Thursday, October 12, 2006

Soaring Real Estate Prices

Real estate values keep up their upward march. Prices have more than doubled, tripled in some cases, over the past three or four years (see here excel file, also see in Armenian). In central Yerevan, the price per square meter was US 631 in 2005 compared to 328 in 2002. However, the price in the Nubarashen district of Yerevan was only USD 152 in 2005, but also grew rapidly up from 50 in 2002. [A square meter is 10.76 square feet]

In contrast to the capital, prices in the regions or marzes remain low but otherwise exhibit similar growth. In Dilijan, for instance, the price increased from USD 26 per square meter in 2002 to 64 in 2005. Similarly, the price in Sevan increased from USD 24 to 54 over the period 2002 and 2005.

The overall number of transactions nearly tripled from 44792 in 2001 to 122545 in 2005.

It should not be surprising that prices are much higher in Yerevan, particularly given the pace of construction with much of it taking place in the capital (see here, also see for more recent and location specific activity). But how long will this price appreciation continue, and what is driving it? Is there any evidence of local speculators? Who is building (and profiting from) the new construction? Are there any distributional issues we should worry about as the poor are frozen out of the market (as in the example in here)? Are we approaching a bubble of sorts, and are mortgages outstanding large enough to be an issue?

How much of what we see is driven by Diaspora purchases of apartments in Yerevan, and how would prices in the capital and more importantly the regions change once the Diaspora is allowed to buy land? How much the prohibition on Diaspora land purchases distorts real estate activity (and prices)?

[Please email me if interested in contributing]


Anonymous said...

very interesting analysis. Have rents gone up? This arguably could be an indicator of whether there is any sustainability.

David said...

Good point. Question is where can we find data on rents.
My thinking is that these prices are sustainable as long as the economy continues its robust growth, remittances keep rolling in, and the diaspora keeps on coming. Of course one needs more empirical evidence to gauge the sources of growth. If you know anyone interested in writing on the subject, I'll be happy to post a working paper on the AEA website (

Onnik Krikorian said...

Rents have increased in my part of town -- Komitas. However, this is driven by a large influx of Iranians and Iranian-Armenians. In particular, this means students.

They're able and willing to pay more rent and Armenians are only too happy to charge them it. Unfortunately, this then affects all of us.

For example, I've rented this apartment for over 5 years now and a friend of the owners who now live in Holland tried to convince them to kick me out.

Iranians would pay an extra $100 / month he told them. Thankfully they didn't listen. Anyway, also interesting to note that rents are seasonal i.e. in the summer people try to double or triple the rent because they hope to make more money from tourists from the Diaspora.

I have never heard of such a seasonal change to such an extent in cities I lived in England, including London, so does that suggest that this area of the economy in Armenia is not stable?

Anyway, I've never looked upon the new construction in Yerevan as being "genuinely" driven as opposed to "corruption" driven.

Nevertheless, another question that needs to be asked is with property prices going through the roof yet salaries remaining disproportionately low, when will anyone even consider the idea of supporting low cost affordable housing and more long term lower-rate mortgages?

Vahe said...

"...with property prices going through the roof yet salaries remaining disproportionately low, when will anyone even consider the idea of supporting low cost affordable housing and more long term lower-rate mortgages?"

Supporting affordable housing ususally means providing government subsidies for rent, or simply placing price ceilings on housing. Either way distorts the true relation of supply and demand, further deteriorating the market and usually creating shortages. The way to relax the growth of prices is by increasing the supply of new housing. That being the case, whether new cunstructions are "genuinely" driven or "curruption" driven, for as long as they add to the number of housing units available for sale, they press the prices downwords.
Also, building houses usually takes long time, but in Armenia, I suspect, underdeveloped infrastructure of roads, power lines, etc. makes it even harder.

David said...

In addition to affordability, the housing sector is plagued with numerous other problems. One major concern is that the quality of the existing stock which continues to deteriorate (cracks in walls, old and unsafe elevators, common areas in need of desperate repairs, ...) which may eventually cost in the $ billions and affect tens if not hundreds of thousands.
Seasonality should not be a big issue. Ski resorts are cheap in the summer, and beach resorts are cheap in the winter! It is not pleasant if you are at the bottom of the food chain, but otherwise it is quite common. Your example Onnik is a good one, but beyond that I wonder how big is the impact of diaspora members locating permanently (or semi) in Yerevan. Also, what role the demographic shifting from rural to urban (i.e. yerevan) plays? As implied by Vahe, unless the supply of housing expands in response to the expanded demand for housing prices are bound to rise and well meaning policies may not be beneficial. I would be curious to know whether anyone has written on the subject and explored the underlying determinants of housing demand and supply.

Onnik Krikorian said...

Well, I'm so sure that the idea of low cost affordable housing is so strange and one that requires subsidies from the State.

Basically, take a look at the new construction going on and it' all luxury apartment blocks or mansions. Okay, while older Soviet apartments are still available, the new construction bumps up these prices.

Interestingly, low cost affordable housing with low mortgages are being made available by charities such as Habitat for Humanity because there is the need. However, this isn't quite what I meant either.

Anyway, I guess a stronger mortgage market would be the idea solution to the main problem in this area although I still find it paradoxical that property prices are as they are, and salaries are still so low.

Or maybe I'm forgetting the obvious. Basically, it is not salaries that determine how you live in Armenia. Corruption and remittances from abroad (as well as the Diaspora factor) determine everything.

David said...

I had a chat with an Italian architect building new condos in yerevan last October. He told me that apartments were for sale for USD 1000-1500 per sq. meter. I don't know what they are worth now, but that is a price beyond the reach of most of the locals.
Obviously I have tremendous sympathy to the point that Onnik is making, but has anyone documented the size and magnitude of what is at stake (how many, where, ...)?