Ukraine Upheaval Spurred By 28% Rates Limiting Buyers

KIEV, Ukraine -- On most days after work, Valentine Diatlenko joins the thousands of anti-government protesters in Independence Square who demand that Ukraine link its future to the European Union.

Newlyweds Mikhail and Margarita Nakonechniy kiss in front of barricades on Independence Square in a gesture of support for pro-Europe activists in Kiev, Ukraine.

His anger over the December bailout from Russia is stoked by a grim fact of life in the former Soviet Republic.

He has no chance of buying a home.

The political upheaval in Ukraine, suffering its third recession since 2008, is driven to a significant degree by a housing crisis, Oleksandr Abramovich, co-owner of Kiev-based real estate agency UA Property, said.

Mortgage rates are so high that first-time buyers shun them and attempt to borrow cash from family and friends to make a deal in a tight housing market.

“The housing deficit is a huge problem and the main issue for many, many people,” Abramovich said.

“Mortgages are very expensive, wages are low and the economy is not doing well.” 

Diatlenko, a manager at paint manufacturer Perspektiva, lives like most residents of the capital city of Kiev.

His family of four stays with his wife’s brother and her two parents stuffed into their small 80-square-meter (861-square-feet) apartment.

Up to 70 percent of capital residents in their twenties live with their parents, according to Kiev-based UA Realty Group.

“I want to be able to buy my own apartment,” said Diatlenko, 29, the father of two boys, ages six and four.

“It won’t happen if the country continues on its road to nowhere instead of joining the EU. Most people I know live with their parents through their thirties.”

Cash Deals 

Ukrainians distrust banks and deal mostly in cash in transactions as high as 800,000 hryvnia ($100,000), which limits their ability to buy homes.

They remember how their life savings in bank accounts disappeared as the Soviet financial system collapsed in 1991.

Home buyers in Kiev use cash for about 95 percent of purchases of existing homes and at least 60 percent of new homes, Abramovich said.

The weakness of the hryvnia also makes people steer clear of mortgages.

The currency plunged from an average 1.82 per dollar in 1996, when it was first introduced 5 years after Ukrainian independence, to 8.3 hryvnia per dollar as of mid-December.

“The mortgage industry is extremely underdeveloped in Ukraine,” said Oleksandr Suhonyako, Kiev-based head of the Association of Ukrainian Banks, a lobby group.

“People don’t want to expose themselves to the currency risk and often don’t have much predictability on their own income, so they avoid debt.” 

Avoiding Risk 

Oleksandr Khmelenko, 36, was able to scrape up the cash to buy a 71 square meter  (764 sq ft) home for 580,000 hryvnia ($71,000) on the outskirts of Kiev in September.

Khmelenko, a manager at a window manufacturer, has lived with his daughter and wife in her parents’ 50 square meters (538 sq ft) apartment in Kiev for five years.

“I was keen to avoid any risk when it came to buying an apartment and borrowing money,” Khmelenko said.

“I borrowed from the family, from everybody who trusts me with money. You can’t really trust a bank, especially when everyone is concerned with the hryvnia’s exchange rate.”

Mortgages are out of reach for most Ukrainians.

The interest rate on hryvnia-denominated mortgages rose to 19 percent in October from as low as 15 percent in April 2012, data compiled by the National Bank of Ukraine show.

Hryvnia-denominated mortgages are very expensive because lenders price in expectations for devaluation, Anastasia Tuyukova, an analyst at Dragon Capital in Kiev, said.

Falling Mortgages 

“Interest rates are prohibitively high and that eliminates demand,” Suhonyako said. 

Ukrainian subsidiaries of Italy’s UniCredit SpA, Austria’s Raiffeisen Bank International AG, France’s BNP Paribas SA and Kiev-based Firtash’s VAT Nadra Bank accounted for 53.4 percent of Ukraine’s mortgages in 2012, according to the National Mortgage Association.

Mortgages plunged 17 percent to 57.9 billion hryvnia ($7.03 billion) in 2012 from 2011, central bank data show.

The share of mortgages in banks’s loan portfolio fell to 6 percent in the third quarter of 2013 from 11 percent in the last period of 2010, analyst Tuyukova said.

Ukraine, a country of 45 million people, also suffers from a housing shortage that keeps prices high and creates overcrowding.

“Lack of affordable housing is a problem and no one seems to know how to solve it, Vladimir Kolomeyko, an analyst at Planeta Obolon real estate agency in Kiev, said.

‘‘The government has no money to finance such construction.’’ 

Unfinished Buildings 

Ukraine is full of partially constructed buildings that may never be completed.

As many as 16,900 buildings throughout the country were unfinished as of the first quarter, about 60 percent of which were slated for demolition, Hennadiy Temnyk, minister for regional development and construction, said in April.

‘‘After several huge scandals, when people invested in housing construction that was never completed, everyone seems to be extremely cautious about it,’’ Khmelenko said.

‘‘You can get a great deal when it comes to financing from a constructor. The question is whether you will ever get what you paid for.’’

With too few apartments, several generations of families are forced to live together.

Each person in Ukraine has an average 20 square meters (215 sq ft) of living space compared with an average of 40 square meters (430 sq ft) for EU countries, analyst Kolomeyko said.

‘‘It’s common that three or even four generations of the same family live together,’’ said Varvara Bochay, a self-employed real estate agent with 12 years of experience in the market.

‘‘Grandparents would normally have their own room.’’

Prices Peak 

Before the global credit crunch, the housing market was showing signs of life.

Between 2004 and 2007, as the economy expanded an average of 7.5 percent a year, first-time buyers were able to enter the market.

Then President Viktor Yushchenko, a former central bank chief, pushed for EU membership and enforcement of property ownership rights.

Real estate prices in Kiev reached a record-high of $2,987 per square meter (per 10.8 sq ft) in August 2008.

Since then, prices have sunk with the economy, falling 44 percent from the peak to $1,700 per square meter in December, according to data compiled by Planet Obolon. 

Kolomeyko said even after prices have fallen first-time buyers still can’t afford an apartment.

‘‘The most common client in this market is parents selling their apartment and buying two smaller places for themselves and their adult children,’’ Kolomeyko said. 

Economic Collapse 

The economy shrank 15 percent in 2009, the most since 1994, as the prices of commodities, Ukraine’s major export, plunged.

The country slipped into its third recession in the last five years in the third quarter, with the economy contracting 0.4 percent, amid weaker global demand for exports such as steel.

Unemployment averaged 8.2 percent in 2013, according to the mean estimate of six economists surveyed by Bloomberg.

On Nov. 21, Ukrainians poured into Independence Square, venting years of frustrations over jobs and housing.

President Viktor Yanukovych’s rejection of an EU integration pact that opposition leaders said would spur economic and fiscal reforms and reduce the country’s dependence on raw material exports was the catalyst for Ukraine’s biggest protests in almost a decade.

As millions of people joined the street protests throughout the country, police attacked demonstrators in Independence Square on Dec. 1 and Dec. 11, injuring 400 people.

Russian Bailout 

Yanukovych agreed to a $15 billion bailout from Russia on Dec. 17, signaling Ukraine’s intent to maintain the economic status quo at least until the next presidential election in March 2015.

For now Diatlenko, the manager, said he’s stuck living with his in-laws.

He and his wife earn between $1,500 and $2,000 a month.

That’s about four times the average monthly wage of $397 in Ukraine.

Still, the best mortgage offer he got required a down payment of 55 percent and had a 28 percent fixed interest rate on a 10-year loan, the maximum length available.

He turned the offer down last year.

‘‘EU membership is our chance to reform the economy and let ordinary people live decently,” Diatlenko said.

Source: Bloomberg