Prices for apartments in Belarus have doubled just within a few years. On the one hand, rising housing prices are not something special only for Belarus. The country follows European trends in this respect. On the other hand, the government is working to the effect of raising the prices even further, instead of trying to bring them down. However, the business cycle laws are inexorable. Belarus is already at the peak of housing prices. Any downward changes can become an unpleasant surprise for banks, construction companies and depositors.
The real property market in EU countries has had a lot of ups and downs in the past 25 years. Prices rose sharply during periods of boom and plunged down during periods of recession. Therefore, it is a misconception that real property never gets cheaper.
The growth of housing prices in Belarus is, to a large extent, a consequence of a substantial supply of relatively cheap money. The word relatively is used here because Belarusian loans are extremely expensive as compared to European levels. The National Bank stimulates housing crediting by commercial banks. And they are more or less willing to accept that stimulation. It is extremely difficult to find profitable investment projects that could really pay back. Belarusian banks cannot invest in shares, land and green field projects, since such market niches are actually not available in the country. So, what else can they do with growing deposits from people? Housing construction is the least risky business. Since the amount of credit covers the largest part of construction costs, the process picked up a high speed within a rather short period of time, especially as the government places a lot of orders with construction companies for building housing that could be bought by individuals on privileged conditions.
Today the country is at the peak of the housing market cycle. Demand remains rather high: more than half a million people on waiting lists and a host of those willing to invest their savings into housing. If each of them wants at least a standard apartment of about 80 square meters, it means 40 million square meters of housing. Incidentally, the year of 2004 saw a record of housing construction: 40,500 standard-sized apartments.
As of the beginning of 2005, the total available amount of housing in Belarus is 221.4 million square meters. The country is still far away from satisfying the market fully, but considering the income situation in Belarusian households, their demand is not properly supported financially: sometimes they cannot even afford making the first installment. Therefore, unlike in Europe, the Belarusian housing market is much more dependent on the government's general economic policies, as well as on its presence in the market as a creditor, guarantor and price regulator.
There are also other peculiar factors that influence the housing market in Belarus: restrictions on offers of construction services and tough regulations governing the access to this market. With a substantial excess of demand over supply, it would be logical to allow foreign construction companies to work in Belarus. This would slow down price increases and diversify supply. However, the Belarusian construction lobby is still strong enough to keep foreigners away.
As a result, the country is witnessing housing price hikes. And the Ministry of Architecture and Construction and construction organizations of local authorities have their share responsibility for rising prices, because they restrict the possibilities for private and foreign companies to supply construction services to Belarus. There is indeed a lot of to share in this market. Gross value added amounted 1.474 trillion rubels in 2004, including 78 percent of gross profit and 18 percent of wage fund. For comparison, value added was 1.062 trillion in 2003, including gross profit of 76.7 percent. Keeping the market in the condition of tensed supply is surely a victory of the Belarusian construction lobby.
But recession will inevitably follow the current boom. The question is only when it will start and how much it will cost. Of course, housing owners in nicely located places should not be worried, because there will be always demand for their apartments and houses. Strange as it may sound, but today's housing market should be afraid of market reforms. When banks get more investment opportunities, they will withdraw a certain amount of resources from this market. Reforms always go together with shrinking public budget incomes. This means that the government will not be able to build a lot of housing, not to mention administer tough regulations in the sector. Private companies will not be able to accumulate sufficient resources, either.
The liberalization of the secondary housing market and development of competition in the market of realtor services would also contribute to bringing down housing prices. Growing prices for utilities are one more factor. Government subsidies will end sooner or later, and then many families will decide to move to cheaper homes. Belarus would also experience the impact of external factors. International experts are predicting that certain adjustments would have to be made in the housing market in the near future. The US is already increasing interest rates. The European central bank will follow suit in 2006. This means that mortgage costs will have to be adjusted accordingly.
As of the end of 2005, prices are slowing down in most markets, with the exception of Spain, where prices rose by 140 percent since 1997 and keep growing at a pace of 17 percent a year. With high unemployment, stricter public budget discipline and low confidence of consumers, this country can enter a period of painful recession. Some experts say that Spain can repeat the experience of the UK in the end of the 1980s. There is a lot in common between Belarus and Spain in this respect.
The example of Switzerland can be also instructive for Belarus. It had a tough landing after the housing boom of the 1980s. Prices reached their peak in 1989 and remained at the same level till 1991. Then they had been falling till 2000. The rest of the economy was an exact reflection of the housing market during that period. Swiss experts calculated that the country's banks lost $33.4 billion because of falling housing prices, or 8.5 percent of all disbursed loans.
If such things can happen to Swiss banks, one can only feel sorry for Belarusian financial institutions when they will have to face the end of the construction boom. And it can be even more painful for those depositors who still believe that "prices for apartments can never fall."

Indicators of Belarus' housing sector

Source: Ministry of Housing, Ministry of Statistics and Analysis, 2005