Housing issue: in Armenia, middle class will not be able to afford apartments in new buildings

In Armenia, a new government decision that will limit the benefits previously provided to residents of the country is being actively discussed. Such benefits were of particular importance for the middle class as they would provide the return of income tax on mortgage lending. The program was launched in Armenia in 2015 with the aim of increasing construction volumes.

The program also solved a social problem – it made it possible for people with an average income to buy an apartment in new buildings. To make it more targeted, since 2017 the government has limited the permissible cap for apartments purchased under this project. The right to take advantage of the income tax refund on the mortgage was given only to those who buy an apartment worth up to 55 million drams ($ 115 thousand).

Now the government intends to step by step limit the provision of benefits for the return of income tax when paying off the interest on mortgage loans. For a start – for apartments under construction in the center of Yerevan and the surrounding areas. This decision is justified by the need to stimulate construction work in the regions of the country. But the main argument is that the program has become a heavy burden on the state budget.

Experts consider both arguments unfounded. They argue that the profitability of the program for the state is higher than the costs, and restrictions on benefits under the program can lead to irreversible consequences, and the volume of construction in the regions of the country will not increase due to their reduction in capital.

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The new bill

On August 12, the government approved the bill “On Amendments to the Tax Code”, which is proposed in 2022-2025. gradually limit the application of income tax refund relief for servicing mortgage interest. At the first stage, the decision concerns apartments being built in the center of Yerevan.

The main rationale for the bill is that due to the sharp increase in the beneficiaries of the program, the expenditure part of the state budget is also growing excessively. The official announcement is as follows: by the end of 2021, the number of people who have used the program will exceed 20,000 and the amount of the refunded income tax will exceed 21 billion drams ($ 43 million).

The government intends to use the program to solve the issue of proportionality of territorial development.

Expert opinion on the project

According to a study by the chairman of the Chamber of Auditors, economist Nairi Sargsyan, within the framework of the current law, the state treasury is replenished in an amount exceeding the cost of returning the income tax:

“We calculated that taxes on the sale of one apartment definitely exceed the income tax that the state returns to the buyer. Therefore, it is unacceptable to assert that the tax burden of the state is increasing more and more. And if this is the case, then such a situation can only be a consequence of ineffective administration”.

According to Nairi Sargsyan, the changes envisaged by the project will lead to a number of negative consequences – from a sharp decline in the pace of construction and related industries to a sharp increase in unemployment and emigration rates:

“The middle class in Armenia will lose their last hope of buying an apartment and will think about leaving the country. This is the biggest problem. In parallel with the slowdown in construction, approximately 30 different construction-related business sectors will be affected. In particular, the companies that supply construction companies”.

The expert is sure that the recession in construction, which plays the role of a “tractor” for other industries, will lead to a decrease in economic activity, a reduction in funds coming to the state budget, and a negative effect in different directions.

According to the chairman of the Armenian Association of Developers Gurgen Grigoryan, if the bill is passed by the parliament, it will cause serious demographic problems:

“The emigration of workers and foremen will begin. In addition, numerous businessmen who, in connection with the construction boom of recent years, intended to build factories of building materials in Armenia, will consider large investments and opening of factories meaningless”．

Experts believe that the statement about the proportionality of the development of all regions of the country, thanks to the proposed construction restrictions in the capital, is groundless.

“The standard of living and wages in the regions is much lower, and more than 90% of the residents of the regions do not have the opportunity to purchase apartments in new buildings. Therefore, from the point of view of investments, it is very risky to build high-rise buildings in the regions. If such investments in the regions were attractive for anyone, this would have already happened”, says Nairi Sargsyan.

There is also a diametrically opposite opinion. According to the chairman of the Center for Economic Law NGO Movses Aristakesyan, the current law has no social orientation and does not solve the problems of people in need of housing.

He considers it necessary to abolish the current law altogether. The expert believes that the best way to help those in need of housing is the construction of social housing, which will provide apartments for those who really need housing:

“According to official information, during the five years of the law, about 40 million drams (more than $ 83 million) did not enter the state budget in the form of income tax, as a result of which wealthy people became rich. Moreover, 750 people have used the law more than once. That is, people, using this right, bought several apartments, they did not solve social problems, someone got rich illegally”.

Panic among developers

According to the bill, the proposed restrictions will not affect building permits issued before January 1, 2022. Experts believe that a short period has been set, which can also lead to negative consequences.

“In the next year or two, an artificial construction boom will begin – a bubble, as developers will run to urgently obtain a building permit. And the residents of the country will decide on an unjustified purchase, realizing that, although they are not ready yet, in two years they will not be able to buy an apartment at all.

After these two years, we will have an even greater crisis and recession, and as regards borrowers, there will be problems with servicing the mortgage”, Nairi Sargsyan said.

However, the Minister of Economy Vahan Kerobyan publicly assured that the state will do everything so that the construction sector does not suffer:

“I appeal to developers: do not think that the government has changed its attitude towards the sphere. We will continue to promote business and closely monitor developments”.

Expert commentary

According to experts, for the effectiveness of the program and equal territorial development, it is necessary to show a deep approach to the problems of the regions before introducing legislative changes.

“In the regions, we first need to raise the standard of living of the population. That is, the government should conduct such an investment policy so that investments in the regions become attractive. For example, they can establish tax-exempt zones, provide subsidies, create jobs.

First, you need to provide the population with the opportunity to receive income, then carry out the construction of houses and not only with the return of income tax, but also with additional assistance in order to encourage residents of the regions to purchase housing. Construction of houses is definitely not the point from which the proportional development of the regions should start”, says economist Nairi Sargsyan.

According to the chairman of the Armenian Association of Developers Gurgen Grigoryan, in the regions, the main condition for activating investment programs for housing construction will be to stimulate demand:

“If the state creates the appropriate conditions, people will receive high salaries, there will be demand, developers will notice this demand and make investments”.

Construction in numbers

According to the Statistical Committee of Armenia, in recent years, a consistent growth has been noticeable in the construction sector. According to experts, this is largely due to the benefits for the return of income tax when purchasing apartments on mortgage loans.

According to the data of the first quarter of 2021, investments in the construction sector amount to 125 billion 599 million drams (approximately $ 262 million), which is 10.8% more than in the same period last year.

In terms of investments in construction, Yerevan continues to lead by a huge margin.