2 posts tagged

alternative investment

Crash of Russian housing sector

After the mobilization at the end of October, housing luxury prices dropped 40%. Prices stabilized at the 15% discount compared to August 2022. Why did it happen and what to expect in the future?

Theory

The housing market can’t be shorted. It is an advantage over the stock market. That means you can’t borrow a house, sell a house and buy it back when the price for this house falls. The problem is that all houses are unique, and the lender expects to get back the same house. The person to whom you sold a house will not sell you a house cheaper than you borrowed it.

The lender may give a set of houses that he will accept from a borrower. Usually, such houses are better than borrowed ones. Such practice is not popular due to the complexity and does not affect the housing market the same way as stocks shorted by institutions for trillions of dollars affect the stock market.

Low liquidity of housing. Stocks are sold fast with a low spread between ask and bid prices. This is because all stocks of a company are the same, information is open, and the stock price is affordable. Also, buying stocks requires a low commission, and the contract is created automatically (in reality it is not so easy and you don’t own shares when buying stocks through a broker, but it is a long irrelevant story).

Buying a house is a long process of finding the right prices by analyzing hundreds of parameters, negotiating, and signing documents with help of a realtor and a lawyer.

To sell a house immediately, seller agrees to sell a house for the bid price, and to buy it, the buyer pays the ask price without negotiations. The spread may be huge, moreover, if too many people sell a house, sellers give huge discounts.

What happened when mobilization started

300k people were drafted in one week. After the announcement of the mobilization, people had three days to leave the country not to be drafted. Plane ticket prices raised from an average of 300$ to 5000$. The last tickets were sold for 15000$ in the economy class. (at that time I was also leaving the country, but I am an EU resident and I paid nearly 500$ to get to Austria by carpooling, plane and bus).

People were scared to get back to Russia. Leavers sold everything they had. They sold houses in one day in exchange for foreign cash. Sellers gave a 40% discount, which was incredible – a luxury house for a price of an economy-class house. Tip: in crisis keep cash to make the best deals.

When all leavers left, the housing prices went up, because there is no need to sell the house fast anymore. That is why the prices bounced. Moreover, the demand for housing dropped, because those who needed a house already bought it, or took a mortgage if it was applicable. Some people who wanted to buy housing may be decided to keep the money in foreign currency to be ready to flee. That is one of the reasons, why the US dollar costs 67 rubbles in cash and only 57 rubles on market (because it is not possible to withdraw money from a bank account, except for SWIFT).

Why prices will continue dropping

There are two reasons for that: Mortgage restrictions and uncertainty. Since the start of the mobilization, the banks stopped giving mortgages to males, except for programmers, who have a right to a 2% mortgage by law. Programmers can’t be drafted by the law.

Due to the risk, that a person will be drafted and won’t be able to pay for a mortgage, banks are not ready to provide the mortgage.

Also, the credits and mortgages, that were taken before the militarisation on the 21st of September, will be automatically discarded if a person dies. That means, the family will keep a house without liabilities, and banks will get huge losses. As for now, the government will not support banks with money and will not compensate for losses. Small banks are f*cked (benefit for big banks).

Eventually, mortgage rates will increase, fewer people would like to take mortgages, and the demand for houses will also fall.

Signal to fall now

40% of newly built houses is not sold. It is bad for construction companies – they should pay off the credits asap, but if there are not enough customers, the manager has 2 variants – sell now cheap and close the credit or keep a small debt, or wait till the best times and pay a lot for a debt. Sometimes firms wait too long and become bankrupt. The banks notice such a situation and increase the credit rates for companies.

The companies stop building new housing if the credit rates are high and the demand is low. Some companies freeze construction. It helps to meet supply and demand, and stabilize prices. If there is no risk of losing the attractiveness of a neighborhood or a city itself, it is the best time to buy housing. However, in times of events like a war, the risk is uncountable and the price may fall even higher.

2022 alternative investment english Real Estate Russia

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Alternative investments as a hobby

I love alternative investments – they are inflation-free and are increasing in price due to scarcity and age premium. Alternative investments are more than just looking at different numbers in financial reports, using, and analyzing macroeconomics. It is a hobby.

lifestyle

When you make alternative investments, you invest in the stuff you like or something about that you want to know more about. People invest in art not only because the picture can cost 3 times more in 10 years, but because they learned that this author made a masterpiece. They read books, go to art galleries and exhibitions, and told to people who are also interested in it.

People did not just get value from keeping the picture in the collection, they have got fun. They were traveling, meeting people, who became friends. They became a part of the art society.

Any type of thing can be an alternative investment – people buy rights for the music, gemstones, houses, wine, violins, and cellos (that are rented out, after which the price and the quality of sound get higher), exotic cars, books with signatures or even boots.

How to learn

Get knowledge by reading books, journals, and blogs. I am interested in wine, art, and real estate, and I give tips about them. All of them are interesting differently: wine is the most profitable, art is the most inspiring and risky, residential real estate is the safest, and, commercial real estate is the most expensive, but profitable and slightly riskier than residential real estate.

books to read

Risks

During the recession, fewer people are ready to spend money because they need first all solve problems with business and a family budget. Some people must sell their investments, just because they don’t have enough money to pay for the bills. Therefore, the demand falls, and the amount of people willing to sell grows. Then the price also falls.

Investors say that stable cash is the most expensive stuff at this time because you get less money after selling your investment (image the price of the stocks in a crisis). Fortunately, it does not last long – the government makes huge inflation so that people buy more because later everything will be more expensive. If there is deflation, people keep cash, companies sell much less. Companies become bankrupt, the market fails and the currency gets to 0 due to the printing of cash for the social and governmental sector and payments for the state debts.

The commercial real estate investment in such times may lose the renters because some companies close. Then you should find new renters and give them 2 months for free. These are renting holidays, that are given to make renovations and to find employees. In Russia renting holidays is not obligatory, but it is a common practice. There are ways to lower the risks: For example, my family rents out an office to the municipal administration – they are not subject to bankruptcy and they stay in one place for decades. Therefore, you don’t need to have an administrator, who does HR, PR, and finances, because you have a constant client.

When to invest

The recession is also the best time to invest. If you have enough cash, just buy as much as you want. Usually, alternative investments weigh 5-15% of an investor’s portfolio (excluding real estate). I don’t recommend investing more if you don’t know too much about the sector and the item you invest in.

For example, if you invest in wine, you may be deceived about the quality. You can also spoil wine by keeping it at the wrong temperature and in the sun. If you invest in art, the seller can sell a picture for double a fair price. The author of a picture may become less interesting to the public. That is why you should know the sector by reading books and consulting with professionals. And don’t keep all eggs in one basket – diversify.

If you are interested in art investment, or real estate investment, write me at daniil@koveh.com, and I will help you to make the right decision, buy the art in the EU and help with legal stuff. I will find the best real estate investment in Russia and Austria based on my experience, and the experience of my family, who through 4 generations were constructing real estate all over Russia.

2022 alternative investment Art english Investment