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Secret becomes clear

01.11.2010
Author: Anna Shekhova
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In the light of the financial crisis as a magnifying glass, the real estate market began to be seen and previously unnoticed problems hidden and dignity.
Despite the fact that real estate is traditionally considered a conservative asset, the last two years have shown that the risks here are also quite high. Especially if you play for a price increase and invest in deliberately speculative markets. The global financial crisis has shown what happens when price increases go beyond economically justified limits. "If the growth in real estate prices exceeds 10% per year, the market becomes unstable and is considered high–risk," comments Igor Indriksons, head of the Department of investments in foreign real estate at IntermarkSavills.
Indeed, markets that have been growing moderately for many years are now declining just as moderately or remaining stable. France, Greece, Portugal, Finland, Croatia – in these countries, the crisis did not cause either panic or collapse – because the market was not inflated earlier. The United Kingdom, Spain, Montenegro, and Bulgaria, which had previously been growing rapidly, suffered much more significantly, and Dubai, the growth record holder, set new records – this time with the prefix "anti". There is an exception that confirms the rule – Cyprus, but its current stability is by no means a miracle.

The bubble that burst
In Dubai, prices have been increasing by 20-30% annually for several years, and even more for individual facilities. The market swelled solely on speculative demand: real estate was bought by investors and resold to investors. As soon as the price increase stopped, the chain ended: there were no people willing to buy fabulously expensive villas and apartments. Sober-minded investors hastily left the market. According to the Global Property Guide portal, the price drop at the end of the second quarter of 2009 was about 50%.
The crisis also confirmed another investment truth: the larger the object, the more difficult it is to sell it. In the same Dubai, the main blow fell on large houses. Ordinary apartments suffered less damage. "They are still easier to sell and rent - unlike the same villas," explains Igor Indriksons.
Similar speculative bubbles, albeit of a smaller size, were inflated in other markets during the pre–crisis years, for example, in the Baltic countries and Montenegro. "In Montenegro, at some point it became obvious to the local population that real estate is a gold mine. Many abandoned their previous business and switched to construction. That is, the market is flooded with non-professionals in pursuit of easy money. Everyone built it, who is good at what," says Ruslan Gavrilov, president of the Runiga group of companies.
Due to high demand, housing prices in the coastal areas of Montenegro soared very quickly and very high – by the beginning of the crisis they were comparable to Spanish and Italian ones. There were incomparably more problems and risks: many new complexes began to advertise and sell without having a construction permit yet, and the quality of most new buildings still left much to be desired.
"The market was obviously overheated. Moreover, it is clear that the quality of this property was not worth the money that was asked for it," says Marina Vasilyeva, Director of the Foreign real estate Department of Advex – Real Estate Corporation. The crisis cut prices almost twice and, according to professionals, brought them in line with quality.

Uncontrolled volumes
The main advantage of the growing real estate markets is their main problems. The higher the demand for housing, the more it is being built and the faster prices are rising. The higher the price increase, the higher the demand and, accordingly, the volume of construction. And unlimited construction volumes are a time bomb.
It exploded at once in several regions experiencing an investment boom, and mainly in resort countries that were actively developed by foreign investors – Spain, Bulgaria, Montenegro, Thailand.
In these markets, the authorities, as a rule, did not restrain construction, and sometimes, on the contrary, actively encouraged it. As a result, when demand fell, there was a lot of unclaimed housing.
The most significant is the tragedy of the Spanish resort market, which, according to Igor Indriksons, was overstocked five years ago.
"The first alarm signal for investors long before the crisis should have been information about the huge volume of housing under construction, which was both built and purchased with bank money. Now the system has failed, so prices have fallen almost three times in some places, and the liquidity of real estate has sharply decreased," says Yulia Titova, head of the foreign real estate department at BEST–Real Estate.
A similar situation developed in Bulgaria, where there were no restrictions on building. When the investment flow subsided, the numerous supply of Bulgarian housing remained in little demand.
According to Igor Indriksons, the problem of Spain, Bulgaria and Montenegro is that the state did not control the issuance of construction permits, did not make econometric forecasts of tourist flows, etc. "For example, in France they simply will not give permission to build an object in the resort area until future flows of tourists, income, taxes are calculated", – he explains.
In a number of regions, developers conducted projects with loan money, hoping to repay debts by selling objects. Sales stopped, banks took away unfinished houses – and the main victims were home buyers on "frozen" construction sites. "The most important thing is that from a legal point of view, everything is absolutely legitimate. Even if the buyer had given the documents to a lawyer for verification before making the transaction, he would not have found anything illegal. But now these people have real problems.: they will lose their apartments and money," says Igor Indriksons.
According to him, such situations have developed at many facilities in Bulgaria, Tunisia, and Thailand.

Accessibility as a problem
It would seem that housing affordability is a goal to strive for, and one of the main government tasks. However, the crisis has shown that one of the main evils for the market is the artificially created accessibility of real estate. In particular, by actively stimulating the mortgage market.
Mortgage markets in most countries can be divided into two categories: those where banks use securitization (issuance and sale of mortgage-backed securities) when issuing loans, and those where they issue loans using only their own funds. The scheme of "securitized" mortgages, which makes it possible to reduce the cost of loans, turned out to be the most fragile: banks faced financial problems and were forced to curtail customer financing. This happened in the USA, Spain, and England.
"The Spanish market was based on mortgages. Thanks to the low interest rate on loans, many people – both Spaniards and foreigners themselves – were able to buy housing. Now banks have curtailed this opportunity, and demand has come to naught," says Marina Vasilyeva.
In the UK, according to Igor Indriksons, demand has increased by 50% since the beginning of the crisis. At the same time, prices have fallen. People's need for housing has not disappeared anywhere, simply because they cannot take out a loan, they cannot make purchases.
Affordable loans caused a boom in Latvia and Estonia: up to 50% of the GDP of these countries was accounted for by the construction sector. In preparation for the transition to the euro and trying to curb inflation, the authorities tried to take control of the issuance of mortgage loans. And Latvia also introduced a large tax on the rapid resale of real estate. As a result, housing has rapidly fallen in price.
In Cyprus, mortgages were carried out mainly according to a different scheme – at the banks' own expense. Therefore, like the Scandinavian countries, Austria and Switzerland, Cyprus has demonstrated relative stability.
In Turkey, the mortgage system did not have time to gain momentum at all – and, despite the general economic downturn, the local real estate market has resisted.

Escape to stability
The markets where it is not so easy to buy real estate have demonstrated the greatest stability among the crisis vicissitudes. The examples of Germany, Austria and Switzerland are typical.
In the list of European countries, Switzerland ranks last in terms of the number of people living in their own homes. Germany is the penultimate. According to Igor Indriksons, only 43% of the population owns housing here. Most of them rent. This situation has developed over the past two decades, as a result of a large market drop in the early 90s. In addition, in Germany, the property tax is one of the highest in Europe, as a result, the Germans found themselves in a situation where it is more profitable to rent a house than to buy.
"There has been no large-scale speculation in the German real estate market in recent years, and real estate prices have only fluctuated insignificantly. The conservative legislative framework in Germany minimizes the number of direct speculative transactions: they are simply unprofitable," says Natalia Bobrova, Director of Development at +7 Realty.
Due to low demand, construction was also limited - as a result, there was a shortage of affordable homes. "In general, in Germany since 2000, the volume of housing construction has almost halved, and the demand for square meters is increasing," the expert notes.
Against the background of declining confidence in banking products and stock market instruments, the stability of the real estate market in Germany, Switzerland and Austria, which has never generated large revenues, turned out to be very attractive.
In addition to the well-known German and Swiss markets, new regions that had not been appreciated before attracted the attention of buyers. For example, Italian Calabria has long been in the shadow of the famous Tuscany and Liguria. "Calabria is an example of "cheap" Italy for buyers. At the same time, the natural characteristicsthe region is no worse than Tuscany. And the prices are significantly lower. Therefore, now people are ready to buy here, even despite the lack of well–developed infrastructure, as in more popular Italian resorts," explains Ruslan Gavrilov.
However, despite the fact that the crisis has placed new emphasis on the map of Europe, it has not revealed any fundamental things. Investors still have the same set of cards in their hands: the amount or size of the investment, the term of the investment and the risk assessment. "If a buyer has an amount in the range of 100,000 euros, then he still cannot enter the market for expensive stability," says Yulia Titova and again cites Germany and Scandinavia as an example, where tax and legislative nuances are now restraining demand as before.

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