On Housing Prices
Translated from Russian with the help of AI. Original: Russian version
Housing prices have risen well ahead of inflation because of state programs and the release of pension savings; the solution lies in developing large urban agglomerations.
I recently spoke at the CFO Club, now a regular gathering of finance directors from the largest companies.
I talked about inflation and interest rates. The presentation was long, so I will post my thoughts here in parts, to share some interesting facts.
In 2018 the "7-20-25" mortgage program was launched, followed later by "Baspana Hit", and in 2021 pension savings were released for housing improvement.
Over this period, the average price per square meter across the country rose from KZT 186 thousand to KZT 466 thousand for resale housing, and from KZT 267 thousand to KZT 424 thousand for new-build housing.
Cumulative inflation over the same period was 43%, or a price factor of 1.43. Had the price of a square meter grown at the rate of inflation, it would now stand at KZT 266 thousand for resale housing and KZT 381 thousand for new-build housing. The excess of the current price over the 2018 price adjusted for inflation can be called the effect of state programs and pension money. In effect, these state programs are putting housing out of reach for people on low incomes. With some more effort one could calculate the effect more precisely, taking into account the structure of construction by region and its impact on housing prices, but I think the picture would not be much better.
Construction is a genuinely important sector, and it should grow together with the economy, but it is a consumption sector and has no multiplier effect in subsequent production cycles. Such sectors should be a consequence of overall economic growth and public prosperity. In other words, incomes must rise first, and only then are consumer goods bought with that income. When capital is scarce, it should first create value, and only afterwards goods for consumption. One can argue at length on this point, citing housing availability figures, dilapidated housing stock and so on. But such an approach is not economically sound. If the level of income in a country does not allow for more square meters per person, an artificial drive to provide them will not work.
What can the state actually do to improve housing conditions while also raising incomes?
It needs to reduce construction costs, reduce the cost of providing for each resident, and increase market concentration in order to stimulate business in one place, which will lead to higher incomes. All of this can be achieved by creating large agglomerations. Large cities bring down construction costs, because high-rise housing is always cheaper to build than low-rise. State infrastructure per resident of a large city is always cheaper than in a village or small town. Schools, hospitals, theaters, roads, public transport and the like all cost less per resident. Unemployment is much lower in large cities, and competition in the city develops people: they acquire more skills, which makes them more productive for the country.
So if we want to solve both problems at once, the only right way forward is to create agglomerations, which will make it possible to address the housing issue and raise people's real incomes.