Housing in Azerbaijan can grow in price

Analysis Materials 3 June 2011 10:04 (UTC +04:00)

Real estate specialists in Azerbaijan predict rising in cost of housing in the capital. Already the prices for construction work in Azerbaijan increased by 0.1 percent in the first quarter compared to the fourth quarter of 2010, and increased by 0.9 percent compared to the same period of last year, the Azerbaijani State Statistics Committee said. Cost of ground work increased by 0.2 percent compared to the previous quarter, while by 1.3 percent compared to the same period of last year. Prices for housing construction during the first quarter rose by 0.2 percent, while by 1.6 percent during the year, construction of socio-oriented facilities increased in price by one percent during the quarter, while by 0.1 percent during the year.

Referring to the recent history of the property market, it is possible to note that the middle and end of the first decade of the century were marked with an unprecedented increase in property values ​​in the capital of Azerbaijan. Housing prices in Baku in 2007 rose by 30-40 percent - an incredible figure with the European standards.

So the catastrophic increase in the property prices was due to many factors, first and foremost - a change in the legislation of the Republic, which significantly complicated the process of obtaining a building permit. Unlike previous procedures, limited only by the signature of the city administration, the new rules required the developer have to pass a dozen of regulatory agencies. In addition, the rise in prices was affected by the decision of control authorities to demolish more than a dozen of residential buildings that do not satisfy the requirements for seismic resistance.

In the midst of crisis of 2008-2009, Azerbaijan's real estate dropped in price slightly - around 5-10 percent. However, such a change in price almost occurs in a standard seasonal fluctuation. In late 2009, in the twilight of world economic turmoil, the cost of the Baku real estate over the past three to four months jumped from one to another extreme grow up in price by 15-20 percent for the week.

As of the end of 2010, a decrease in value of real estate was recorded: compared with the same figure of the previous year, the cost of housing in the primary market fell by 16 percent, second market by 5 percent.

The reasons for today's projected growth in housing prices in Azerbaijan are in some ways caused by developing a new general plan for the Azerbaijani capital. In accordance with the general plan, the new agglomeration that includes Baku, Sumgait city and Absheron district will cover a territory of more than 219,000 hectares - in fact, the city will grow by 10 times. Inevitably this will lead to a revision in real estate prices.

There is one more reason for the growth of housing prices in the country. Thus, the conditions of mortgages in Azerbaijan are expected to be amended soon. The new changes will allow young families to benefit from the mortgage. After the changes, the new apartments will also become available via the mortgage. Changes will also affect the salary and primary payment. The amount of initial payment is projected to be decreased up to 10 percent and the minimum wage - by twice. Problems with the registration documents for new apartments also made it difficult to obtain mortgages. The main purpose of change is precisely to create opportunities for young people to buy apartments in new buildings. From this point of view, it is assumed that it will be possible to buy an apartment, even without registration.

For example, today the conditions of preferential mortgages are not favorable for young families because it is impossible to buy an apartment for such a sum in downtown Baku or surrounding districts. If the interest rates fall from 4 to 2 percent, the amount of required wages will also fall by half. This means that if earlier to obtain preferential mortgage the monthly salary was to be AZN 400, after changes, the preferential mortgage will be received by citizens with a salary of AZN 200 per month. There are plans to create a Guarantee Fund associated with the initial payments and payment of interest on loans. The Fund will help young families in interest payments on the mortgage. In addition, the Central Bank plans to establish a Building-Savings Bank, which will provide funds to persons who are unable to pay the initial fee. It is also expected to allocate 28 million manat from the state budget for mortgage loans.

Accordingly, the situation in the real estate market will change significantly in the direction of demand, hence prices will pull up. Another obvious reason for the supposed increase in housing prices is imminent abolition of the visa regime between Azerbaijan, Iran and Turkey. At this stage, the discussions on lifting visa regime between Azerbaijan and Iran are continuing. Iran, for its part, has canceled visa requirements for citizens of Azerbaijan and is waiting for reciprocal steps from the Azerbaijani side. However, there are technical problems that Azerbaijan should consider, in particular Azerbaijan is going to lift the visa regime with Turkey and Iran.

Exactly in this connection, the real estate market of Azerbaijan could face a certain pressure. After all, the money supply in Turkey and Iran are much higher than in Azerbaijan, which could cause the price boom in real estate.

Possibility of reducing the surplus between supply and demand due to demand for housing in Azerbaijan among foreigners seems likely. Today, the share of foreigners buying property in Azerbaijan is not high, although about 2 years ago, the number of flats purchased by the citizens of Iran increased. According to experts, if during a month about 450 apartments are sold, then an eighth of them are accounted for the citizens of Iran.

In the case with the Turkish citizens, the situation is as follows. The number of purchases of apartments by the citizens of Turkey could increase by 3-5 percent after the lifting of visa regime between the two countries. Although such a small increase is not enough for the price boom. To raise prices on the real estate market the "pressure" should increase by about 20-25 percent. However, the increase in prices is still apparent.

The compulsory insurance of housing - the bill on which is discussed in the Parliament of Azerbaijan may also affect the price climate in the market. Azerbaijan has started to apply the practice introduced in almost all countries worldwide where. Paying AZN 50 to the insurance company per year, the citizens can buy security for their homes in amount of 25,000 manat.

Under the bill, regardless of the housing cost the insurance sum is set at 25,000 manat for Baku, and the release amount at 250 manat. The figures are 20,000 manat and 200 manat, respectively, for Sumgait, Ganja and Nakhchivan and 15,000 manat and 150 manat - for other regions. The insurance fee for Baku's resident will hit 50 manat a year with insurance rate at 0.2 percent for this type of insurance. One who seeks a higher amount of insurance compensation has the opportunity to buy voluntary property insurance policy that will allow development of this insurance type. Under the bill, the compulsory insurance of real estate will be distributed to all types of buildings, houses and apartments belonging to individuals, offices, legal entities, public property. In this case the insured event will be considered the facts related to damage to this property as a result of fire, explosion, lightning, short circuit in the electrical system, an accident in the sewer or water system, natural disasters, etc.

Although many analysts argue that the introduction of compulsory insurance of residential and commercial real estate would increase its value, their opponents believe that the existence of compulsory insurance will not lead to a significant increase in housing costs, since the insurance rate is only 0.3 percent of insured property.