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Archive 2008

  • 15.10.2008

    The Housing Construction Sector in Ukraine: Reasons for the Current Recession and Policy Implications

    (Code:PP_04_2008)

    Since the year 2000 the housing construction sector in Ukraine enjoyed very favourable macroeconomic conditions. High liquidity led to relatively low interest rates, while real incomes increased rapidly, thus supporting strong demand for housing. On top, ever increasing housing prices ensured an additional speculative demand for housing. As a result of this particular macroeconomic constellation, the housing construction sector performed very well.

    In 2008, the macroeconomic conditions have changed dramatically. First of all, interest rates went up, due to a necessary tightening of liquidity by the National Bank in order to fight inflation and as a consequence of the international financial crisis. Since as a rule construction companies and households rely heavily on bank loans, the rise in interest rates has increased the financing cost for both sides of the market and thus reduced the supply and the demand for housing. Furthermore, housing prices stopped rising and might be even decreasing, a fact which may have reduced speculative demand and can also lead to a postponement of future housing purchases by owner users. Also, a huge increase in the prices for construction materials has significantly increased costs, thus reducing profits and supply. Thus, the current decline in housing construction can be explained by both supply and demand factors.

    Several policy makers have called for a macroeconomic response to the current slowdown. Although such a demand-side reaction could help the construction sector in the very short-run, it would certainly not help the country as a whole. An expansionary monetary and/or fiscal policy would further fuel inflation, which stands today at a massive 26% yoy. Besides, the adoption of demand-side policies would send the wrong signals to international financial investors and thus lead to a further increase in the country risk and the cost of external borrowing. Consequently, we strongly advise the authorities not to tackle the current problems at the construction sector from the demand side.

    But this does not mean the authorities should remain inactive. There is plenty of room for policy action at the supply side. The supply side is dominated by just a few large-size holding companies, an oligopolistic structure which can be hardly considered as being cost-efficient. Also, the intransparent allocation of land plots creates huge problems for the sector and poses a high barrier to entry for new medium-size companies to the market. But also the long list of bureaucratic requirements has to be considered as a main structural deficit. Furthermore, the system of housing finance needs to be significantly improved. All in all, the best way to react to current problems is by pushing ahead structural reforms, thus lowering the cost of construction. Only a reformed construction sector will be able to react flexibly to a changing economic environment and to provide the population with proper housing at decent prices.

    Authors:  Âîçíÿê Ðîìàí, ʳðõíåð Ðîáåðò, Äæó÷÷³ гêàðäî
    Research spheres:  Real sector
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