Consider the two apartment complexes from the previous post (just scroll down) – the older-looking one and the brand-spanking-new looking one. That’s Ukrainian real estate … well, the apartments inside a building like that.

The new complex is built for the ultra-rich – the apartments are sold in advance. A one-bedroom in something like that would cost you a cool $250,000 because of the quality, location, and, of course, demand. A one-bedroom in the older building can be bought for around $75,000-$85,000 (hurry, the dollar is falling … oh, crap … now it’s $85,000-$95,000).

“But Max“, you ask, “didn’t you just say that the average paycheck was like $350 a month and the lending industry is in its infancy?”

Though it’s true, I had no idea how the real estate prices can stay that high. However, the real question here is not the price levels, but real estate appreciation.

I’ve been gone since 1999. A little studio apartment near the last subway stop could be bought for $9,000 back then. Now it’s pushing sixty grand. See why I boldfaced that? Because it appreciated nearly 700% in 7 years. Crazy? It’s true, I checked today.

Completely mesmerized by this insane growth in real estate values, at first I thought, “bubble“. After asking a few guys who know, I realized the combination of certain factors can, in fact, create such an appeciation for the nearest foreseeable future, and not be a “bubble”.
Here are some factors:

• Only upscale apartment complexes are being built at this time. Simply put, the average Joe is suffering the same low supply … with ever-growing demand.
• The demand is ever-growing because everyone wants to live in Kiev (the capital). There is nothing to do in the regions. The other important town in Ukraine is Odessa, but it’s treated as summer home territory for the Europe’s wealthiest. Because of such influx of people into Kiev, the demand skyrocketed, but the supply remained the same or decreased.
• The supply of the apartments is monopolized by two companies, KievMiskBud-1 and KievMiskBud-2. For all intents and purposes, they, and only they decide where and how and for how much and for whom the new apartment complexes are going up. I mean, the barriers of entry are so vast here that the monopoly situation is not going to change for a while.

If you are convinced it’s still a bubble, give it up. Who’s going to build a row of nice, yet cheap, apartment complexes to destroy this bubble? And why? If I was an apartment-building mogul in an UNREGULATED MARKET WITH WEAK LAWS, I would too slowly build a few aparments for the rich and maximize my super-revenues.

The only way out of this situation is to either stop people from coming to Kiev, or build more apartments. I feel I pretty much cleared up the latter.

Back to me being a construction mogul … I’d have a nice house … nice things … and repaint my Benz black.