Author's column by Denis Sokolov: When will the real estate bubble burst in Tashkent?

Housing prices in Tashkent are rising by 20% annually. Many potential buyers believe that a bubble has formed in the capital's real estate market, which is on the verge of bursting. How does a bubble form, does it really exist, and what should you pay attention to when buying property? Analyst Denis Sokolov explores these questions in his column. 

Denis Sokolov is a partner and managing director of the international commercial real estate consulting firm Commonwealth Partnership Uzbekistan (CMWP) and a member of the Royal Institution of Chartered Surveyors (RICS). In his column, "The Language of Real Estate," the expert discusses the structure and characteristics of this market and shares insights on its future development. The two most common questions clients ask us are: "How can I make money in real estate?" and "When will the market bubble burst?" Greed and fear are the two emotions that drive investment decisions, whether it’s buying a street kiosk or a business center in London. Everyone wants to earn a lot but is afraid of losing everything. In the professional community, the balance of these emotions is called the risk profile or risk tolerance. It’s no surprise that many of my readers and clients are concerned with whether there’s a real estate bubble in Tashkent and, if so, when it will burst.

What Is a Real Estate Bubble?

Analysts at UBS define a bubble as a significant deviation of an asset's price from its underlying value over an extended period. They also note that a bubble becomes evident only after it bursts, meaning bubbles can only be analyzed retrospectively. Moreover, governments and central banks take significant measures to prevent bubble formation. For instance, restrictions in Berlin limiting short-term rental housing to no more than 90 days per year, or the ban on non-residents purchasing apartments on the secondary market in Tashkent, are aimed at addressing this issue.

The phenomenon of price bubbles has fascinated economists and historians for years. The most vivid example is the tulip mania of the early 17th century in the Netherlands. Tulip bulb prices rose steadily over three years. Many people grew wealthy simply by trading bulbs, which at their peak cost up to six (!) annual salaries. In 1637, the bubble burst, tulip prices fell 100-fold, and they never returned to their previous heights.

At first glance, flowers and real estate seem worlds apart. However, growing a tulip bulb from seed takes 7 to 12 years, a timeline comparable to the real estate development cycle. Consequently, the market couldn’t quickly respond to the surge in demand and supply enough bulbs.

The same applies to real estate: it takes 3 to 15 years from project initiation to a finished building. In developed and affluent countries, this timeline is closer to the upper limit due to stricter regulations, lengthy approvals, permitting processes, and design requirements.

When real estate prices start rising, developers initiate new projects, banks open credit lines, and construction companies ramp up their capacities. However, the finished product enters the market several years later, often when the price surge has ended, forcing developers to lower prices to sell actively.

As a result, all real estate markets globally experience cycles of sellers’ and buyers’ markets, but these cycles are unrelated to bubbles.

A bubble can be defined as a situation where prices rise rapidly and then fall just as quickly, returning to baseline levels. For example, in Baltic cities between 2004 and 2007, prices doubled or tripled and then returned to previous levels within two years.

It’s crucial to understand that price growth can be speculative, driven by the desire to buy low and sell high, or sustainable, accompanied by economic transformation, urban development, population growth, and other factors.

Real Estate Bubble in Tashkent

Many in Tashkent have observed rising housing prices. Let’s explore whether this constitutes a bubble.

Listed vs. Actual Sale Prices

A distinctive feature of the Uzbek market is the significant difference between the initial listed price, also known as the marketing price, and the actual transaction price. This creates a serious cognitive bias for buyers and even market professionals.

A potential buyer visits a sales office, where they are quoted a marketing price. Negotiations follow, resulting in a discount that can reach up to 30%, depending on the stage of construction. This gives the buyer the impression that they’ve made a great deal right from the start. In Europe, incentivizing discounts are also common but rarely exceed 10%.

The critical factor is that developers, on one hand, aim to maximize profit per square meter but, on the other, constantly need cash flow to continue construction. The larger the cash flow gap for the developer, the more willing they are to offer discounts.

Real Apartments vs. Commitments

Developers in Tashkent often start selling apartments at the earliest stages of a project, frequently without even having a construction permit. In such cases, the buyer doesn’t acquire an actual apartment but rather a promise of one. This comes with significant risks, including delays in construction, subpar quality, or the apartment not meeting expectations. A fair discount in this case may reach up to 50% compared to the price of a ready-to-move-in apartment that can be inspected and occupied immediately after purchase.

Naturally, when the building is completed two years later and the buyer comes to collect their keys, they see that the selling price has doubled. They may assume this is due to market growth. In reality, these are two different products: in the first case, it’s a commitment to deliver a property in the future, while in the second, it’s a completed apartment with visible flaws, ready for immediate use or renovation.

Structural Changes in the Market

In Tashkent, only 2% of all ongoing projects are in the economy class. Each year, there is an increasing supply in the luxury and business-class segments, which also raises the average market prices.

Globally, price dynamics are analyzed using the *like-for-like* principle, where identical properties under identical conditions are compared—i.e., apartments of the same class, in the same district, and with the same finishing standards. Unfortunately, Tashkent has yet to establish reliable methodologies for such comparisons, as the necessary data is still being collected.

However, an expert estimation of like-for-like price growth suggests an annual increase of 20% in the national currency, equating to around 10% in real terms after adjusting for inflation. These figures reflect a dynamic market, but there is no indication of a bubble. Comparable returns are also offered by bank deposits.

There are indirect signs supporting the sustainability of current housing prices. UBS uses an affordability index as a predictor of a real estate bubble, reasonably suggesting that the lower the affordability, the closer the market is to a bubble. According to their data, for example, in Hong Kong, a qualified professional with above-average income must work 24 years to buy a 60 sqm apartment near the city center. For Tokyo, this figure is 15 years; for Paris, it’s 14 years. At the lower end are cities like Madrid, San Francisco, and Toronto, where affordability is around 5–6 years.

According to our calculations, Tashkent falls into the same category, with an affordability index of 4–5 years. However, there is one significant difference: all the aforementioned cities offer diverse mortgage lending models, while residents of Tashkent primarily purchase properties with cash. This means that a bubble is still far off, as the availability of credit, while solving housing problems for individuals, simultaneously introduces the risk of a crisis.

When factoring in economic growth (+6% per year), rising wages, and urbanization rates (migration from rural to urban areas), the rise in housing prices in Tashkent does not appear extraordinary. Moreover, if the country’s development trajectory and banking system improvement continue, the main price growth wave may still be ahead. The government might need to start considering measures to support housing affordability today.

Key Points to Consider When Buying Property in Tashkent Today:

Today, there is certainly no real estate bubble in Tashkent. The potential for price growth remains, and the city is becoming increasingly comfortable and developed. If we want the value of our apartments to rise, we must take care of the city by enhancing greenery, reducing harmful emissions, and creating new businesses.

Source: Gazeta.uz