Unreal estate

Why does Almaty’s economy lag the nation’s?

What’s afoot in the Almaty market for real estate?

Four years ago, its price bubble burst. In 2007, the price of a new square meter of residential space in the city was nine times higher than in 2000, according to the national statistical agency. Then the price slid by a third. This presaged the collapse of several of Kazakhstan’s largest banks, which had lent for mortgages as if tomorrow would never come (and it almost didn’t).

The problem lay in the nature of a real estate price, which has two components. One is for improvements to the land, such as buildings, roads, and water pipes; the other, purely for the location. Rents in the center of the city are much higher than those on the outskirts, because people pay for convenience. The central business district is close to colleges, hospitals and workplaces. Growth of the national economy increases these rents by raising labor productivity and wages. You’ll pay more to be able to commute comfortably to a better job. In 2007, “land rents” (as economists refer to location value) had been rising far more rapidly than the expected rate of national economic growth. Being unreasonably high, they were headed for a crash that summer.

Construction costs in Kazakhstan are rising by only 3% per year, so land rents in Almaty probably account for the bulk of the continuing decrease in residential prices. But new-home prices here remain two-thirds above the nation’s. Probably that’s largely because of the convenience of living in the nation’s largest city.

Almaty banks are about as exposed to real estate now as in 2009. Construction loans still account for nearly a fifth of all bank loans, totaling 18.8% of all loans in June 2011. The figure for June 2009 was 19.7%, according to data from the country’s central bank, the National Bank of Kazakhstan. Of all bank loans, only a fourth are in “standard” shape, according to the National Bank’s latest Statistical bulletin. More than half are “doubtful,” and a fifth are outright “losses.”

With a record like that, it’s easy to understand why bank lending in Kazakhstan remains, to put it mildly, sluggish. Total lending in June 2011 was only 3.2% higher than in June 2010, according to data from the National Bank. Adjusting for inflation, lending has fallen 5%. Compared to June 2009, lending has declined 19.7% (again adjusting for price changes). One apparent consequence is an anemic construction industry, which has grown only 1.7% since the first half of 2010, according to the national statistical agency. In Almaty, construction value (adjusting for inflation) is down by a fourth since the first half of 2010. In terms of space, new residences have declined by a fifth since early 2010. Sluggish banking and construction have created a quagmire for the economy of Almaty, home to two thirds of all bank loans in Kazakhstan.

Though lending is declining, its composition has not changed much. Short-term loans in June 2011 amounted to 1.3 trillion tenge ($9 billion) -- just 7.4% above that of the previous June, according to National Bank data. Adjusting for inflation, short-term lending was stagnant.

Medium- and long-term lending was 6.6 trillion tenge ($46 billion) -- 5.3% above that of the previous June. Adjusting again for inflation, that lending had fallen by 3%. This may be prudent behavior. Our banks must finance their long-term loans partly with short-term money obtained abroad, so when one of their loans suddenly goes soft, they may find themselves short of money to pay off their own creditors. Nevertheless, medium- and long-term lending still comprised more than 83% of all lending, according to National Bank data. Should a price bubble recur, banks in Kazakhstan could again be at risk.

Bubble trouble

Why would land rents rise too rapidly? Well, real estate lenders often finance a price bubble because they do not have to pay all the costs of doing so. Suppose that the bubble bursts, reducing the collateral of the bank’s loans and endangering its own net worth. If the bank is big enough, the government will bail it out, thus insuring its managers against their own mistakes. In fact, since 2007, the government of Kazakhstan has acquired large stakes in several leading banks. (True, in a few cases, it has also pursued charges of mismanagement.) Also, a commercial bank here could sell shaky loans to an arm of the central bank, the Kazakhstan Mortgage Company.

Housing bubbles may also form because lenders and borrowers do not consider the actual value of the land. Instead, they will create a loan whenever the land rent seems to be rising rapidly enough –- for whatever reason –- to enable them to sell the land (or the loan) at profit. The English macroeconomist John Maynard Keynes pointed to this possibility in 1936. It may explain why a financial bubble appears and disappears rapidly. People buy assets when the bubble is growing, stimulating it to grow faster; and they sell assets when the bubble is bursting, hastening its demise. Never a dull moment in the real estate market. -- Leon Taylor, tayloralmaty@gmail.com


Good reading

John Maynard Keynes. The general theory of employment, interest and money. London: Macmillan. 1936. Chapter 12 analyzes financial speculation.

Arthur O'Sullivan. Urban economics. Sixth edition. New York: McGraw-Hill. 2006. Analyzes land rents.


References

National Bank of Kazakhstan. Monetary and credit statistics. www.nationalbank.kz

National Bank of Kazakhstan. Statistical bulletin. 2011. www.nationalbank.kz

Statistics Agency of Kazakhstan. Various series. 2011. www.stat.kz The pages in Russian are more informative than those in English.