"OVERHEATED" MARKET

In the past 18 months, the real estate market in the capital city has experienced unprecedented growth. The last time a comparable feverish demand and a rapid price rise were seen, primarily regarding budget housing, was in the years 2007-08. However, the current rise in the prices of flats is largely due to the massive demolition of several neighbourhoods in central districts of Baku. At the same time, some experts believe that the peak of the current housing boom has now passed, and as soon as next year one can expect stabilization in the overly "overheated" market.

In the first two to three years after the global economic crisis, the capital city's real estate market showed relatively sluggish dynamics of sales operations, which resulted in insignificant changes in price parameters. Housing in the capital city, which became cheaper after October 2008 by more than 30 per cent, regained positions it had lost by means of a pace of growth that did not exceed 3 to 4 per cent each year. The latter fact was largely a manifestation of inflation indexation. 

A marked activity of construction companies also contributed to the preservation of stable, relatively affordable real estate prices. After passing through a period of decline (2009-10), which fell on the peak of the global crisis, Azerbaijani construction companies confidently increased production dynamics in the next three years. This trend was most clearly seen in the housing construction segment.

Thus, according to the State Statistics Committee, in 2011 volumes of housing construction in this country exceeded 1.9m square metres, and this figure has been named an absolute record of the past decade. Although in 2012 volumes of housing construction decreased slightly - to 1,757,000 square metres, already last year the construction sector, supported by consumer demand, made a breakthrough again and achieved volumes of housing construction that were unprecedented throughout post-soviet history. In particular, more than 2,138,000 square metres were built, which was 21.7 per cent more than in the previous year.

Unfortunately, most probably it will not be possible to achieve comparable record levels this year: according to the State Statistics Committee, the pace of housing construction in January-July this year decreased by 16.5 per cent, and approximately 986,000 square metres were built. The reduction in the overall pace of construction is due to several factors, including a reduction in free plots of land in the capital city, whose price would have allowed building economy-class blocks of flats on a mass scale. Most of the land that is suitable for the construction of multi-storey blocks of flats in the centre of Baku has actually already been used, and the remaining plots are expensive and are therefore mainly used to build premium-class residential complexes.

"The about 110 construction companies that operate in the capital city have markedly reduced the construction of buildings with budget flats," Nusrat Ibrahimov, a well-known expert in the housing market, believes. He says that under current conditions - constantly rising prices and excessive market demand - it is not profitable for construction companies to build budget housing. Construction companies increasingly more often reorient themselves to a more expensive and therefore highly profitable segment with larger flats, because even this not so cheap housing has now come to enjoy demand amid a general rise in prices. Thus, since the beginning of this year, there has been a marked rise in the prices of luxury apartments in newly-built blocks of flats in Yasamal and Nasimi districts, where 1 square metre costs between an average of 1,500 and 4,000 dollars.

So, what is the cause of this very high demand for flats and the corresponding price rise that have been observed over the past 18 months? Certainly, this is not the least because of favourable market conditions: people with a stable income are active in the real estate market in the capital city. In particular, there has been a marked increase in the proportion of civil servants and employees of large private companies who buy flats on mortgage loans, which results in an increase in market demand and a price rise.

"An equally important reason for the rise in the prices of flats is large-scale work to demolish dilapidated housing in the centre of Baku. Owners of demolished housing are given a compensation of 1,500 manats per square metre, and this is also a significant factor that jacked up the prices of new and used housing," Ibrahimov believes.

The most graphic example that illustrates the current situation is the construction of the multilane road and the Winter Boulevard between the Heydar Aliyev Palace and Fuzuli Square, which involved the demolition of homes and the payment of compensation, which provoked the first surge in real estate prices. The plans of the authorities of the capital city to build a motorway and a park complex in Narimanov Avenue (former Soviet Street), which will also cover adjoining neighbourhoods, has no lesser effect on the ratio of market supply and demand. Thus, by mid-August this year, about 1,650 people living in this area had sold their homes to the state in return for the fixed compensation.

A total of about 3,300 properties will be demolished in Narimanov Avenue. Similar operations are also being carried out in connection with the construction of metro stations and expansion of road junctions in other parts of Baku, which inevitably affects pricing in the capital city's real estate market as well.

Thus, in 2013, the rise in prices in the used housing market was 20 per cent, while in the new housing segment it even reached 28 per cent. This trend continued in the first half of this year, when the growth of prices for flats in Baku was almost 16 per cent.

In parallel, in January-June this year there was a marked increase in turnover in the real estate market in the capital city. According to the Central Bank of Azerbaijan, it was worth 2,383,000,000 manats, which was almost 30 per cent more than in the first half of 2013.

"Currently, there is a shortage of cheap housing in the market, and there are fairly many potential buyers left with money in their hands. Lack of budget flats has also affected mortgage lending, which has markedly decreased in volumes lately," Nusrat Ibrahimov believes.

So, two factors have affected construction companies in Baku: one of them is a marked increase in the intensity of operations to purchase and sell housing, primarily flats in the budget segment, and also feverish demand fuelled by the demolition of dilapidated housing in several parts of Baku. The trend of a general rise in prices for free plots of land in Baku, which has been observed for several years now, also contributes to the overall process.

What is experts' vision of further trends in the development of the housing market?

"Real estate prices gradually started to go down after the first half of the year. On the one hand, this was due to the vacation season, when market activity traditionally falls, and on the other hand, this had to do with a decline in the purchasing power of the population. Prices in the housing market are over-inflated, and the index of purchasing power lags behind the price rise. In these circumstances, real estate prices start to go down," Nusrat Ibrahimov believes.

When the vacation season ends, prices in the market will rise 3 to 4 per cent - mainly due to the purchase and sale of residential and commercial properties. Overall, in 2014, the housing market will record a 15-per-cent price rise, which is almost half the growth rate last year.

The excessive "overheating" of the capital city's housing segment has already forced a significant part of potential buyers out of the market. If this trend continues, there will very soon be a reduction in activity in the market, which will lead to stabilization of housing prices within the range of effective demand.