Shocks in 2008 and the real estate market

The country was subjected to 3 shocks in 2008. One of its own creation in March, and two external and beyond its control. I have written about the first, the post election violence of March, and the second, the war between Georgia and Russia in early August. The third, the financial meltdown in the US and the evolving global crisis and their ramifications for the country have yet to be fully explored.

This post addresses the impact of these shocks through the prism of the real estate market in Armenia. Obviously any observation made has to be subject to several caveats as a complete model is necessary to evaluate the various factors that drive the real estate market.

Prices have been increasing at a rate of 30 percent per year since 2001. Prices reported by the Cadastre committee for November suggest a growth close to 10 percent (actually 299400 vs 279900 Drams per sqm for same month). This could be good news or bad news depending on one's perspective on the counterfactual. But the trend gleaned from the number of transactions is much clearer.

Compared to 2007, sales dipped by 5 percent in March following the disturbances in Yerevan on the first of the month. In early August, war broke out between Georgia and Russia which in effect cut off Armenia's links to most of its trading partners. Real estate transactions dropped by 22 percent in that month compared to sales in August of 2007. And it has been on the decline ever since, with sales lower than the comparable figures for 2007 by 35 percent in November. Obviously instability in Georgia does not bode well for Armenia. It is not clear whether the global financial crisis has hit Armenia as of yet, and very difficult to glean its impact through the real estate market with the information at hand.

There is an obvious need for greater research on real estate and the housing market in Armenia. It would be good to hear who else is working in this area.


Percent change in volume of real estate sales: 2008 vs. 2007.
Source: computed from Cadastre data

Note: I have posted prices through 2006 on the data pages of aea.am. I have yet to update the information through 2008.

Acemoglu on the 2008 Crisis

Daron Acemoglu wrote a recent essay on the economic crisis that you may find interesting. Daron makes the case, among others, that the assumption that rich countries had good institutions which would prevent abuse and not endanger social systems was incorrect.

This is a must read for those who are interested in how economic models and our thinking of institutions need to be revisited.

Daron is an economics professor at the Massachusetts Institute of Technology, an Armenian originally of Istanbul.

Government policies

The IMF released two reports last month, one written by the government and the other reflecting comments from IMF and WorldBank economists.

The government's 300 page Poverty Reduction Strategy Paper released by the IMF provides an exhaustive non-technical review of its policies and plans, as well as includes a treasure trove of figures and statistics. In an IMF/WorldBank joint Advisory Note on the paper (11 pages), the second document critiques the government's proposals highlighting its failures (and praising its successes) as well as advances the staff's own recommendations.

Given the various shocks the country was exposed to in 2008, these make for very timely and informative reading.

What is the outlook for the economy?

Much has been written lately in the press on how the global financial crisis will impact Armenia's economy. Some express concern over how remittances may be affected if the economies of the host countries for local migrants were to slow down, and others on how the market for the few goods that the country exports might contract.

This global crisis was triggered by the financial meltdown and recession in the US. The business cycle is a fact of life, which may, with various degress of severity, hit the US economy every seven years or so. In all likelihood, the US will recover by 2010. There is little that a country the size of Armenia can do about these (external) cycles. The government's talking up the economy and expressing a sense of optimism, a cheerleader of sorts, is all that it could do in the immediate run. In the long run policies to streamline the economy are critical. Here the government is aided by economists at the IMF and the World Bank in shaping its macro stance and long term outlook (see an excellent IMF report on economic policy in Armenia released in December).

This crisis may have adverse impacts on the country. In addition to the above, fewer tourists may visit the country and less FDI may take place. But there is also an upside to the current situation. There will be tremendous reduction in the cost of energy imports; over $600 million was imported in 2008. In addition, the price of raw materials and of capital goods have also declined, in the presence of a stable currency.

The economy was subjected to a number of shocks in 2008. The fact that the economy has grown about 7 percent is nothing short of a miracle. But the uncertainty generated by these shocks does not bode well for the short term performance of the economy. Market psychology is critical but it is also very difficult to gauge. Would foreignors continue to invest? Will the Diaspora keep coming and building? Would Armenian consumers switch from imports to locally produced goods? Would the growing number of Armenians vacationing abroad now stay home? Also, how effective will be the World Bank, IMF, and EBRD programs? Equally important is how vigorously the new government will pursue the reforms it announced.

Following news coverage of the discussions on the US economy at the American Economic Association annual meetings in San Francisco last week, I wondered why this environment cannot be transplanted to Yerevan and have researchers discuss their findings on the economy of Armenia. The reality is that there is no visible independent research on the economy of Armenia with competing views presented and debated.