First You Have to Earn the Mansion

I read today that real estate prices fell by more than 20 percent over 2016. This is not surprising, and there are many reasons for it. Whether this is good or bad is not obvious. In my view it is very bad, and I will try to explain a few things:

1. Falling household incomes. After the 2015 devaluation, incomes fell sharply. We are assured, of course, that inflation in Kazakhstan is only 8.5 percent, but people who are in a position to buy apartments have felt inflation of at least 30 percent. This means the middle class has no money left to buy property, because basic needs are always met first. Demand fell as a result, which pushed construction companies to cut apartment prices.

2. The state myth that building housing helps the economy. All state programs to stimulate the economy were built on increasing housing construction. Where did this lead? It led to a very large supply on the housing market, especially of cheap housing, not backed by corresponding demand. Yes, these construction projects raised the country's GDP, but in the end they created a colossal imbalance in the housing market, tied up a large amount of capital that will not generate added value in the future, and hit the construction industry, leaving it distorted and inefficient. In effect, only the construction companies with access to state contracts are surviving, while small and medium-sized builders will sink into oblivion, because it is simply impossible to compete with the state when there is no real demand.

3. Shrinking collateral in the banking sector. This will also hit the banking sector indirectly. Many loans, especially problem loans, were issued against real estate collateral. When the value of collateral falls, banks have to set aside additional provisions. Amid the current banking crisis, additional losses from provisions will be a stab in the back, and the question arises once again of whether, in our country, the right hand knows what the left hand is doing.

What should actually be done:

1. As everywhere in the world, if you have overproduction, you need to cut production. The state should therefore wind down direct housing construction. It is also risky for officials, in light of recent events.

2. It is better now to stimulate demand in the real estate market, not supply. That requires cheap mortgages without selectivity or tailoring to specific developers: simply cheap mortgages for everyone who wants one.

3. The state would do better to put its money into infrastructure (roads, railways, industrial zones, gasification and so on) than into housing. All of this later becomes part of the productive infrastructure and generates profit, rather than standing idle and depreciating.

If the state wants every resident of our country to live in a mansion, that is admirable. But for people to live in mansions, they must first earn the money for those mansions. The market itself will determine how much to build, when to build and for whom. Provide infrastructure, remove the bureaucracy and all the red tape around construction and commissioning, give the population mortgages, and that is enough. There is no need to do the construction industry a disservice.