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Real estate market to re-activate in the likely event of low interest rates on mortgage loans

Author:

15.07.2018

The shape of Baku is changing rapidly, and the capital city is steadily getting rid of out fashioned houses and five-story buildings replacing them with modern buildings instead. With the exception of the historical sites of Baku, construction cranes can be seen in central and peripheral areas, where private construction companies are active.

According to the State Statistics Committee, in January-May 2018, 640,8 thousand square meters of housing was commissioned, which is 11.1 thousand square meters (1.8%) more than the indicator of the same period last year.

In fact, for the first time in four years, the growth of housing construction was registered in 2017, when the practical implementation of the Demolition and Replacement Program for dilapidated and obsolete housing approved by Decision No. 86 of the Cabinet of Ministers of Azerbaijan on February 25, 2016 was started. Last year, more than 1.7 million square meters were commissioned, which slightly exceeded the statistics of 2016. Although this indicator is also lower than the level of 2013, when more than 2.1 million square meters were built throughout the country. However, it's still early to talk about the times when the volumes of housing construction reached 4 million square meters.

Undoubtedly, the pace of housing construction depends on how attractive this sector is for the business community. Taking into account stimulating measures on the part of the government, within the framework of the aforementioned program on dilapidated housing, the business community increased its investments in the construction of houses.

According to the State Statistics Committee, investments in fixed assets in the first five months of this year reached ₼5.2b, which is 10.5% less than in the same period of 2017. Meanwhile, business community invested ₼319.3m in housing construction, which is by ₼25m, or 8.5%, more than the same period of 2017. In 2017, the volume of investments in housing construction reached ₼891m.

It is known that each manat invested in construction sector equals four manats in related industries. Therefore, the construction sector is an important industry in terms of creating additional jobs.

The increase of public solvency is one of the pillars of the development of housing construction, as business circles do not wish their finances "stiffen" in concrete.

Compared to the corresponding period of the previous year, in January-May 2018, the nominal income of the population increased by 9.3%. Given the curbing of inflation, the population was able to increase its savings and channel part of the income to improve housing conditions.

Chairman of the Board of the Appraisers Society of Azerbaijan Nusret Ibrahimov said that due to the growth of housing construction in recent years, prices have decreased slightly. On average, the cost of housing in the secondary market was ₼1,630 per square meter, which is 6.16% lower compared to the previous year. In the primary market, a square meter costs an average of ₼1,221, down from last year's 5.94%.

In return, there is a growth in prices for rental housing, which is associated with the demolition of dilapidated housing and the provision of construction companies with cash compensation for the removal of temporary housing to the owners of demolished apartments.

According to Ibrahimov, in comparison with last year, the activity of the population in the real estate market grew by 8%.

It is also possible that the development of tourism in Azerbaijan can lead to the purchase of housing by foreign, in particular Arab investors. In Azerbaijan, foreigners are allowed to build and own housing, but the land under it will remain a state property. This in most cases does not suit foreign investors.

Therefore, construction companies also rely on the solvency of the population. It is possible to intensify activity of the population in the real estate market by decreasing interest rates of mortgage loans, which was also noted by the Chairman of the Central Bank of Azerbaijan Elman Rustamov.

By the way, in May 2018, the Cabinet of Ministers significantly simplified the requirements for borrowers of mortgage loans. Prime Minister Novruz Mammadov signed changes regarding the conditions for granting a mortgage (“On calculation of monthly total income of the borrower(s)”) – a compulsory requirement on the period of entrepreneurship of the borrower, as well as the total income of entrepreneurs paying simplified tax in the service sector was reduced from 24 to 12 months (the upper ceiling of their total recorded income is now set at 70% of the turnover, which was previously 40%). It should be noted that as of June 24, the Mortgage and Credit Guarantee Fund has lended a total of 22,638 mortgage loans for the amount of ₼1.040b.

All forecasts suggest that in the near future world markets will not be volatile, as in previous years when oil prices fell by three times. On the other hand, the Azerbaijani government is actively implementing reforms in non-oil sector, which will reduce dependence on oil revenues. This will eventually be reflected in Azerbaijan's economic stability and, correspondingly, in the growth of housing construction.


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