MULTI-STOREY PRICES

The already volatile real estate market of the Azerbaijani capital has been hit especially hard in recent days. The news that a decision has been made to demolish houses in a large area in the city centre, popularly known as "Sovetskaya", hit this segment almost as a tectonic weapon. The curve of prices started to creep up immediately, realtors and brokers are rubbing their hands in anticipation of "big business" while developers are counting expected profits. This is one side. On the other "side of the scale" is the dissatisfaction and confusion of potential customers, who say it is becoming more and more impossible for middle-income people to buy a house in Baku.

Demand against supply

Every month, the real estate market of Baku offers 2,000 apartments, but experts say the figure does not cover the existing demand. In this connection, it is not difficult to imagine what excitement awaits this area in the coming months: the residents of the famous Sovetskaya district have been notified of the demolition, and even the process of evaluation and negotiations for compensation have started with some of them. It is known that houses located in the area from Isa Haciyev Street to Narimanov Avenue, which borders on Tolstoy Street on the left and Alibay Huseynzada Street on the right, are to be demolished in the first stage. On the site from the monument to Nariman Narimanov to Huseyn Cavid Park, it is planned to build a road along the building of the Tax Ministry. This alone will lead to an influx of about 10,000 new potential customers into the market.

And if you consider that further demolition will take place in areas that are away from the centre, but are also densely-populated areas of the capital known as Alatava and Xutor, as well as White City in the direction of the village of Zig, you can imagine how rapidly the demand on the market will increase.

It would seem so what? A lot of new buildings that can, at first glance, meet the growing demand are already being built or planned to be built in the city centre. However, unfortunately, almost all new residential complexes here are premium or business class, which many of the current residents of Sovetskaya cannot afford because they have small houses, for which it is sometimes impossible to pay even half the cost of these luxury apartments in compensation. So they cannot even dream of newly-built houses, and most likely, many will seek to acquire new houses on the secondary market at least in areas close to their former homes. Market participants are well aware of this. But that's not all. "Potential buyers, who are wary of this year's projected price increases, will try to solve the housing problem as soon as possible, i.e. without waiting for a rise in prices, which will generate additional demand on the housing market," economist Vuqar Bayramov said. In short, housing prices that have started to increase will not stop any time soon.

The trend continues

Since 2000, real estate prices in Baku have risen by more than 7 times. If one square metre of secondary housing in the capital cost 244 dollars at the time, by the end of 2013 the price was already 1,807 dollars. At the same time, the most intensive growth in real estate prices was reported in 2005-2006. There were times when prices rose by 60% in one year.

During 2013, the cost of one square metre of secondary housing rose by almost 20% and primary - by 28.9 %, reaching 1,146 dollars. By the end of the year, the share of expensive homes in the supply portfolio accounted for 45.42 % and cheap ones - for 54.58 %.

A large portion of the portfolio (35.9 %) fell to apartments worth 85,000-95,000 dollars.

Prices per square metre of luxury housing by the end of last year increased to 3,339 dollars in the capital while in January 2013, the price was 2,120 dollars. Luxury housing rose in price mostly in Nasimi and Yasamal districts of Baku.

The director-general of the MBA Group consulting company, Nusrat Ibrahimov, believes that the rise in prices is due not only to the expansion of demolition work in the capital, but also the gradual decline in the share of cheap apartments in the supply portfolio (it is due to the reduced volume of construction) and, accordingly, the increased proportion of relatively expensive apartments.

The primary housing market also rose in price because of mass gasification as one square metre in an apartment connected to gas is 50-100 manats more expensive that in ungasified houses. The Azerigas Production Association of SOCAR connected 149 houses (30,374 apartments) in 2013 compared with 60 a year earlier. And in January of this year, SOCAR gasified 14 more new buildings (1,611 apartments).

We need to add here that such an important factor as the gasification of buildings confirms the existence of a government certificate for the house, which allows the developer to issue a bill of sale to homeowners and makes the apartment even more attractive and therefore more expensive.

But, on the other hand, according to Ibrahimov, developers are interested in selling the housing they build. Therefore, the further rise in prices on the primary market will not be as significant as expected on the secondary market, where some other processes are taking place.

The situation may also be exacerbated by the spread of information about the seismic unreliability of old residential houses in different areas of the city, high risk of earthquakes or any administrative bans. With this scenario, prices may rise by 20 % by the middle of this year.

The misleading information distributed recently about the country's Central Bank banning the issuance of housing loans can also cause an artificial price increase. This ban allegedly applies to construction companies that often sell housing in credit based on an individual contract, bypassing banks.

This report was denied by the Central Bank because it does not have the authority to issue instructions to other entities other than credit institutions operating in the country. Several major banks also denied information about the ban, saying that the situation on the market of housing loans has not changed.

Solving problems

As we see, the construction of affordable housing in Azerbaijan is becoming increasingly important just like questions of reducing rates on mortgages and expanding mortgage financing through the Azerbaijan Mortgage Fund, which are still under review, including at the Milli Maclis. As options for their resolution, the implementation of mechanisms of construction of high quality and affordable housing, the creation of private entities that will be interested in providing long-term funds to banks or subsidizing mortgage interest, as well as tools of public-private partnerships - including in the form of citizens' participation in the construction and savings banks based on the model of postwar Germany, which proved their effectiveness, are being considered.

As long as the conditions for obtaining a mortgage loan remain tough, not everyone who wants to buy a roof over their head can solve their housing problem by borrowing.

Also, as an alternative solution to existing problems and grievances, experts suggest building several high-rise houses on the site of the demolished houses and resettling residents there (if they wish to do so). "We could offer citizens apartments nearby according to the number of rooms in the demolished houses. Such a practice was used in Russia and Kazakhstan. In this case, new money does not come into circulation, which minimizes the impact of the plan to renovate the capital on the housing market," expert Bayramov says.

In any case, it is necessary to take effective measures today before the situation on the market becomes uncontrollable as the trend of growth in housing prices will undoubtedly eventually affect inflation in the country.