Ukraine’s housing market prospects: up or down?

Ukraine used to have an acute housing problem owing to the lack of effective social policy in the housing sector, aggravated by the low level of housing provision in Ukraine and its relatively high cost. During the past few years, the growth in the volume of housing construction, mainly in large cities and in their suburbs, has made significant adjustments to the market, though. Given the historically high need for housing and a number of existing conditions for growth in this market, there has been significant progress in the development of the housing sector.

Written by Sergii Zapototskyi – UVECON, EECFA Ukraine

Tetris Hall Residential Complex, Kiev. Source: http://tetrishall.com.ua

Housing market situation

Since 2015, the market has grown quite significantly for a number of reasons. First of all, due to the sharp devaluation of the national currency when the best option not to lose one’s money was to purchase a residential real estate. This process accelerated the crisis of the banking system. The lion’s share of the money that Ukrainians paid to developers was taken into banks where they were on deposits with fairly high interest rates. Another problem was providing housing for internal migrants, soldiers and their families, and the like. Customers tended to choose dwellings in new buildings where, when buying, the prices were more acceptable, and when selling, they could stick to their positions. Under such conditions, the housing market began to grow, including the primary one.

More details on Ukrainian housing market trends can be found in the EECFA Forecast Report Ukraine that can be purchased here.

In fact, this growth was driven primarily by the increase in large cities and their suburbs. In Kiev, the year 2013 registered about 130 newly constructed buildings, while in 2015 around 220 residential buildings were built. In 2016, already 290 such buildings were built, whereas at the beginning of 2018 there are more than 330. Within the Kiev region, the figures are somewhat smaller, though the trends are very close. Although five years ago Lviv lacked sufficient new residential buildings and there were only few construction sites, today there are approximately two hundred sites. The situation is similar in Odessa, where there are now almost one hundred and fifty new residential buildings. In Kharkov, there are approximately a hundred new buildings, almost 70 in Dnieper.

Thus, we can observe a growth in construction volumes, and consequently, a rise in the commissioning of housing in these regions. Kiev region remains a leader in housing put into use, accounting for 35% of all housing put into use in this region. This attracts investors due to lower housing prices and the fast transport access to the capital city Kiev. In 2017, the share in Kiev region is 18%, and in Kiev city, another 17%. In the capital city in 2017, only holding company Kyivmiskbud commissioned more than 300 thousand square meters of housing. In 2018, the company plans to put into use at least seven new facilities on around 450 thousand square meters.

The dynamics in housing put into use in Kiev region shows considerable input volumes when compared to other regions. Thus, over the past 10 years, in Kiev region (Kiev city + Kiev agglomeration), 28 million square meters of housing was put into use, which is 28.6% of all housing put into use in Ukraine in the period. It is followed by Lviv region (8%), then Odessa (7.2%) and finally Ivano-Frankivsk (6.2%). Customers in such conditions are becoming pickier and they are seeking some kind of ‘zest’ in the project. We can see an increase in supply and hence a saturation in the housing market.

Housing affordability

Demand for housing is generally influenced by many factors such as political and financial stability in a country, legislation and the development of the mortgage system. Among major factors affecting demand for housing is the income level of the population and the affordability of housing. Housing affordability is what characterizes the ratio of income to housing costs. There are several ways to calculate this indicator. We have used the UN-Habitat methodology to assess housing affordability, indicating the period necessary to purchase housing provided all incomes are savings. This indicator shows the balance of the cost of housing and the income level of the population. The basic indicator in the calculation is a household consisting of three people and a home (apartment) of 54sqm. In our research, income was calculated for three working members of the family. We have calculated this indicator on the basis of income indicators of the population for 2016 and housing indicators at the end of 2016 according to UVECON[1]. The cost of housing was taken based on the average cost per square meter of housing in regional centres.  For Kiev region, such value was established as the average price indicators of the cost of residential units in the satellite cities of Kiev and in the settlements of the Kiev-Svyatoshinsky area.

Housing affordability is one of the highest in Kiev city (5.8 years), despite the high average cost of dwellings. In Kiev region, this indicator is equal to the average Ukrainian value (7.6 years). The lowest housing affordability is in the western regions of Ukraine (Lviv, Chernivtsi, Transcarpathian, Ternopil) and in Donbass. In general, the dynamics indicate a certain increase in housing affordability; for example, the country-wide housing affordability indicator in 2012 barely reached 12 years, while in 2017 it was 7.6 years. For comparison, in countries with a market economy it ranges from 3 to 4 years and in highly developed countries it is 2 to 3.5 years.

Buyers investing in new housing today also include people aged 25-35. According to experts, about half of buyers are young people connected with the IT industry, having the appropriate funds. State programs last year began to revive a bit, but their impact on the housing market is almost non-existent.

Housing market prospects

The Ukrainian housing market is rather saturated. Market experts say that demand for housing has now sharply fallen, evidenced by the frequent loyal offers of builders for buyers and the low volumes of mortgage lending. According to consulting company CDS, in early 2017 housing supply exceeded demand (number of transactions) by 10 times[2]. Independent expert Jaroslav Tsukanova says that supply exceeds demand by 18-20 times[3].

Looking at the housing market prospects in the capital city, the mayor of Kiev, Vitali Klichko, suggested a collapse due to the large number of new residential projects[4]. As per information he published last year, about 60,000 apartments in Kiev from developers are unsold and empty.

At the same time, the director of developer Львовской Мечты (‘Lviv Dream’) says that they have enough buyers and homes are being sold at the level of construction of 4-5 floors, so last year the company was engaged in the construction of completely sold objects[3].

It is extremely difficult to expect growth in housing prices in such conditions. Despite the increase in construction costs caused by a hike in prices for fuel and building materials in 2018 (by 27%) compared to 2017 (according to the Ministry of Regional Development), an increase is not necessarily expected in the cost of housing in the primary market. Although some experts predicted drop in prices (8%-10%) in the primary market, it seems unlikely as within the framework of developed competition, the price level of housing sales has already reached a practical minimum. At the same time, falling prices in the secondary market are highly likely in the current situation.

The most likely scenario in the housing market in the current situation of overheating is a gradual deceleration. A sudden market collapse is unlikely. Gradually, market saturation will realize and a sharp growth in demand should not be expected.

Detailed housing market forecast on Ukraine is available in the EECFA Forecast Report Ukraine that can be purchased here.

In this situation, one can assume the more supportive measures for the market by the state and local authorities through increasing the effectiveness of mortgage programs, eliminating additional administrative barriers in housing construction, in particular those for obtaining permits, cheaper credit resources for the construction industry, reduced costs for land acquisition, reduced fees for connection to utility networks, infrastructure development of plots, and so on.

Such circumstances will require developers to make decisions to preserve demand. One should expect non-price benefits such as energy-efficient technologies, interesting infrastructure solutions in adjacent areas and public spaces, and obtaining additional bonuses, among others. Investors can only predict more favourable conditions for investments in residential real estates.

Sources:

[1] Official website of UVECON/ Geoportal: https: //www.uvecon.ua/ru/geoportal.html

[2] Official website of City Development Solutions: http://cdg.com.ua/ru/about/

[3] Prospects of the real estate market in 2018: the square meter will rise in price: https://dyvys.info/2018/02/12/perspektyvy-rynku-neruhomosti-2018-chy-podorozhchaye-kvadratnyj-metr/

[4] Website of kyiv.depo: https://kyiv.depo.ua/ukr/kyiv/klichka-zayaviv-scho-u-misti-gulyayut-60-tis-kvartir-20171103669961

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