians, Mexicans, Colombians, Bolivians, Paraguayans, Argentinians, Lebanese, Israelis, and the Brazilian corrupt officials. A lot of this international housing boom has to do with laundering money, thus I'm not sure if it'll ever go back to normal prices. Most of Brazilian home owners bought their homes long time ago, at normal prices, and now are feeling rich on paper, even though there's nobody with money to buy their properties, since crooks build or buy from each other to launder money. Home owners and realtor whores won't let the prices go down, even though nobody will ever buy for those inflated prices. It's one of the craziest real estate markets I've ever seen.

Anonymous said...

what if Honica Jewinsky
comes back to claim her grandpas lot in Kiev.
point is, corrupt government can just as
easily do it today, like whats going on in Moscow.

All this ‘under the table cash’ has no paper trail.

Anonymous said...

International housing boom is mostly based on laundering money from crime, corruption, and drug trafficking. Seventy five percent of Americans live from paycheck to paycheck, so there are no huge inflow of money from the US to buy expensive international properties like some biased international realtors claim. For example, it's much more expensive to retire in Russian countries or Brazil right now than retiring in the US. Only a fool would pay more to retire over there, with less safety or poor quality health care. Sure, you can sell the pretty girls, but they will dry you out and even killed you for insurance money. Very easy for an American to have "an accident" and leave all the money to "poor widow". Those countries are not for amateurs. I know, I lived in some of them for years and have relatives who are diplomats representing them. The problem is that the organized crime comes to small markets and start buying everything to launder money and inflate prices, then using these inflated properties as collateral to open legit businesses.

Anonymous said...

I agree completely. People really underestimate how much money is now concentrated in places that only 10 years ago were considered dirt poor.

Here is one stat that will suprise most american hicks, the largest number of billionaries is concentrated where? New York, nope, Zurich, nope, Hong Kong? Nope

The answer is Moscow: http://news.bbc.co.uk/1/hi/business/3710977.stm

I have been traveling to moscow for business for years and can tell you that people have been betting a bubble there for the last 5 years which never came. People there will sit on a loss rather than lower the price, real estate there is considered the absolute best investment one can make no matter what is going on in the market place.

Also, as someone just said, there are cases of one individual owning 100+ or in some cases 1000+ of individual units. These are multi millionaires, they could care less if the prices fall. It is all new money, they did not work hard for it and if there is no buyers giving them what they want they simply hold on to these places. Wouldn't count on any real decrease in prices in Eastern europe anytime soon.

Anonymous said...

Don't forget, in these cities there is a finite number of western quality apartments, in the entire city it is maybe 5% - 10% of all units. The rest are sh*tty soviet style flats which no westerner would want to live in.

BINGO!!

Decent apartments are outrageously expensive in most ex-soviet cities for the same reason. Even if only 10% of the population makes western style incomes, but only 5% of apartments are up to western standards, guess what the prices will increase.

Anonymous said...

Most of the official statistics are of course wrong becuase of the massive wealth from non-reporting criminal and otherwise sleazy activities.

On paper everybody pretends to be poor.

foxwoodlief said...

So all this being said, how does that make the typical US home price a bubble in comparison? I think the same statistical analysis applies here, people love to quote that Phoenix has a medium household income of say $42,000 but those who have lived there know that is skewed toward the low end, just like median price of homes can be skewed by high or lower priced sales, the actual median in my opinion is closer to $80,000 based on the people I've met, and that means 50% make more.

Not to dispute that I do believe in a world wide bubble. I just don't claim to know when it will end or how.

joey said...

"I from ukraine. Ukraine not weak"

Anonymous said...

$2400 annual income statistic is meaningless. In Ukraine, Russia, Romania, Bulgaria, etc the majority of economic activity is black market, ie not recorded as official income.

This is something Americans can't understand. In the US there is plenty of black market activity too but it's at the margins. In E. Europe it is the norm. Sales tax? Income tax? Accounting standards? Yeah right. Imagine a whole country run Enron style with no oversight. That's how it works over there.

So just like nobody knows for sure what an apartmemt is worth, nobody knows for sure what anyone makes either. Reading any income/property value ratio in Ukraine is about as useful as a David Lereah economic report in the USA.

Anonymous said...

They aren't making any more land! Places like the white hot Chernobyl Estates will never drop in price.

Anonymous said...

For the past 3 years I have been living in Kiev and have seen the real estate craze that has taken place. I personally was lucky enough to buy two units when they were somewhat reasonably priced and to confirm what was said before, the entire deal is done in cash. I don't mean cash as in you wire the 200K to the other bank account, i mean you bring the $200K with you to the notary office in a plastic bag and it gets counted there, as well as checked for counterfeit bills and if everything is ok all the documents get signed and you get the title to the place.

Prices are driven almost entirely by a wealthy group of people who laugh at the idea that average income in ukraine is 2500. The poor, which is most of this country are completely shut out of the real estate market due to the small number of elites.

Ukraine itself loves to portray itself as a very poor country, sometimes even stating they are 2nd or 3rd poorest after Albania and Moldova. In 2001 someone even wrote that ukraine is a 'small african corner' in the middle of europe. This is just a big lie. The country is pretty rich from a number of standpoints. There are oil reservers, vast gas reserves, pretty big tourism industry in the crimea that is not even close to developed, huge coal reserves in donbass area and pretty much every other commodity you can think of. Ukraine being dirt poor is all just words. Just take a look at the average car on the Kiev streets. You can't go more than a few steps without seeing a luxury SUV like a porsche or a benz. Moscow last year was had the highest number of Bentleys sold of any city in the world. Kiev is very close behind. The day they opened a Bentely dealership in Kiev they sold 3 cars in the few couple of hours. There are people here that have so much money they simply dont know what to do with it.

Anonymous said...

The rich Russians from the north used to go the Ukraine to vacation at the Black Sea beaches.

The Chinese stock market has risen about 130% in about 13 months. A bubble formation warning was offered by one writer.

Kalinin said...

I agree with those who talking about corruption as main driver for rising prices. I wouldn't like to mention a "crime" as reason, because there isn't
"real" crime as significant source for real estate investments, like in Brazil, for instance. But a corruption is absolutely true one.

Xoxol said...

The housing boom in Kiev started when banks began giving mortgages to ordinary people. In 1999-2000 it was almost impossible to get a mortgage loan, now practically anybody with steady job and income of $1k per month can get one. Same goes for car loans, btw, hence the car buying boom (waiting time for Honda Civic is more than 9 month!). Ukrainians are inexperienced with loans and still remember hyperinflation of 90s, so they tend to treat loans as "free money". Banks now offer CDs for more than 12% APY just to get enough money to lend - the demand is huge. So not all flats are bought on saved cash - far from it.

It's true that there is no property tax at the moment, but there is no tax deductions for mortgage interest either. Maintenance costs are low, because they are still state-subsidized, but this is coming to the end: new mayor of Kiev just started rolling out new tariffs which are significantly higher. People with modest income, living in inherited 3-4bdrm apartments, may be forced to sell them and move into smaller units just to afford upkeep.
If property tax is introduced on top of this, there will be "money drain" for investors and panic selling may begin...

BP said...

"Why would anyone want to live in Ukraine except if your family was there?"

My answer: Ukraine has some of the most beautiful women to be found anywhere on earth. (Ties with Bratislava and Florianopolis/Sao Paolo).

Any more reason needed?

Anonymous said...

It did crash, and badly...much more stronger than the USA....Apartments now are half the price, but there are still overpriced...