One should not expect property prices to fall

Victoria Bereshchak

Real estate market columnist

The question "What is happening with the housing prices?" never loses its popularity, but constantly causes spirited discussions at the time of difficult economic situations, as it is now.

Some predict further significant price increases for the housing market, while others, on the contrary, shout about the impending apocalypse, fall, and collapse. The truth, as usual, has to be sought independently, analyzing macroeconomic and general market factors.

In short: prices will continue to rise, but there are a number of constraints and risks.

What is happening to real estate prices

Since the beginning of 2021, the average cost per square meter of housing in the residential complex in Kyiv has grown by 17% in hryvnia and by 23.5% in dollars. And the price rise in hryvnia since the beginning of the pandemic is even more significant—30%, despite several months of spring-summer stagnation in 2020, when the market was idle without a buyer.

In the wake of the rise in weighted average prices, dumps appear in the media space from time to time about the next soap bubble on the Ukrainian housing market, that is about to burst.

I hasten to disappoint: nothing will burst. Taking into account the news on the world commodity markets and inflation forecasts, we are in for a further rise in prime costs.

The key factors behind the square meter price rise in the residential real estate market in Ukraine in 2021 were the growing cost price, price rally in world markets, and accelerating inflation in annual terms in Ukraine.

Let me recall that in the first half of the year, the prime cost went beyond the target range, and this deviation was much higher than the expected one. And already in July 2021, we saw the figure at the level of 10.2%.

The growing investment demand, which remains in the comfort+ and business class segments to this day, was also an important factor behind the acceleration of price rise. In the overall structure of demand, this indicator has grown by 20% since the beginning of the year. It was this factor that caused a significant difference in prices in the primary market.

If the total market value of a square meter has increased over this period by 17%, then in the comfort+ segment the average growth meridian has already reached 20-22%, and in the business class—about 24%.

The degree of construction readiness also impacts the difference in price: liquid complexes with a high level of effective demand have a noticeably higher level of dynamics on the site. Moving to a new stage in the development cycle is a legitimate way to raise the price.

What will happen to real estate prices prices in Ukraine: Forecast

In the Q4, the rise in real estate prices in Ukraine will continue, the increase in the cost of building materials will continue to boost prices.

There are two main reasons for active growth: high inflation (both in the country and in the world), as well as the consequences of the coronavirus reality related to disruptions in supply chains.

Metal, mineral wool insulation, window profiles, and engineering systems are growing intensely in price. Aligning with the metal, all metal-dependent components of construction are becoming more expensive: elevator equipment, pipes, doors, etc.

The increase in the cement price also puts pressure on the concrete cost—one of the main building materials.

Since the beginning of 2021, the growth in prices for building materials averaged 15-30%, prices for certain items have increased by 1.5-2 times.

It is likely that prices will rise by another 10-15% by January. And then a slight lull awaits us, if the level of effective demand decreases slightly.

The main risks for the construction market in Ukraine

Effective demand exhaustion. The real incomes of Ukrainians are once again headed for a decline, and that is somewhat worrisome. The mortgage has not yet become that powerful locomotive that would take up the industry and level the situation. The effective demand slowdown can hit the market, including impacting on the number of projects to be taken into use, and on the pace of construction.

Bill 5600 that involves VAT on the first delivery of housing. Adoption in such a version immediately implies a 20% increase in the cost of a square meter, and taking into account all the costs and the need to earn, +25% can fall on the shoulders of the end consumer, in addition to the prime cost increase that we have already discussed. This is where a lot of risk factors come from: a decrease in the level of demand, a decline in the share of investment transactions in the overall structure, a drop in the construction multiplier, an increase in the cost for a housing buyer, etc.

General market problems. These include the reform in the field of urban planning policy, including the liquidation of the State Architectural and Construction Inspectorate (SACI) and the establishment of of the State Inspectorate of Urban Planning (SIUP), the successful full launch of issuing building permits and operational readiness certificates in the electronic system, the issue of protecting the rights of investors and many other profound issues that directly affect the functioning of the building market. It is impossible to move forward without solving them.