Property boom: A burst housing bubble could leave Kurdish region in tears

By Shwan Zulal:

This article first appeared on Niqash

In Iraqi Kurdistan, locals are enjoying a property boom. As demand outstrips supply, buying off-the-plan is more popular. But if this housing bubble bursts, the region could face severe economic and political consequences.

In the semi-autonomous state of Iraqi Kurdistan, an area that is generally more secure and more open to international investors than many other parts of Iraq, there are more and more people climbing onto the property ownership ladder.

And one of the latest trends in this property market is buying off-the-plan properties from larger developments; they’re very much in demand and often popular projects sell out almost immediately. Even before a popular property development is completed, buyers may have been able to cash in on an up to 40 per cent increase in the property’s value.

As well as being semi-autonomous in terms of legislature and security, Iraqi Kurdistan has a semi-independent economy. Since the fall of former Iraqi leader Saddam Hussein after 2003’s US-led invasion of Iraq, the economy in this area has accelerated rapidly; in fact, over the past four years it has literally boomed. A combination of increasing oil revenues and the money poured into reconstruction efforts along with lax regulation have been the main drivers of this boom.

Oil production has been increasing quarter on quarter – even though it is not always being sold through conventional channels – that is, the oil supplies are trucked and do not go through the Iraqi government’s pipelines. The fact that Iraqi Kurdistan receives 17 per cent of Iraq’s budget and that oil prices have risen and remained above US$80 per barrel for almost a year now has kept the regional government’s finances in good shape.

As it is in the rest of Iraq, the government is by far the largest employer in the region. The private sector makes up a tiny proportion of the economy although large telecommunications and construction companies promise to increase private sector employment, as does the banking sector which looks likely to be the fastest growing sector in Iraq in the near future.

The oil money comes in and is distributed through payment of inflated wages by the state. Yet ordinary people have little or no access to any kind of investment. Banks are not yet fully trusted and the local stock market has a long way to go – the local population have very little knowledge of how it works.

So property is by far the most attractive form of investment.

Having said that, there is very little data maintained on property prices in the area – as a nation Iraq does not publish a house price index – so it’s hard to find meaningful numbers. The numbers that do exist indicate that house prices have quadrupled and, in some cases, even risen tenfold since 2003. All the hallmarks of a housing bubble are there – you can see it just by looking through any real estate agent’s brochure in Erbil or Sulaymaniyah, the two largest cities in the region.

Before the 2003 US-led invasion of Iraq, property prices here were seriously undervalued for obvious reasons. However, since the fall of Saddam Hussein, prices have risen dramatically. And while the Kurdish Regional Government is investing heavily in commercial property, public demand appears to be driving the residential market.

And the off-the-plan market is the new investment craze. Demand is high in this area but the lack of consumer protection means the potential for malpractice and fraud is also rising.

Due to high prices, private properties are fast becoming unaffordable for young people and first time buyers in Iraqi Kurdistan. The government has been trying to tackle this issue by introducing financial schemes to enable younger people to get on the property ladder. This includes, for instance, offering government employees the option of an interest free loan. The state provides 30 per cent of the financing for an off-the-plan project, depending on the age of the recipient. The recipients need to reside in Iraqi Kurdistan and they usually won’t pay any interest for around 20 years. The policy has proved popular although it is not completely fair as it is only aimed at public sector employees.

Initially these kinds of government initiatives will only push housing prices higher until the market catches up and more properties are built. The majority of buyers are cash purchasers but there will come a point where property prices are so high that newcomers to the market won’t be able to buy outright and will require mortgages. Apart from various government schemes though, the mortgage market is almost non-existent.

High property prices may well lead to a mortgage market opening up in the region, which would also be a catalyst for the multinational banking sector’s presence in Iraqi Kurdistan – although an overpriced market may mean that banks are reluctant to lend a great deal if, and when, they decide the time is right to enter the Kurdish market. Lack of financing and a shortage of new capital could eventually catch up with the market and deter buyers.

Meanwhile, the rental market has risen outrageously and rental yield – that is, the amount of rent the property earns over a year expressed as a percentage of the purchase price – in the populous city of Sulaymaniyah, for example, appears to be go between 6 to 17 per cent. To compare, average rental yields in Germany sit at around 4 per cent, in the USA around 5 per cent and in Egypt they are around 7 per cent. This rise in rental yield in Iraqi Kurdistan has made the commercial property market particularly attractive and investors have been rushing to cash in on what the market has to offer.

All of this means that the appetite for investments in properties and land appears to be unquenchable, with new developments offering deals and selling properties off-plan.

However this doesn’t mean the good times will last forever. Ask around estate agents in Sulaymaniyah and it quickly becomes apparent that rental demand for commercial property in other than central city locations has been sluggish; property owners are starting to lower rent prices. This could be the start of a pattern that may spread into other parts of Iraqi Kurdistan’s property market.

But as with other property bubbles, such as those recent ones in the US and in Europe, those involved convince themselves that the market is resilient and search for any excuse to prop up their convictions. Researching the property market in Kurdistan, you will often hear people using the same arguments that one would have heard in the US and UK prior to 2008, when the housing bubble there burst. They says things like: the economy is strong and will keep growing at more or less the same pace, there’s more demand than supply and even: “they don’t make land anymore”.

Should the property bubble currently inflating in Iraqi Kurdistan burst, the crash could have a damaging effect on the region. For many people, property really is their only investment option and a market correction would be a severe blow.

The economic impact of a failing property market could have severe consequences for Iraqi Kurdistan’s fragile economy. Property transactions are one of the main economic activities in the region and falling property prices would be directly linked to falling consumer confidence as well as business stagnation in the area.

In most nations, when the economy falters, the government gets the blame – and Kurdistan is no exception. Tensions are already high between different political factions in power as well as between the government and the public who have been protesting about corruption. Added economic uncertainty, as locals see the price of their most valuable investment drop dramatically in a short period, would only add to this kind of unrest.

However policy makers in Iraqi Kurdistan do not seem to have grasped the seriousness of the housing bubble the region is sitting on and its consequences if the bubble eventually bursts. There are no real policies in Iraqi Kurdistan to try to control the property market and currently local politicians appear to be content for the general public to feel wealthy, while they see the value of their property continue to rise. The state’s Ministry of Finance is also happy to benefit from duties paid on property transactions.

It is never easy for a government to meddle in the property markets but leaving the local property market unregulated could have severe consequences. In particular, the Kurdish Regional Government should take steps to tighten regulation around off-plan developments in order to minimise any potential foul play by developers. As yet, there have been no reported cases in Iraqi Kurdistan so far but the potential is clearly there.

Measures the government could take here include requiring property developers selling off-plan to maintain escrow or trust accounts to protect consumers in case of developer default. And, in more general terms, the government could also introduce taxes that try to calm inflated property prices so that when the local market hits its peak, the landing for everyone involved will be softer.

“Predicting how a property market will go is never an easy task. But taking precautions when buying off the plan is essential. Consumers can do this finding out how long the developer has been in business, how many projects they have completed, whether there have been any complaints made, what sort of financial backing the developer has and how realistic the development is – for example, looking at the general market, does the unit seem too good to be true”.