In the United Arab Emirates, yet-to-be-built real estate was massively sold
Main sign: abnormal price growth
According to experts surveyed by Metrinfo.ru, the term "bubble" is not officially recognized by economics. It is specialist slang, but it has already penetrated the media and is more or less understandable to ordinary people. The main sign is an overheated market where prices are rising too quickly.
Here, naturally, questions arise: what is "too" fast? How to distinguish, figuratively speaking, a healthy flush from a consumptive one? Is there any threshold value below which everything is normal, but above which it is already that same "bubble"? Unfortunately, specific numbers cannot be given here. But we can list some important signs.
"First of all, a 'bubble' can be discussed when real estate prices start to grow out of proportion with other economic indicators," believes Igor Indriksons, head of the foreign real estate investment department at IntermarkSavills. "Parameters such as construction costs, population size, GDP, yield on government bonds – all this should be in harmony with real estate prices. When imbalances appear, the market becomes at least risky."
The expert reminds that in the US (it was in this country that today's problems in the global economy started, and precisely from the housing market) in the last pre-crisis years, real estate appreciated abnormally fast. "The yield on US government bonds is just over 4% per annum," says Igor Indriksons. "The risk premium for this market is estimated by specialists at 2%. That is, normal growth for real estate in the US should be 6-7% per year. A figure of more than 10% per annum I would call super-risks. And in reality, on the American market we saw about 30% per year."
And a number of other signs
In addition to the mentioned (main) indicator – abnormally fast price growth, there are several others. Yulia Titova, head of the foreign real estate department at "BEST-Real Estate," mentions speculative sentiment in the market – when real estate is bought by those who do not actually need it. "The sole purpose of such purchases is investment," notes the expert. "There is no question of using it for personal purposes. It should be understood that sooner or later the speculator-investor will start to massively try to lock in profits – anyone values their own offshore company somewhere in the islands more than an unneeded apartment in the capital. And then supply will radically exceed demand, and the 'bubble' will burst."
Also, one can mention frenzied demand, minimal time properties stay on the market. Everything sells – including properties with obvious defects. Sales at the earliest stages of construction become widespread. One should also look at the number of building permits and mortgage loans issued – their unjustified growth also indicates that problems are brewing in the market.
Igor Indriksons (IntermarkSavills) also describes another method widely used by international financial analysts. The essence is that countries with approximately similar economic development and standard of living are taken – Russia's neighbors in this list will be Brazil, India, and China. Then housing prices are compared. "In São Paulo (Brazil), a two-room apartment of 100 sq m costs about 100 thousand euros. It is clear that Moscow's realities look suspicious against this background," notes the expert.
Among the signs of a "bubble" is narrow domestic demand, when newly built real estate is intended not for local consumers but for "visiting lads." This sign was pointed out to us by Oleg Repchenko, head of the analytical center "Indicators of the Real Estate Market."
Where did it happen?
We decided to compile a list of countries where "bubbles" have been observed in recent years. The goal, of course, is not a "dance on bones" but a visual illustration for future investors. Stanislav Zingel, president of the international agency Gordon Rock, helped us with this work.
So, the USA. Problems began in the middle of the past decade, caused by banks issuing mortgages to everyone. A wave of defaults began in 2007, banks started foreclosing on properties and tried to sell them – as a result, the market became oversupplied and prices plummeted. The consequences were most felt in large cities (New York, Chicago, Los Angeles, Washington, San Francisco, etc.), as well as regions where real estate was most prestigious and accordingly expensive (Florida, California).
Spain. From 2001 to 2006, price growth averaged 20% per year. Active demand for real estate was driven not only by local buyers but also by Britons, Irish, Russians, etc. Construction was massive, and cheap credit also fueled demand. Also during this period, many speculator-investors appeared. With the onset of the crisis, real estate became an unaffordable luxury for many owners, and people tried to get rid of it. Today Spain has one of the highest unemployment rates in the EU, and it continues to grow – this means there is no domestic demand for real estate, and it will not appear in the near future.
Latvia. Since 2000, the real estate market was influenced by the upcoming entry into the European Union – it was considered indisputable that prices would rise due to this event. Foreign buyers became interested in the local market, and Western banks began issuing mortgages. Until mid-2007, prices grew by 30-40% per year – mainly due to speculative purchases. This growth was followed by an equally rapid decline: today in the Old Town of Riga there are offers at 500 euros per sq m – in 2007 it cost over 2000 euros.
And, of course, Dubai is the most recent and therefore memorable example. However, the Dubai case also has its own distinctive features. The main one is that not even real estate was sold there, but options on it, i.e., yet-to-be-built properties. 'Nobody needs real estate in the quantity that was being built there,' states Igor Indriksons (IntermarkSavills). 'Nobody intended to live there; people bought and resold option contracts. These are the riskiest markets in the world.'
The first warning signs, by the way, began to sound long before last autumn. 'Back in 2007, when housing prices in Dubai were growing by 30% per year, our company managed with great difficulty to sell an investment apartment purchased by our client,' recalls Anton Lyubin, head of projects at the analytics and consulting department of the company 'Novoe Kachestvo'. 'The situation was absurd: on the one hand, market prices were rising, i.e., the apartment's value was constantly increasing, but on the other hand, it was extremely difficult to sell the apartment due to a lack of end buyers.'
And Sochi joining them
Although this article is about foreign real estate, we cannot fail to mention our native Sochi – a Russian-made 'bubble' where prices grew more on emotions and excitement. 'This region is similar in its characteristics to Spain and the UAE,' says Oleg Repchenko (Indicators of the Real Estate Market). 'After Sochi was declared the capital of the 2014 Olympic Games, the growth rate of local real estate prices even overtook Moscow. But their decline also turned out to be deeper than in Moscow.'
Sochi is a striking example of an imbalance between internal and external demand. After all, it is unclear what will happen to Sochi's properties after the Olympics. Even our eternal shortage – housing – they planned to build so much that poor Sochi cannot digest it. And housing bought 'for investment' will be extremely difficult to sell on the secondary market – there is no one to sell to.
Life after
In smart economics books, the recommendation to buy at the 'bottom' of prices has long become commonplace. When prices have fallen to a minimum, it's time to make purchases: after a crash, a period of growth always follows. The question is solely how to understand whether this 'bottom' has been reached? Or are we facing another (or several) waves of decline?
No one knows the exact answer to these questions – otherwise everyone around would be rich and successful investors. 'The rule is known: buy when prices fall, and sell when they rise,' notes Stanislav Zingel (Gordon Rock). 'But almost no one ever manages to 'catch' the bottom.' 'It's simple,' Igor Indriksons (IntermarkSavills) is convinced. 'We need to look at the macroeconomic indicators mentioned at the beginning and make sure that real estate prices have come into line with them.'
As for a bit more specifics, our experts agreed that the US and the Baltic states have good chances – there the crisis has been going on for quite a while, and the situation should normalize. Dubai is only at the very beginning of the crisis – accordingly, it (the crisis) still has to 'bloom out'. The exception is Spain: everything there has been going on for quite a long time, but it is not recommended to enter this market, since the macroeconomic problems that caused the crisis have not gone away in that country...
Where are 'bubbles' brewing?
With deep respect for Nostradamus and his fans, the author cannot help but note one oddity: as soon as some bad thing happens in the world, there are always people claiming that Nostradamus predicted it. But in my memory, there has not been a single case where the forecast appeared when it should have appeared, i.e., before the event. A spoon is expensive at dinner time, and a prediction is for the future, not for an event that has already happened.
And we asked: where are 'soap bubbles' only expected? According to Igor Indriksons (IntermarkSavills), the most likely candidate is Panama. 'This market is a complete analogue of Dubai,' says the expert. 'Everything is happening according to the same model and will end the same way – and very soon.' Another bubble is inflating in Hong Kong: the problem arose because people with money need to invest that money somewhere. After the start of the crisis, many players in Asian markets decided not to take risks and began to invest in a 'safe haven' – Hong Kong real estate. As a result, prices there have now sharply risen, in complete isolation from other economic indicators.
As for countries closer to us (i.e., Europe), experts believe that everything there is more or less calm. First of all, because the state very clearly controlled the processes there: when necessary, they raised mortgage rates and limited foreigners in their market. As a result, everything develops without jerks and stably.