Housing boom or a new spectrum of speculation; when will flats become cheaper?

Lia Pitiurishvili. Candidate of Economic Sciences, Ambrosi Grishikashvili, Candidate of Economic Sciences

Over the recent period, prices of flats have risen sharply in all transitional economy countries, including Georgia. The price increase affected one-room, two-room, three-room apartments as well as commercial spaces and carcasses.

For instance, if in January 2002 the rent of 1m2 of commercial space made up 200 USD (Saburtalo district), in January 2006 it reached the level of 1500 USD; during the mentioned period the price of commercial space increased 5 fold. The price and rent of living space is rising at similar rates:

During the same period the cost of dwelling houses’ carcasses (1m2) has risen as well – from 200 USD to 700 USD.
For instance, on 1 January 2006 the average price of a one-room flat in Saburtalo district made up 28 thousand USD, that of a three-room one – 55 thousand USD. A similar flat price increase is observed in other districts of Tbilisi as well (see Chart1).
Flat price increase in Georgia is stipulated by different reasons, and we shall consider several of them.
For instance, the first reason is that Georgia receives considerablle incomes in the form of money transfers from abroad. Money is sent by approximately 200-300 thousand emmigrants (the annual volume of the sums received by means of bank channels reaches 300 million USD, while, according to various inofficial calculations, i makes up about 1 billion USD), a certain part of which is spent on purchasing of real estate. Besides, in the recent period there has been a serious competition between house-building companies; rising of the price of 1m2 of carcass contributes to considerable rising in price of secondhand flats.
The development of house-building and flat price increase are also caused by rising in the cost of construction materials and builders’ work;
Another circumstance is also noteworthy in this aspect: as it is known, the hypothec system should contribute to meeting the population’s requirements in housing. In the recent period the volume of this kind of loans has considerably increased in the country. At the same time, as it can be seen, this kind of loans, on the one hand, help pepole to buy flats, but on the other one – cause the increse of flat prices.
In particular, after the beginning of the construction boom in Georgia in the recent period, the hypothc loan, granted by banks for construction, purchasing or repairing of flats, has become especially relevant (the annual interest rate on the loan is 14%, while the hypothec loan of „Bank of Georgia“ – „Hypo +“, 10,5%), which promotes further increasing of prices. A certain part of the population can afford this kind of loans, though we should point out that with such a catastrophic price increse it is impossible for a family with mean incomes to get it. It turns out that purchasing of a flat has become a dream for an ordinary Tbilisian. There is a similar situation in other big cities as well: Kutaisi, Batumi, Telavi, etc.
Chart !1

Rising in price of flats takes place not only in Georgia…
As it can be seen from the materials discovered by us, rising in price of flats takes place almost in the whole of the world (with some exceptions). For instance, the price of 1m2 of living space in the capital of Poland – Warsaw makes up 2500 USD. Here flat prices are rising at astronomic speed. For instance, in January 2006 the price of 1m2 of living space in Warsaw made up 1570 USD, while in June – 1899 USD. During the same period the price of 1m2 of living space in Krakow increased from 1355 USD to 1670 USD. Flat prices were rising at the same rate in Vrozlav, Gdansk, Poznan and other large cities.
This kind of price increase shows us that if, for instance, in June 2006 a buyer had to pay 17,5 thousand USD more for a 55 m2 flat in Warsaw or Krakow than at the end of the last year.
According to Polish experts, the reason for the increase in flat prices is the fear that they will rise still more in the future. This atmosphere of fear is aggravated by the mass-media, which regularly announces that the prices will allegedly rise still more in the future.
In this situation the total volume of hypothec credits is increasing at high rates as well. For instance, according to the statement of the Association of Polish Banks, in May 2006 the country’s banks granted the sum equivalent to 4 billion 63 million USD, which by almost 50% exceeds the volume of credits granted during the corresponding period of the last year.
It is true that the hypothec credit contributes to flat price increase in Poland, but it gradually becomes cheaper. For instance, if 6 years ago the country’s citizen had taken 120 thousand zlotys from a bank (1 USD is approximately equal to 3.2 zlotys) for 25 years, he would have to pay 2,5 thousand zlotys monthly as interest. It is clear that this kind of credits were taken rarely. Now, in case of taking 120 thousand zlotys, a borrower monthly pays maximum . . . 900 zlotys. And this takes place when, during the same period, the average wage has increased almost 4 fold. Granting of the credit in the amount of 100% of the property’s cost has become popular in Poland. If a year ago ¼ of Warsawians took such credits, now this figure has increased to 1/3.
On account of all the aforementioned, now purchasing of a flat by means of a credit has become very widespread in Poland, with the purpose of its subsequent more profitable selling. Almost every fifth of flat buyers purchases it in order to rent it out and have a source of a regular income.
Foreigners also have an effect on the increase of flat prices in Poland. It becomes clear from the corresponding calculations that one tenth of the flats being built in large Polish cities (especially in their centers) is financed Britishers, Irishmen and Spaniards. The latter purchase especially the flats that they will then profitably sell or rent out. According to the builders, up to 80% (!) of flats located in the centers of Polish cities already belong to foreigners.
The circumstance that the demand for flats in Poland is far greater than the supply is also pushing up prices. In particular, in the first half of 2006 up to 50 thousand new flats were commissioned, which is equal to the indicator of the whole last year.
These circumstances contribute to the fact that people have to wait for flats, and this period is growing. In particular, if two years ago a person had to wait 197 days in order to get a flat, now this period has increased to 370 days. In Krakow this waiting period has increased from 169 to 500 days.
Rising in price of construction lands (for instance, over the last year the price the land price in Warsaw increased by . . . 60%), construction materials as well as the necessity to increase renumeration of builder’s labor, etc pushes up flat prices in Poland. It is known that especially in the past years a lot of Polish builders left their homeland and went abroad in search of high incomes. For this reason construction firms have to attract builders that stayed in the country by high wages.
The high margin of construction companies is also pushing up flat prices. Today the average margin of construction firms makes up 20-25%, but if they purchased construction land years ago, it can reach 100%.
According to the calculations of some experts, the changes in real estate prices are characterised by ten-year cycles. It happened so, for instance, in Great Britain and Spain. They are characterized by average annual growth in the amount of 3% (with the deduction of inflation).
In such conditions some countries try to make it easier for those in need of a flat to purchase it by means of credits. For instance, if in Poland, under usual conitions a person can get a hypothec loan at 5%, the state helps him and gives an opportunity of getting the same credit at 1,9%.
Real estate prices are rising at high rates in other countries of Central and Eastern Eurpope as well. Here these rates will be retained for at least 10 years. Price increase in the mentioned region was caused, one the one hand, by these countries’ entry into the EU on 1 May 2004, and on the other – by going of many young people from these countries to Western Europe. As the reviewers point out, the main purpose of their going to Western Europe is saving up money in order to purchase a flat after their return to their homeland.
The situation in Russia is almost the same
Flat prices have increased in Moscow as well. In the first quarter of 2006 flats rose in price by 50%. In particular, if in October 2005 the price of 1m2 of living space here made up only 2 thousand USD, at the beginning of this year’s July it rose to 3500 USD. Even from this fact it can be seen that Moscow is one of the most expensive cities in the world.
It is noteworthy that in conditions of such high prices, a part of the started constructions (about 30%) were temporarily closed down in view of the further increse of prices. It is clear that this is also pushing up flat prices. As a result, the demand on the real estate market exceeds the supply by 2,5 times.
In May of this year money investment in real estate in Russia was 10 times more profitable than in bank long-term deposit.
Russian hypothec is characterized by a large initial payment (for instance, almost a third of a flat’s cost), short period (return of the remaining sum during 5-10 years), high interest rate (almost 20% tax on credit) and all this takes place when average wage in Russia makes up 600 USD.
Real estate prices have risen in Europe as well; in large French cities they start from 10 000 Euro, not mention the coast from Cannes to Nice. A similar situation is in Italian coastal and large cities.
In view of big fluctuations of oil and gold prices, investors are investing more in real estate. Half of Parisian flats are closed since it does not suit investors to rent them out, they are rising in price all the same. A similar situation is in Georgia – flats are bought and sold, money investments in the houses that are under construction have become a customary and profitable business for Tbilisians, and this is the reason for rising of prices. On the other hand, the volume of the bank hypothec credit has increased, which has made flats more available and changed the mechanism of purchasing. In 2007 flat prices will stop growing and from 2008 they will slightly begin to come down, except for historical places and super elite houses. Currently the profit rate in this sphere is fluctuating between 60 and 150%.
Thus, as we can see, both in Georgia and other countries price increase is influenced by different factors, which cannot be avoided in the present globalization and integration conditions