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Weakness in the US housing market notwithstanding, the global property boom continues apace.
Property prices in the UK rose by just under 10% last year, according to the Nationwide building society, while many analysts expect a similar figure this year.
But that pales into insignificance compared with Kiev, where the BBC reports, prices have risen by 10-25% in the last two months of 2006 alone…
Kiev, the capital of Ukraine, is now apparently the “most expensive city in Eastern Europe” in terms of property, says the BBC. Prices at one development start at $1m for a three-bedroom flat, while the cheapest one-bedroom flats start at around $100,000.
Apparently, the cost of apartments is already higher than in Amsterdam. A number of reasons are given for this: “People simply want to move out of their old-style Soviet housing, and move into something more comfortable,” says property developer Jaroslav Kinach.
And then of course there’s the tiny group of massively wealthy businessmen who have flourished following the collapse of the Soviet Union.
But of course, the Kiev property boom couldn’t all be down to supply and demand and a small group of hugely wealthy business people, could it? There must be a pretty wealthy population to support a city where the cheapest one-bedroom flat costs in the region of £55,000, surely? After all, that may not be London prices, but there are certainly a few far-flung parts of the UK where you might just be able to get a one-bedroom place that cheaply.
So what’s the typical inhabitant of Kiev earn? $25,000 a year? Maybe $15,000?
No. Ukraine is one of Europe’s poorest countries – apparently the typical salary is around $2,400 a year. So the average Kievite would need to pay just over 40 times their annual salary to buy the cheapest property in the region.
As the BBC concludes, “the main driver for the property boom is speculation.
“It could be a bubble – and if so, there is no way of knowing when it might be burst,” concludes the Beeb ominously.
Could be a bubble? Of course it’s a bubble! Who is buying these places? Why on earth would you choose to live in Ukraine unless you had family or a job there? Not that there’s anything wrong with Ukraine particularly, but has it turned into the world’s financial centre over night? No. Have the streets recently been repaved with gold?
The whole idea of a boom could well be overblown of course – as investors would do well to remember if they decide to buy property abroad, the UK’s system of property records and rights is some way ahead of most international markets. There is no public register in Ukraine, so the honest truth is that no one’s really sure how much prices have risen.
One estate agent in the BBC piece says that she bought a flat for $30,000 three years ago, and it’s now worth “up to $200,000”. Well, she would say that wouldn’t she? She’s trying to sell flats to naïve foreign investors who think that they too will be able to make seven times their money in three years. My initial reaction is, that if the average salary in the region is $2,400, then why hasn’t she sold her great investment flat and retired?
It’s these kind of stories that show the unsustainable hysteria that lies beneath the global property boom. When you hear of properties in Kiev going for 100 times average earnings, that’s when you start to think about the triple-digit p/es of the dotcom bubble era.
We’ve been predicting a property collapse here at MoneyWeek for some time – and there’s absolutely no getting around the fact that we’ve been wrong so far. But we can’t, in all honesty, recommend property as an investment (buying a property as a home is slightly different – though it’s more important now than ever to ensure that you aren’t overstretching yourself to buy a place).
When people start relying on capital gains rather than income to justify an investment, it means they are expecting a “greater fool” than themselves to come along and buy it for more at a later date. But even the supply of fools in the world isn’t inexhaustible. And with the threat of a US slowdown knocking onto other global economies, that supply could well dry up if life isn’t as rosy in 2007 as everyone seems to expect.
Turning to the stock markets…
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In London, the FTSE 100 was hit by a poor start on Wall Street and continuing weakness amongst oil and utilities stocks on Friday, closing 66 points lower at 6,220. The falling price of crude saw BG Group, Cairn Energy and Royal Dutch Shell all sustain heavy losses. For a full market report, see: London market close (/file/23650/london-close-heavy-losses-on-us-gloom.html)
Elsewhere in Europe, the Paris CAC-40 ended the day 57 points lower, at 5,517, and the Frankfurt DAX-30 closed at 6,593, a fall of 81 points.
Across the Atlantic, concerns that strength in the labour market will discourage the Federal Reserve from cutting interest rates in the near future led to triple digit losses on Friday. The Dow Jones fell over 100 points in intra-day trading, but clawed back some of its losses to end the day 82 points lower, at 12,398. The Nasdaq was 19 points lower, at 2,434. And the S&P 500 ended the day 8 points lower, at 1,409.
In Asia, the Hang Seng also sustained triple-digit losses, ending the session at 20,029. The Japanese market was closed for a holiday.
Having fallen below $55 on Friday, crude oil had edged back up to $56.63 this morning. In London, Brent spot was last trading at $55.58.
Spot gold fell nearly $2 in New York on Friday, but had climbed back up to $608.75 today. Silver had slipped down to $12.12.
And in London this morning, BA shares rose by as much as 3.3% after the airline struck a deal with trade unions over pensions late on Friday. More details on the deal, which should avoid threatened industrial action, will be released today.
And our two recommended articles for today…
The stock market indicators you should watch now
– January’s price action is often taken to be predictive of the year to come. But what are the other key indicators telling us? John Robson and Andrew Selsby of RH Asset Management look at where the ‘four horsemen of stockmarket apocalypse’ are heading. Click here: The stock market indicators you should watch now
US interest rates: what will 2007 bring?
– It had begun to look as though a US interest rate cut was on the way, says Jeremy Batstone of Charles Stanley. So the latest FOMC minutes came as something of a surprise. To find out how the Fed is likely to react to the plunging housing market, read: US interest rates: what will 2007 bring?