Crash of¬†Russian housing sector
After the¬†mobilization at¬†the¬†end of¬†October, housing luxury prices dropped 40%. Prices stabilized at¬†the¬†15% discount compared to¬†August 2022. Why did it happen and¬†what to¬†expect in¬†the¬†future?
The¬†housing market can‚Äôt be shorted. It is an¬†advantage over the¬†stock market. That means you can‚Äôt borrow a¬†house, sell a¬†house and¬†buy it back when the¬†price for¬†this house falls. The¬†problem is that all houses are unique, and¬†the¬†lender expects to¬†get back the¬†same house. The¬†person to¬†whom you sold a¬†house will not¬†sell you a¬†house cheaper than you borrowed it.
The¬†lender may give a¬†set of¬†houses that he will accept from a¬†borrower. Usually, such houses are better than borrowed ones. Such practice is not¬†popular due to¬†the¬†complexity and¬†does not¬†affect the¬†housing market the¬†same way as¬†stocks shorted by¬†institutions for¬†trillions of¬†dollars affect the¬†stock market.
Low liquidity of¬†housing. Stocks are sold fast with a¬†low spread between ask and¬†bid prices. This is because all stocks of¬†a¬†company are the¬†same, information is open, and¬†the¬†stock price is affordable. Also, buying stocks requires a¬†low commission, and¬†the¬†contract is created automatically (in¬†reality it is not¬†so easy and¬†you don‚Äôt own shares when buying stocks through a¬†broker, but¬†it is a¬†long irrelevant story).
Buying a¬†house is a¬†long process of¬†finding the¬†right prices by¬†analyzing hundreds of¬†parameters, negotiating, and¬†signing documents with help of¬†a¬†realtor and¬†a¬†lawyer.
To¬†sell a¬†house immediately, seller agrees to¬†sell a¬†house for¬†the¬†bid price, and¬†to¬†buy it, the¬†buyer pays the¬†ask price without negotiations. The¬†spread may be huge, moreover, if too many people sell a¬†house, sellers give huge discounts.
What happened when mobilization started
300k people were drafted in¬†one week. After the¬†announcement of¬†the¬†mobilization, people had three days to¬†leave the¬†country not¬†to¬†be drafted. Plane ticket prices raised from an¬†average of¬†300$ to¬†5000$. The¬†last tickets were sold for¬†15000$ in¬†the¬†economy class. (at¬†that time I was also leaving the¬†country, but¬†I am an¬†EU resident and¬†I paid nearly 500$ to¬†get to¬†Austria by¬†carpooling, plane and¬†bus).
People were scared to¬†get back to¬†Russia. Leavers sold everything they had. They sold houses in¬†one day in¬†exchange for¬†foreign cash. Sellers gave a¬†40% discount, which was incredible¬†‚Äď a¬†luxury house for¬†a¬†price of¬†an¬†economy-class house. Tip: in¬†crisis keep cash to¬†make the¬†best deals.
When all leavers left, the¬†housing prices went up, because there is no¬†need to¬†sell the¬†house fast anymore. That is why the¬†prices bounced. Moreover, the¬†demand for¬†housing dropped, because those who needed a¬†house already bought it, or¬†took a¬†mortgage if it was applicable. Some people who wanted to¬†buy housing may be decided to¬†keep the¬†money in¬†foreign currency to¬†be ready to¬†flee. That is one of¬†the¬†reasons, why the¬†US dollar costs 67 rubbles in¬†cash and¬†only 57 rubles on¬†market (because it is not¬†possible to¬†withdraw money from a¬†bank account, except for¬†SWIFT).
Why prices will continue dropping
There are two reasons for¬†that: Mortgage restrictions and¬†uncertainty. Since the¬†start of¬†the¬†mobilization, the¬†banks stopped giving mortgages to¬†males, except for¬†programmers, who have a¬†right to¬†a¬†2% mortgage by¬†law. Programmers can‚Äôt be drafted by¬†the¬†law.
Due to¬†the¬†risk, that a¬†person will be drafted and¬†won‚Äôt be able to¬†pay for¬†a¬†mortgage, banks are not¬†ready to¬†provide the¬†mortgage.
Also, the¬†credits and¬†mortgages, that were taken before the¬†militarisation on¬†the¬†21st of¬†September, will be automatically discarded if a¬†person dies. That means, the¬†family will keep a¬†house without liabilities, and¬†banks will get huge losses. As¬†for¬†now, the¬†government will not¬†support banks with money and¬†will not¬†compensate for¬†losses. Small banks are f*cked (benefit for¬†big banks).
Eventually, mortgage rates will increase, fewer people would like to¬†take mortgages, and¬†the¬†demand for¬†houses will also fall.
Signal to¬†fall now
40% of¬†newly built houses is not¬†sold. It is bad for¬†construction companies¬†‚Äď they should pay off the¬†credits asap, but¬†if there are not¬†enough customers, the¬†manager has 2 variants¬†‚Äď sell now cheap and¬†close the¬†credit or¬†keep a¬†small debt, or¬†wait till the¬†best times and¬†pay a¬†lot for¬†a¬†debt. Sometimes firms wait too long and¬†become bankrupt. The¬†banks notice such a¬†situation and¬†increase the¬†credit rates for¬†companies.
The¬†companies stop building new housing if the¬†credit rates are high and¬†the¬†demand is low. Some companies freeze construction. It helps to¬†meet supply and¬†demand, and¬†stabilize prices. If there is no¬†risk of¬†losing the¬†attractiveness of¬†a¬†neighborhood or¬†a¬†city itself, it is the¬†best time to¬†buy housing. However, in¬†times of¬†events like a¬†war, the¬†risk is uncountable and¬†the¬†price may fall even higher.