Denis Sokolov's Column: When Will the Tashkent Real Estate Bubble Burst?

Housing in Tashkent is increasing in price by 20% annually. Many potential buyers believe that a bubble has formed in the capital's real estate market, which is about to burst. How bubbles form, whether one actually exists, and what to pay attention to when buying a home — in an article by analyst Denis Sokolov.

Denis Sokolov is a partner and CEO of the international commercial real estate consulting company 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 of this market, its characteristics, and forecasts for its development.

The two questions we are most frequently asked by clients are: "How to make money on 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 fears losing everything. In the professional community, the balance of these emotions is called risk profile or risk tolerance.

It is not surprising that many of my readers and clients are concerned about whether there is a bubble in the Tashkent real estate market and when it will burst.

What is a real estate market bubble?

Analysts at UBS Bank define a bubble as a significant deviation of an asset's price from its fundamental value over an extended period. They also note that a bubble only becomes apparent after it bursts, meaning that bubbles can only be analyzed retrospectively. Moreover, governments and central banks make every effort to prevent bubbles from forming. For example, the ban in Berlin on short-term rental of housing for more than 90 days a year, or the prohibition for non-residents to buy apartments on the secondary market in Tashkent, pursue precisely this goal.

The phenomenon of price bubbles has occupied economists and historians for many years. The most striking example is the tulip mania of the first half of the 17th century in Holland. Tulip bulb prices rose continuously for three years. Many people became rich simply by buying bulbs, which at their peak price cost up to six (!) annual salaries. In 1637, the bubble burst, tulip prices fell 100-fold and never returned to their previous level.

It might seem that nothing could be further apart than flowers and real estate. However, it takes 7-12 years to grow a tulip bulb from seed — a period comparable to the development cycle. Therefore, the market could not react quickly to the increase in demand and supply everyone with bulbs.

Similarly, in real estate, it takes 3 to 15 years from project conception to a finished building. Moreover, in developed and wealthy countries, this period is closer to the upper limit because they can afford more complex regulations, approvals, obtaining permits, design, and so on.

Consequently, when real estate prices begin to rise, developers launch new projects, banks open credit lines, and construction companies increase capacity. However, the finished product enters the market en masse several years later, when price growth has already ended, and all developers are forced to lower prices to sell actively.

As a result, all countries worldwide experience seller and buyer cyclesin the real estate market, but these cycles have nothing to do with bubbles.

A bubble can be defined as a situation where prices rise rapidly and then fall just as quickly to levels comparable to the base. For example, in the Baltic countries, prices in 2004-2007 doubled or tripled, and then returned to previous levels within two years.

It is important to understand that growth can be speculative, based on the desire to buy low and sell high, or sustainable, accompanied by economic transformation, urban development, population growth, etc.

The Tashkent Real Estate Market Bubble

In Tashkent, many are observing rising housing prices. Let's try to determine if this is a bubble.

Advertised vs. Actual Sale Price

A characteristic feature of the Uzbek market is a significant difference between the initial advertised price, the so-called marketing price, and the actual transaction price. This creates a serious cognitive distortion for buyers and even market professionals.

A person visits a sales office and is quoted a marketing price, then begins to negotiate and receives a discount, which, depending on the construction stage, can be up to 30%. This creates the impression that they have already made a good profit at the moment of purchase. While incentive discounts are also practiced in Europe, they rarely exceed 10%.

Crucially, on one hand, the developer wants to earn as much as possible per square meter, but on the other hand, they constantly need funds to continue construction. Therefore, the greater the developer's cash flow gap, the more willing they are to offer discounts.

Actual Apartment vs. Obligation

All developers start selling apartments at the earliest stage of project implementation, often without even having a building permit. In this case, the buyer receives not an apartment, but a promise of an apartment. They bear all the risks that the building will not be completed on time, the quality will be low, the apartment will not meet expectations, and so on. In this scenario, a fair discount can be up to 50% of the price of a finished apartment that can be viewed and moved into immediately after purchase.

Naturally, when the building is completed two years later and the buyer comes to collect the keys, they see that the selling price is now twice as high and consider that the market has grown so much. In reality, these are two different products: in the first case, it is an obligation to provide a unit in the future, and in the second, it is an apartment where all the flaws can be seen today and renovations can begin.

Qualitative Market Changes

In Tashkent, only 2% of all ongoing projects are in the economy class. Every year, the supply in the elite and business segments grows, which also increases the average market prices.

In global practice, the like-for-like principle is used to analyze price dynamics, which involves comparing identical products under identical conditions, i.e., comparing apartments of the same class in the same area and with the same finishing condition. Unfortunately, reliable methodological foundations for such comparisons have not yet been established in Tashkent — data still needs to be collected.

However, an expert assessment of like-for-like price growth can be estimated at 20% per year in the national currency, which is about 10% in real terms after deducting inflation. These are indicators typical for a dynamic market, but there is certainly no question of a bubble. Bank deposits yield approximately the same return.

There are also indirect signs of the justification of housing costs. UBS Bank uses the affordability index as a precursor to a real estate market bubble, reasonably believing that the lower the housing affordability, the closer the bubble. According to their data, for example, in Hong Kong, a qualified specialist with an above-average income would have to work 24 years just to buy a 60 sq. m apartment near the center; for Tokyo, this figure is 15 years; for Paris, it is 14 years. At the bottom of the list are Madrid, San Francisco, and Toronto, where the affordability index is around 5-6 years.

According to our calculations, Tashkent falls into the same category, with an affordability index of 4-5 years, but with one significant difference: all the listed cities offer residents diverse mortgage lending models, while Tashkent residents buy apartments with cash. This means that the formation of a bubble is still very far off, as it is precisely the availability of credit that, on the one hand, helps people solve their housing problems, and on the other, creates the threat of a crisis.

If we consider the factors of economic growth (+6% per year), salary increases, and urbanization rates (migration of rural residents to the city), then the rise in housing prices in Tashkent does not look exceptional at all. Moreover, if this development dynamic of the country continues and the banking system improves, it is not excluded that the main wave of price growth is yet to come. And the state may need to consider today how to support housing affordability levels.

What to pay attention to if you are planning to buy a home in Tashkent today: