Today.Az » Analytics » How manat devaluation affects real estate?
08 April 2015 [09:25] - Today.Az
By Vusala Abbasova
Depreciation of the national currency manat by roughly 25 percent with regard to hard currencies has been met with concerns on the real estate market of Azerbaijan, which did not know how to react.
Ups and downs on the global commodity markets were expected to affect first of all the property market. Although it could retain stability, the change was felt only in the margin between the rates of manat and hard currencies.
Against the background of Western sanctions on Russia, falling oil prices and the appreciation of the dollar, CIS economies have undergone a number of sudden changes. The dependence of the CIS economies on Russia is determined by close connections through trade, remittances and investment flows.
"The sharp slowdown in Russia's economic growth has carried a significant shock to the economy of other CIS states, but the effect on the creditworthiness of these countries varies considerably," Fitch Ratings noted in its statement earlier. All oil exports-oriented economies --Russia, Kazakhstan, Turkmenistan, and Azerbaijan-- were affected by the decline in oil prices.
As the cost of Azerbaijani manat is determined by cash flows from oil and gas exports and about 95 percent of export earnings in the energy sector, Azerbaijan could not escape the side effects of fluctuations in the global markets. The strong decline in world oil prices and as a result, a decrease in the volume of petrodollars, resulted in a cut of Azerbaijan's export revenues, further entailing the state budget deficit. The escalation of economic instability pushed prices on the property market up.
The market was quite sensitive to the 25-percent rise in the exchange rate of the US dollar with regard to the manat, and immediately responded with a collapse by 24.1 percent. The Central Bank of Azerbaijan has reported that the turnover of the real estate market in January collapsed by 24.09 percent compared to 19.1 percent in 2014, 40.9 percent in 2013, and 24.86 percent in 2012.
The CBA stated that the property market turnover (on a cash turnover of notarial offices) amounted to 243 million manat on February 1, 2015 compared to 320 million manat a year earlier.
Proceeds on account of notarial offices on the purchase / sale of real estate amounted to 115.6 million manat compared to 155 milion manat in the previous year (down by 25.55 percent), and the write-off from these accounts made up 127 million manat compared to 165 million manats (down by 22.71 percent).
"Prices on the real estate market have not changed in Azerbaijan after a sharp devaluation of the national currency, and will retain stability in the coming months," Nusrat Ibrahimov, an expert on real estate, believes.
Is it too risky to buy a house when there is fluctuation in the manat rates?
Prices of real estate in the capital of oil-rich Azerbaijan located on the alluring coast of the Caspian coast is comparably high, leaving many hunters of comfort to seek housing outside of the city. In the last two years, many potential buyers have switched even from the primary and secondary housing market to the land market.
Now many potential buyers in Azerbaijan prefer private houses, which are rather cheap.
"You need to pay for the cost of an apartment at once, whilst buying a plot of land, for example, at 10,000 manats per one, offers you the possibility of gradually building a house over two or three years. For some people this method is much more advantageous," Ibrahimov assured.
Recently the government has stepped up measures aimed at improving housing affordability. Some experts believe that the cost of housing in Baku exceeds the purchasing power of the population. Mortgages are helpful in solving this problem, but the maximum amount of such loans (both conventional and social) stand at 50,000 manat (roughly $50,000), which is not enough for the acquisition of a property in most cases.
Now the Central Bank of Azerbaijan announced it plans to increase loan sum, but it still has not provided any figure. Head of the Central Bank Elman Rustamov assures that there "will be a significant increase" in the amount of mortgage lending.
Moreover, applications for mortgages will be available online from February 2015.
Today, the acquisition of housing is one of the most important issues for young families. To simplify the purchase of housing mortgages for young families in Azerbaijan, the state has already proposed to minimize or even cancel all pre-payments/deposits. Initial down payments in the social mortgage market stand at 15 percent of the house value and for conventional loans at 20 percent of the house value.
Only citizens of Azerbaijan have the right to purchase real estate by means of a loan or mortgage, according to the legislation of the Azerbaijan Republic. While a foreigner can buy property - for example an apartment or a house - they cannot buy land, which is reserved for Azerbaijani citizens only.