A Pa­tient Pros­per­ity in a Sea of Change

The Kurdish Globe - - COMMENT & ANALYSIS - Co-writ­ten By Jamin Cas­ci­ato and Swara Kadir

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.

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