Ukraine: Price History

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The Ukraine property boom ends abruptly

Ukraine's house price boom has suddenly stopped. Prices decreased by around 5-8% during the second quarter of 2007, in the used dwelling market. The new apartment market was more vibrant, with a small increase in prices of around 5% in the second quarter.

The past year saw house price rises in Kiev (pop. 2.6 million) of around 70%, following rises of 65% in 2005, according to Kiev real estate agents In Real.

These extraordinary price rises followed 30% price growth in 2004, and 35% price increases in 2003.

Ukraine is an interesting case. Like many of the countries experiencing substantial house price rises, it has no official house price statistics. Two local real estate agents occasionally provide numbers - In Real, and Teren Plus. In addition the Global Property Guide surveys house prices. But the lack of official statistics mean that Ukraine's house price increases rarely figure in those European house-price rise league tables, so loved by the press.

According to our numbers (January 2007), square metre prices in central Kiev range from €2,588 to €3,304. Larger apartments are somewhat pricier. Gross rental yields are healthy, ranging from 7.50% to 10.23%. Smaller rental units produce better returns than large units, as normal in most countries.

Inflationary pressure

The official inflation rate for 2006 was only around 9% (IMF statistics) or 10% (National Bank of Ukraine statistics to March 2007). However, this disguises very large price increases in rent, water, electric power, gas and other fuel types (74.4% annual price rises for the category as a whole, according to the Bulletin of the National Bank). Rent was the fastest-growing category January-March, up 17.6% over three months (longer time-series are not available for the categories).

Ukraine, in other words, has been experiencing high inflation in the non-traded goods sectors, while traded goods such as food have showed almost no inflationary pressure.

Why? The explanation is simple. The hryvnia was introduced in 1996 and initially steeply declined against the US$. But during the past five years the currency has been a tightly managed float at H5.5 to H5 to the US$. When currency stabilization first occured, the hryvnia was heavily undervalued in real terms against the US$ (IMF Country Report No 07/50, 2007, P14).

The result has been a very strong current account surplus and generally strong economic growth, in the context of a fixed peg, which has led to substantial non-traded goods inflation.

Real interest rates (currently around 14% on overdrafts) are well below this non-traded goods inflation, adding fuel to the fire. This has led to a domestic credit boom. Real credit growth has been about 40% annually since 2001. At the same time, corporates and banks have borrowed heavily abroad. Household sector debt, mostly in foreign currency, has also surged over the past 18 months, albeit from a low level. The situation has been exacerbated by the liberalization of the financial sector and by an influx of foreign banks, eager to acquire customers.

Ukraine's current account has now switched from large surpluses (10.5% of GDP in 2004) into mild deficit (1% of GDP in 2006). Capital inflows, FDI in particular, have however been buoyant, reflecting improved perceptions of Ukraine as an investment location. Thus foreign-exchange reserves have more than doubled since end-2004 to about 4½ months of imports, and are projected to exceed the level of short-term external debt at end-2006. This will mitigate external vulnerabilities.

Future trouble

Nevertheless the future is potentially troubling. Domestic demand is booming, while export volumes are slumping. Corporates' overall debts already exceed levels in more advanced economies. The majority of loans are denominated in foreign currency, thus raising banks' indirect foreign-exchange risk. While these are mitigated by the influx of foreign banks, these same banks could fuel even higher foreign borrowing.

Note that structural reform is only occurring at a snail's pace in Ukraine. This is still a state-dominated economy, where permits, connections and bribes rule.

GDP increased 7% y-o-y to March 2007, responding particularly to strong investment spending. This compares to the nose-dive to 4% GDP growth in 2006 and 5.2% in 2005 (the result of the tensions with Russia) after 11.8% growth in 2004. Manufacturing and construction have been particularly strong sectors this year, and the economy weathered the 65% hike in the price of imported gas in early-2006 as well, plus the long political wrangling which followed the parliamentary elections of March 2006. Central government deficits have been reasonable, at around 3% for 2006.

Connections and bribes

There is clearly a speculative element in recent property price rises, which, till this latest quarter, were rising at an average rate of 5% per month (see the discussion in Kiev Weekly), but there are other factors too.

Ukraine is still a semi-socialist country. The construction market in large cities is divided between two to three companies, whose management is directly linked with the local authorities. For example, nearly 70% of the new residential buildings in the capital are built by companies that belong to the KyivMiskBud holding company in which the Kyiv City State Administration has a large stake, and the same phenomenon is observed in other cities.

So those having direct ties to high ranking officials and who are prepared to pay large bribes come out as winners in land allocation, allowing construction companies to acquire land plots for construction. There are few builders, and at the moment, demand largely exceeds supply, and so there is a seller's market. In the primary residential segment of the market in 2005 the volumes grew by only 7.5% and amounted to 1130 million sq. m., according to In Real. In 2006 primary residential market volumes hardly increased.

Protection from inflation

The hyped up demand for real estate has been partly caused by people's desire to protect their savings from inflation by investing them, and the absence of alternative ways of saving and multiplying money in Ukraine. Another factor has been the development of the home mortgage lending, which has been growing very rapidly.

The rapid increase in prices of real estate in Kiev has stimulated the construction of houses surrounding Kiev. Starting from the year 2000 there were a couple of "cottage towns" built near Kiev, mostly in the Koncha Zaspa area, which is close to the Dnepr River.

Over the next two years another 15 cottage towns around Kiev are planned, with a total area of 200 thousand sq. m. The prices for houses in cottage towns are from US$800 to US$2,000 per sq. m. including the price of the land plot. There are average houses costing from US$175,000 to US$250,000, but also elite houses costing from US$700 000 to US$ 2,500,000 (The average construction cost for these houses is from US$400 to US$600 per sq. m., depending on the materials used, according to InReal).

It is hard to forecast what will happen next on the residential property market:

• GDP growth is strong - positive for the market
• Yields are strong - positive for the market
• BUT prices are very high by the standards of Ukraine - negative for the market

Ukraine - more data and information

• Ukraine's house prices, rents, and letting income - real data!
• How expensive are houses in Ukraine, compared to the rest of Europe?
• How much rent can be earned from Ukraine's property, compared to the rest of Europe?

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