2 posts tagged

Real Estate

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?

Theory

The housing market can’t be shorted. It is an advantage over the stock market. That means you can’t 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’t 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’t be drafted by the law.

Due to the risk, that a person will be drafted and won’t 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.

2022   alternative investment   english   Real Estate   Russia

Why high mortgage rate is dangerous

If the mortgage rate is high, more people would prefer renting apartments instead of buying a house. That drives rent prices up. The problem is that due to the high inflation, the price of a house also rises.

The price for housing also rises when the mortgage rate is low. Then it is much easier to take 30-year long mortgage and get your own housing instead of paying expensive rent and getting nothing at the end of the rent term. Then more people will buy a house with a mortgage. With higher demand comes higher price. So the price for housing rises.

Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, September 13, 2022.

In some countries, government incentivises taking a mortgage. Military servants usually get lower mortgage rates. In UK if a person above 18 buys his first house for less than 500k$, he pays only half of a house price. In Netherlands, government insures mortgages, meaning, if a person is insolvent to pay for a mortgage, government will buy a house from a bank, and return money from mortgage payments to a person. The government will also give a discounted rent for a person (I will check this information, I can be mistaken). Therefore the prices for a condo in Amsterdam tripled (if i don’t mistaken). All of these incentives drive prices for housing up.

Real estate market has a¬†huge problem¬†‚Äď it is hard for¬†prices to¬†fall. Not¬†only because of¬†scarcity of¬†land, higher price for¬†materials and¬†labor costs. There are no¬†market mechanisms to¬†make prices fall. In¬†the¬†stock market, it is possible to¬†short stocks¬†‚Äď sell the¬†stock that you don‚Äôt own, and¬†buy it back when price falls, making the¬†profit in¬†the¬†difference. Short selling works with stocks, because the¬†stocks of¬†one company are identical, their value is always the¬†same.

It is not possible to find 2 exactly the same houses, even Soviet flats have different views, neighbors, and house condition. Therefore, short is not really possible.

To¬†lower the¬†housing price, either the¬†place should loose the¬†attractiveness or¬†the¬†new technologies should make housing cheaper. That what happens in¬†the¬†US market. New housing for¬†the¬†mid-class household became simplier and¬†smaller than before. Remember the¬†housing in¬†Manhattan and¬†Brooklyn of¬†20th century¬†‚Äď the¬†red brick houses with fire stairways on¬†the¬†fa√ßade. Compare their quality and¬†design with new housing: the¬†cheap coloured ventilated panels with studio apartments.

How 9/11 affected housing prices

The example of attractiveness loss was on 9/11. Based on the Federal Reserve Bank of New York, most of the employees who worked nearby moved to other parts of New York City or New Jersey. The rent prices for an office in Manhattan dropped from 52.5$ to 50.75$ per square foot. By November 2001, 57 million square feet near Trade Center were traded on market just for 41.81$ (Pearson, Macroeconomics, page 54). but that happened with offices. What about the households?

More people started to buy one-family houses near New York. The prices went up 10-15% comparing with previous year. Even thought, the average price of one-family house in the US has fallen.

Mortgage crisis

After looking at the graph, we see that there was only one fall of housing in the Mortgage crisis of 2008-2009. The crisis basically happened, because banks gave too much mortgages to people, who had a huge risk to become insolvent.

Thousands of¬†people couldn‚Äôt pay off the¬†debts. Their houses were put for¬†a¬†sale. The¬†supply of¬†houses was so high, that the¬†prices went down. Construction companies stopped building houses, just because there were not¬†too much people who could afford houses and¬†not¬†so much banks would give mortgages. For¬†construction companies it is very bad¬†‚Äď they should sell nearly 70% of¬†housing as¬†fast as¬†possible to¬†pay off the¬†debts. Therefore, a¬†lot of¬†companies became bankrupt and¬†ceased the¬†construction of¬†objects.

Such situation lasts till the supply is covered by demand. Meaning that prices fall to a fair price. When it is happened, the construction continues.

2022   english   Finance   Real Estate