A Patient Prosperity in a Sea of Change
It is an exciting time for the residents of Iraqi Kurdistan. Foreign direct investment is flooding into the region and new development projects in real estate, transportation, and health care are springing up in its urban centers. A climate of security and stability has become the economic hallmark of a region compassed by areas characterized by volatile investment environments. Companies, both domestic and foreign, are eager to invest in the local economy, and the potential of the area appears to be limitless. However, with much potential comes much risk, and the perils associated with a rapidly growing economy are of paramount significance to the region.S
The potential pitfalls associated with an over-capitalized housing sector are of particular relevance considering both the wealth of financing currently streaming into this area of the local economy and the global repercussions of the real estate meltdown in the West.
Real estate agents in small blocks in the main cities of Erbil, Sulaimania and Dohuk have become a common site, especially in Erbil. In the absence of buildings to house these businesses, makeshift cabins are put in place for small-time fast-cash mini estate agents. The real estate market is no exact science with entry qualifications. These agents are usually common men with a streetmarket practical understanding of what’s hot and what’s not.
When housing prices are on the rise, there is a temptation to invest in real estate projects to a degree that becomes unsustainable in the long run. Investors see yields rising almost overnight and are quick to jump on the bandwagon so as not to miss out on potentially lucrative investment opportunities. The recent trend toward off-plan property development is an example of the wave of speculation approaching the shores of the local economy, with housing prices rising significantly even before construction is completed on some of the projects. Such real estate speculation can bid up prices to unsustainable levels as investors who attempt to profit from the short-term, often temporary, appreciation in housing prices vie for ownership of the assets.
Land is quickly becoming more and more scarce as huge plots are assumed into municipality master plans and are taken from the ministry agriculture for the purpose of feeding the population pieces of land to deal with the growing housing problem. The shift toward apartment blocks has been all too slow, especially after the government burned its hand with one Turkish contractor, Cevikler, that was supposedly building a large number of apartment blocks for low-income households. This by no means was the first and last foreign company that cashed in their capital quick and left the country high and dry before completing their project.
Speculators are generally not interested in the fundamental value proposition offered by a development project, as they are not long-term investors. It is important to note that more and more of the capital that is fueling the rapid growth in the local real estate market is coming from investors who do not live in Kurdistan, and are thus only “invested” in the local economy to a marginal degree. For those who actually live in Kurdistan, the consequences of speculation are more critical.
As real estate prices are a fundamental determinant of the general price level of an economy (people need places to live and businesses need places to do business), an inflated real estate sector resonates throughout the entire economy, resulting in an increase in the cost of living for all citizens. As long as local incomes are rising as rapidly as the cost of products and services, residents should be able to maintain the same standard of living. However, if this is not the case, local residents may have to resort to other methods of financing their spending, such as going into debt. Consistently rising housing prices could very well lead to a general movement toward debt-financed living, as the average home buyer would be required to take out a mortgage in order to afford housing. In light of the recent global financial crisis, which was catalyzed by an inability of individual citizens to meet their mortgage obligations on overpriced housing liabilities, fueled by mass speculation in U.S. real estate markets, the application is of critical significance to the developing economies of the world. The ebb and flow of the Kurdistan real estate market is largely dependent on two fundamental factors. The first is oil, which is going to be constant with no sudden changes in the foreseeable future. The other is political stability; here the area is in constant metamorphosis, and geopolitical shifts with the looming prospect of the collapse of the Syrian regime could have a cataclysmic domino effect and alter the balance of power in the region.
For a developing nation with the potential of Kurdistan, patience is the path to permanent prosperity.
A view of cafes and stores at the Family Mall, a modern shopping center in Erbil.