Azerbaijan real estate prices fall in 1H of 2015

The decline in the real estate market has also been reflected in a drop in property prices, which were down by 22% year on year in the capital, Baku, in June. The fall in prices is all the more striking, as some segments of the real estate market are likely to be dollarised, and it was, therefore, expected that prices would adjust upwards in manat terms, following currency devaluation in February.

The fall in prices is in part due to a tightening of lending conditions following the currency devaluation, which prompted banks to increase the size of the deposit that potential borrowers must provide. However, it is likely that the fall in prices and business activity also reflects a significant weakening of demand and suggests that household and business confidence has fallen significantly in recent months. 

The softening of the property market appears to contradict preliminary growth figures, according to which real GDP has accelerated to over 5% year on year in January-June 2015, from 2.1% a year earlier.

The sharp fall in real estate prices may also weigh on growth in the coming two years. The construction sector has been a key driver of the economy in recent years, contributing 2.7 percentage points to growth in 2013 and around 1 percentage point in 2014. According to official figures, construction rose by over 11% year on year in real terms in the first half of 2015, but it is likely to slow sharply in the second half, in response to the fall in property prices. 

The slowdown in the real estate market may also have negative implications for Azerbaijan's banking sector, via both a decline in new lending opportunities, and an increase in negative equity and non-performing loans (NPLs). As of June, the construction and real estate sectors accounted for just under 14% of the total domestic loan stock, with household mortgages accounting for a further 6.7%.

(Economist Intelligence Unit)