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European construction crises macro and micro-economic effects ( Detemmerman , 2009):

THE IMPACT OF THE ECONOMIC CRISIS IN THE DEVELOPED COUNTRIES ON THE REAL ESTATE MARKET AND PUBLIC SECTOR IN THE TRANSITION ECONOMIES – A BELARUSIAN AND LUTHIANIAN CASE STUDY.

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European construction crises macro and micro-economic effects ( Detemmerman , 2009):

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  1. THE IMPACT OF THE ECONOMIC CRISIS IN THE DEVELOPED COUNTRIES ON THE REAL ESTATE MARKET AND PUBLIC SECTOR IN THE TRANSITION ECONOMIES – A BELARUSIAN AND LUTHIANIAN CASE STUDY Authors:Dr. Nikolai Siniak,Associate professor of Belarusian State Technological University, E-mail: siniakn@mail.rusiniakn@tut.byProf. PhD. DrSc. Arturas Kaklauskas, Dr. Uladzimir Valetka

  2. European construction crises macro and micro-economic effects (Detemmerman, 2009): Macro-economic effects: • The situation varies significantly from country to country (initial market state and long term trends, real estate market corrections, effects of the financial crisis, effects of the overall recession, effectiveness of governmental recovery measures). • Economic downturn has a delayed impact on the construction sector. • Redundancies. • Negative impact on the "sustainability" trend?

  3. Micro-economic effects: • Tightened credit conditions. • Downgrade with regards to credit insurance. • Funding of projects at risk. • Cancellation and postponement of orders. • Increasing late payment by clients. • Risk of “cascading bankruptcies” throughout the supply chain.

  4. In the period between 2001 and 2008, the growth of Lithuania’s GDP and personal income made a positive impact on infrastructure investment and private construction activities

  5. The Lithuanian housing affordability index, compared to countries of Western Europe, was usually the lowest; it managed to exceed 100 only in the period between 2001 and 2004, when the conditions of credit taking improved and before the rapid growth of housing prices started. In 2005, growing housing prices caused the affordability index to fall again; in 2007, its value was only 63 and was the lowest among all 8 compared countries. However, the housing affordability index began to grow once again in 2008, when housing prices started falling and income was still increasing. In March 2009, this index was equal to 75.9. Despite dropping incomes and worsening loan conditions, the housing affordability index might continue growing in Lithuania in next years due to falling housing prices.

  6. Collapse of companies or firms is part of our reality. The situation is determined both by financial tension and other types of tensions in society and government, and it may affect international community as well. Though attempts are made to forecast and recommend action plans for cases of threatening bankruptcy, collapses of organisations spread from sector to sector and from country to country uncontrollably. Scientists (Marwa and Zairi, 2008) studied documents of 120 companies involved in various activities, which collapsed in the period between 2000 and 2007, and looked for similarities or differences in activities of top managers. Six of the companies operated in the construction sector.

  7. The specified reasons of their failure could be described as follows: • Group 1. Reasons that could be described as internal: accounting errors, discrepancies with calculations, poor construction quality, internal disputes, contract prices blown out of proportion and lack of integrity in project management; • Group 2. Impact of immediate (micro) environment: unsuccessful merger, rapid expansion, big receivables, failure to meet deadlines, big operating expenses; • Group 3. Effect of macro environment: falling sales, competition, financial barriers. • Housing starts in Sweden, USA and Lithuania declined sharply during the crisis

  8. The competitiveness of Belarus substantially depends on the development of the building and real estate sector. The role of building branch in economy of Belarus have been increasing lately – specific gravity of building in GDP has made 9,8 % in the first quarter of 2009 . The branch realizes a considerable part of investment activity of a national economy.

  9. Gross value added at basic prices

  10. investments in a fixed capital, blnrbl.

  11. investments in a fixed capital, %

  12. So, for January-March 2009 as a whole in republic was used 8049,8 billion rbl. of investments in a main capital, provided rate of growth of investments at the level of 120 % (with the forecast for 2009 123-125 %). It is obvious, that state bodies consider this branch to be the locomotive of growth of the national economy in the conditions of decrease in business activity

  13. Let's remind, that according to the Decree of the President of Belarus №291 from June, 3rd, 2008, 23,5 million sq. m of a total area of habitation.

  14. Habitation building,mln sq. m

  15. To realize the intended plans, it is necessary to involve considerable investments in building and the industry of building materials. Thus it is necessary to realize, that such extensive requirements for investments and priority allocation of resources in building will occur to some extent at the expense of other branches and kinds of activity. It will increase the risk of diversification growth delay of the national economy and disbalance increase.

  16. With the purpose of given risks compensation it is necessary to accomplish the investments into its development during the branch management taking into account the changes of economy requirements in the future. In other words, the sector should develop on an innovative basis so that investments carried out today wouldn’t restrain economic growth in the future.

  17. The decision of the assigned problem, as well as transition of the whole economy of Belarus to an innovative way of development requires the development of both branch, and general, horizontal mechanisms of stimulation and activization of innovative activity at the enterprises. The financing mechanism of innovative activity at the expense of innovative funds means which has been developed since 1996 allows to increase a share of new production, however only at the expense of the centralized deductions included in the cost price of production. As a result the possibility of innovations financing is reached at the expense of decrease in the general competitiveness of production.

  18. Y = 1118,9 + 17,8· X1 – 11,5 · X2 X1–inflation X2–salary

  19. At that stage of development funds have lost in many respects the function of R&D support which was one of the main at their creation. Following the results of 2007 170,3 billion rbl. or 9,6 % from the general size of the used funds means was turned to financing of scientific researches and works on preparation and development of new kinds manufacture of high technology production

  20. The general size of the used means, billion rbl.

  21. The absolute majority of current buyers in Europe take loans to buy housing. The term of mortgage loans varies between 30 to 40 years. 2. ГЕОРЕЙТИНГ КАК ИНТРУМЕНТ ДИАГНОСТИКИ Situation with mortgage in Belarus УНИКАЛЬНОСТЬ ИССЛЕДОВАНИЯ ВОЗМОЖНОСТИ СОЦИОЛОГИИ • The Council of the Republic of the National Chamber of Representatives of Belarus have adopted Draft Law ”On Mortgage". • It remains to be waited for the President to sign the Draft Law. • The Draft Law lists grounds for mortgage emersion , as well as property to be covered by it, engagements and requirements secured by mortgage. The Draft Law specifies the notion of mortgage deed as a security. • Впервые поставлена задача изучить ресурсы массового инвестирования РФ с разбивкой по регионам. • 2006 год – начало формирования социальной базы массового инвестирования.«Схвачен момент» зарождения массового инвестиционного сословия. • Опросами охвачено 1930 населенных пункта. • Население исследуемых регионов - 94% населения страны. • Объем выборки – 34000 респондентов. • Выборка репрезентативна для населения каждого из 68 субъектов РФ и для России в целом. • Статистическая погрешность по России в целом – не более 1,0%. • Исследование малых групп, формирующих «инвестиционную моду». • Инвестиционная география: создание атласа инвестиционных настроений РФ, учет специфики регионов. • Изучение стратегий инвесторов, каналов влияния и коммуникации. ГЕОРЕЙТИНГ – ЭТО ОПРОС НАСЕЛЕНИЯ РФ, КОТОРЫЙ СКЛАДЫВАЕТСЯ ИЗ 68 РЕГИОНАЛЬНЫХ ОПРОСОВ. ДАННЫЕ РЕПРЕЗЕНТАТИВНЫ КАК ДЛЯ СТРАНЫ В ЦЕЛОМ, ТАК И ДЛЯ КАЖДОГО ИЗ РЕГИОНОВ.

  22. One of the most important obligations of a pledger consists in the fact that such pledger is obliged to insure a mortage object. In such case an insurance policy serves a warranty in the event of such mortgage object damage or loss. This Draft Law will enhance opportunities for citizens in purchasing dwellings, procure development of the construction sector, promote banking business. Specifically, a mortgage object may be real estate to be considered by lawmakers in future since as on a mortgage agreement date it is not considered to be created. For instance, such situation emerges when a dwelling is being built, but a pledger has no property yet, since it has not been created yet. Mortage is called up to become one of the tools to mobilize funds to all branches of the national economy and in the first turn to the residential housing sector.

  23. The Draft Law also provides for such aspect as an opportunity for mortgaged property to be recovered both in a judicial and extra-judicial procedure in the event of a failure to pay debt.Besides on the same day the Council of the Republic of the National Assembly of Belarus approved the law allowing the creditor to take recourse upon a house or a flat in the event of a failure by a borrower to comply with mortgage obligations. The Code of Civil Procedure of Belarus is added with a provision provides an opportunity to take recourse upon a borrower’s house or flat in the event that such borrower fails to comply with mortgage obligations The mortgage rate is equal to 8-9% p.a. inUSD

  24. Share of Mortgage Transactions in the Housing Market Housing construction Scope of transactions Housing purchases Transactions with mobilized bank loans

  25. Loan Rates Currently loan interest rates under loans for housing purchasing are varying between 11 to 19% per annum and in average are equal to 14-16% p.a.The rate equal to 12-15% in foreign currencies and 16% in BYR should be considered typical for the market. Interest rates offered by Belarusian banks two-three times exceed those existing in countries with developed mortgage lending systems. For comparison purposes: in the U.S.A. a 15-year mortgage loan is equal to 2-4%, in Baltic countries - 3,3-3,5%.

  26. Of approximately 30 operating banks only around a dozen are rendering services related to extending loans to individuals for housing purchasing or building (see the Table). As at 7 May, 2008 Belarusian banks offered real estate financing under the following terms and conditions Bfnk

  27. Other Belarusian Banks

  28. Major forms of loan and interest repayment security are sureties by individuals and legal entities , pledge of purchased housing, pledge of real estate or another property available, as well as pledge of legal claim on a flat being constructed with further pledge of purchased property. This significantly reduces loan debt risk.

  29. For instance, in 2001 housing loans on easy terms amounted to BYR 210 bln. . As at 1.09.2003 housing loans balance in the banking system amounted to BYR 632,8 bln. . In 2004 housing loans amounted to BYR 862,4 bln. , in 2006 this figure was almost twice as much, or around BYR 1.650 bln., of which BYR 1.490 bln. fell on easy- term loans. As compared to 2000 in the foreign exchange equivalent loan volume growth amounted to approximately 500%, and 200%. In respect of their purchasing power. It should be stated that loan demand has been always growing concurrently with housing price growth (as in recent months) and reducing concurrently with some price stabilizing (as in the first half of 2004 .). for 2007 - BYR 2.194 bln. Loans for housing purposes.Of them 76% on easy terms, the rest 24% - conventional loans. Of this 76% the Exhibition tended: rural individuals – 5%, families with many children - 17%, young families 10-12% , and the rest – on a common basis. It is true that currently in Minsk loans are extended to those who queued them in 1986-87, in provinces – somewhere in 2005-2006..

  30. Summary of Mortgage Lending in Russia

  31. In balance-sheets of banking institutions Securitization

  32. Dynamics of Mortgage Loan Interest Rates RUB loan interest rate Foreign exchange interest rate

  33. Situation in the Housing Sector of the Republic of Belarus (according to data the Statistics Agency) • The housing space of the Republic of Belarus equals to over 223 mln. sq.м. Currently the share pf private housing space is over 75% . • In 2006 45,6 thou. Flats were built. An average flat size is around 89,7 м2. . Annually there are built around 15% of one-room flats, 28% of two-room flats, 37% of three-room flats and 20% of four-room and over flats. • Currently Minsk is inhabited by around 16% of the country’s total population (over 1,7 mln. people), or every fourth inhabitant of the country. The population density is 6,7 thou. People per 1. кm2. • Annually around 0,4. м2 of total housing space is built per each inhabitant of the country.

  34. Housing Space in Belarus • According to international standards the annual volume of housing real estate should be maintained on a level equal to 1 sq.m. per person. • Belarus is inhabited with 10 mln. People , hence it is required to annually build around 10 mln. Sq.m. and this figure is scheduled to be reached by 2011 (in 2008 г– around 5). • In order to reach the U.S.A. housing figure Belarus is required to additionally build approximately over 400 mln. sq.m. of living area. • The Government is planning to annually build 8-10 mln. sq.m. of housing area. This means that 65 sq. m. of housing area per person will be built approximately inз 45 years (к 2053 ).

  35. The Netherlands, USA, Great Britain, Belgium, Luxemburg, Denmark, Germany, Sweden, France, Portugal , Ireland, Japan, Bulgaria, Hungary, Poland, China, Belarus, Russia, Ukraine

  36. Government –supported housing construction in 2005 averaged USD per 350-370 per 1 m2. For individuals in housing line in 2007 the cost of such construction with individual share will average around USD 460–470 per 1 m2, and in the near future it is expected to exceed USD 550–600 per 1.m2. • Currently new housing in Minsk is sold at market prices equal to USD 1700–2200 per 1 m2 .

  37. In this way an average 67 sq.m. flat will cost USD 21,5–25,0 thou. while its market value is USD 65–87 thou.. Easy-term housing is planned to be up to 80%, the rest 20% will be commercial housing. In order to save money for building a cheap two-room flat a Belarusian family of three persons with monthly income equal to USD 500 will need 46 years. (Such family of three persons should monthly spend at least USD 450. Let us assume that the remaining USD 50 the family would place in a bank to save USD 600 a year. Therefore the family will need 46 years to buils a two-room 60 m2flat at the cost of USD 460–470 per 1m2). Hence, even in case of Government-supported housing construction for many individual s such housing will remain to be unpurchaseable.

  38. Housing availability in Minsk(The cost growth of sq.m. in Minsk averaged by 32,8% a year, while average wages grew by 26.3%) Average cost of 1sq.m.

  39. Housing availability in Minsk reduces with every year

  40. Only 15–20% of Belarusians have enough funds to build housing without any external aid, and а wages of a Belarusian builder are 6 times lower as compared to his Polish colleague .

  41. Поможет ли ипотека? Average interest rates existing in the secondary market BYR Foreign currencies

  42. Price per 1 sq.m. Wages GDP

  43. Dynamics of Growth of Prices, GDP and Income in Belarus Price per 1 sq.m. GDP Wages

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