Introduction

The construction industry is a cornerstone of economic growth, directly influencing employment, investment patterns, and urban development. In Armenia, this sector has undergone significant transformations over the past decade, shaped by government policies, economic challenges, diaspora, and evolving market dynamics. This article, “Asset Bubble: The Future of the Construction Industry and the Impact on the Economy,” examines these shifts and offers a detailed analysis of the trends, risks, and opportunities that define the sector’s trajectory.

From the introduction of personal income tax (PIT) return programs in 2015 to the subsequent decision to phase them out, the construction industry has experienced periods of rapid growth and looming uncertainties. The analysis highlights the compound annual growth rate of 5.7% from 2016 to 2023, followed by a surge to 17.3% in recent years, fueled by policy changes and increased housing demand in Yerevan (Russo-Ukrainian conflict). However, this growth has come with challenges, including rising real estate prices, an increased burden on the state budget, and potential risks tied to external economic dependencies.

This article explores data from the State Revenue Committee and the Central Bank of Armenia to provide a comprehensive overview of the factors driving the industry’s evolution. It also examines the possible scenarios for the coming years, evaluating the impact of external shocks, such as economic downturns in Russia, on Armenia’s real estate market, developers, and financial institutions.

Authored by the Nexus Intellect Research team, this article aims to equip policymakers, industry stakeholders, and financial leaders with the insights needed to navigate the challenges ahead. By shedding light on the interplay between government policies, market behavior, and economic resilience, it contributes to a deeper understanding of the construction industry's critical role in shaping Armenia’s economic future.

Background: In 2013-2014, Armenia's construction industry reported a decline and had not recovered from the aftermath of the financial crises reported in 2009. The Government of Armenia decided to boost the industry's growth and adopted a decree in 2015 that was a driver of its solid performance reported in 2016-2023. The Government introduced personal income tax return rules to give back amounts paid as interest rates paid on mortgage loans[1] to the buyer (employed person, sole proprietor, and notary) if the buyer acquired an apartment (and/or house) in a newly constructed residential building or if the building was under construction and/or to be built (primary market of the real estate). The construction industry grew at a compound annual growth rate (CAGR) of 5.7% from 2016 to 2023[2]. Both the tremendous growth of the construction industry and the growing burden on the state budget (in terms of the amounts of the personal income tax (PIT) returns on the mortgage loan payments (see Figure 1)) urged the Government of Armenia to gradually eliminate the program in 2021, effective for the first zone of the capital city (mainly downtown or small center of the town) July 2022 (and January 1, 2025, for the administrative districts of Yerevan), and entirely ending on December 31, 2028, for the remaining provinces of Armenia that are far from the capital[3]. The decision of the Government to gradually cancel the PIT return program accelerated the growth rate of the construction industry (mainly attributed to the growth in the capital), which was growing at a CAGR of 17.3% from 2021 to 2023, thus exacerbating the price hike of the real estate (mainly apartments in newly built residential buildings). During the three quarters of 2024, the construction industry continued to report a solid performance compared to the same quarters of the previous year (12.4%, 17.9%, and 16.8%, respectively), which would keep some inertia in at least the first half of 2025. Under the worst-case scenario, the deteriorating economic situation in Russia could seriously hit the industry, the banking sector, and the whole economy from 2025 to 2027.    

PIT Returns, Hiking Apartment Prices, and Burden on the Budget 

Figure 1. The amount of PIT returns on the mortgage loan returns and the number of beneficiaries.

Source: State Revenue Committee of Armenia (SRC). Hetq.am, Link.

Note: The number of beneficiaries who submitted PIT return applications at least once 

PIT returns and beneficiaries have grown significantly over the last 10 years (see Figure 1). In the first half of 2024, there were 39,992 beneficiaries, and during January-November 2024, the number increased to 44,564.[4]. The PIT returns also reported tremendous growth, reaching 51.9 billion Armenian drams in 2023.   

Figure 2. Distribution of beneficiaries of PIT returns equals the amounts paid as interest rates paid on mortgage loans as of November 2024 by provinces and the capital. 

Source: State Revenue Committee of Armenia.

Note: the numbers of beneficiaries include those beneficiaries that are registered in the information database of the SRC of Armenia, who, however, have not submitted applications to be eligible for the PIT return

Yerevan accounts for 53,574 beneficiaries, a staggering 83% of the total number of beneficiaries, due to higher housing demand in Yerevan associated with the concentration of economic activity in the capital and a higher proportion of households with higher incomes[5]. Kotayk is the only province in Armenia with a notable share, representing 8,974 beneficiaries (14%), due to its proximity to Yerevan, construction projects in Tsakhkadzor (as an attractive tourism destination), and its proximity to travel amenities and attractions, and additionally to benefit the from the job market, amenities, and infrastructure of Yerevan. The minimal participation in other provinces suggests that the demand for housing financed through mortgages is relatively low, the incomes are lower than in Yerevan, and the formal employment rate is higher in Yerevan than in provinces.

The difference between the number of beneficiaries on both figures (Fig. 1&2) above might suggest that the program's elimination in Yerevan attracted many beneficiaries who haven’t submitted applications yet to be eligible for the PIT return. This means that in the medium term, the amount of the PIT returns would be significantly higher than that of the amount of 2023 (51.9 billion) and could be a higher burden for the budget, thus constraining the possibilities of the government to fund health, education and infrastructure project or raise pensions for the retired people. The difference between these numbers might suggest that some beneficiaries bought apartments at least twice as an investment: to buy an apartment on a mortgage loan and make it available for rent[6].

According to Finance Minister Vahe Hovhannisyan, the number of PIT returns on the mortgage loan returns from the state budget reached 80 billion AMD annually as of December 25, 2024,[7]. The Minister expects that no significant changes could be reported regarding collecting the taxes since the Yerevan program's elimination in December 2024 urged many to receive a mortgage loan during recent months[8] before 2025. However, Mr. Hovhannisyan assumes that the construction growth rates would not slow since the construction would move outside Yerevan[9]. The increase in provinces' construction could be attributed to granting housing certificates to the forcefully displaced people to purchase either a house and/or apartments, mainly in the provinces. 

Figure 3. Loans extended by the commercial banks of Armenia to developers (loans for construction of residential and non-residential buildings) and households (as mortgage loans for buying real estate), billion Armenian drams (AMD).

Source: Central Bank of Armenia (CBA).

Note: end of period.

The decision to eliminate the PIT return in Yerevan drove the growth of mortgage loans starting from 2021. At the end of November 2024, the mortgage loans extended by the commercial banks to the households reached about 1.10 trillion AMD (in Armenian drams), thus fueling the increase in loans extended by banks to the developers for the construction of residential and non-residential buildings (see Figure 3). The rapid rise in mortgage loans compared to construction loans could imply that a consumer-driven real estate market ensured higher profits for the developers. Moreover, the consumer-driven real estate market fueled apartments’ price hike (per square meter) (See Table 1), mainly in Yerevan and some provinces close to the capital.  

Table 1. Prices of apartments of 1 square meter in residential buildings (Armenian dram)

Source: Statistical Committee of Armenia.

Note: The average prices in the province are the average prices of towns and cities in each province.

Overall

The PIT tax return mechanism on mortgage loans (and the termination thereof in Yerevan in December 2024), along with the rising average salaries[10], have boosted the demand for new apartments and forced the prices of apartments to rise (see table 1), particularly in Yerevan. The amount of PIT tax returns was increasing faster than the number of beneficiaries, which could mean the following: the prices of apartments (see Table 1) have been growing, resulting in a demand for larger mortgage loans (See Figure 3) and higher PIT returns, and additionally, to borrow more significant amounts of mortgage loans the number of co-borrowers (family members) have been growing as well to allow the household to qualify for the mortgage loans. 

This implies that in the case of Yerevan, those who could afford apartments in newly built residential buildings (and/or to be built) have possibly already qualified for mortgage loans; hence, if the apartment prices don’t decline, the demand for new apartments (primary market) could start declining, possibly rising the demand for apartments from owners (secondary market). The declining demand for apartments could affect the developers. However, the changes in the prices of flats (price decline) would highly depend on the economic situation in Armenia, which is associated with the possible financial crisis in Russia. 

Possible Developments in the Real Estate Market: Expectations of the Armenian Association of Developers

According to the Chairman of the Armenian Association of Developers, Gurgen Grigoryan, the primary reason that developers are hesitant to initiate new projects is the business climate that has become less attractive for investment due to the introduction of legal regulations and acts that establish new local duties in the case of administrative districts of Yerevan[11]. Moreover, terminating the PIT return could contrarian the household’s possibility of servicing mortgage loans since interest rates are very high. The Council of Elders of Yerevan set a substantial fee to provide an architectural and planning assignment and a design permit, depending on the project's total area. A local fee for a construction permit and other local fees, which either did not exist before or were symbolic amounts, were also set. It would be possible that there might be a zone in which the construction project would not be profitable. Among the risks the developers could face are exchange rate risks and frequently changing fiscal regimes, namely the introduction of the VAT tax system. Construction costs increased as well. Sometimes, granting permits could be delayed, thus causing financial losses. Hence, the construction industry would report a decline.[12] 

According to Armen Sakapetoyan, a member of the above-mentioned association, construction in the provinces could report growth; however, it won’t be enough to compensate for the decline expected in Yerevan. Some developers could face difficulties, urging them to file for bankruptcy. Sales decline, would negatively affect the growth rates of construction. As a result of lower demand, prices may decrease by 5-10%[13].

Shrinking job opportunities for Armenians and Returned migrant workers from Russia.

Moreover, the price decline would cause an inflow of migrants as cheap labor (to complete the ongoing projects and substitute Armenians with foreigners). If the deteriorating economic situation in Russia and strict requirements for the migrants by the Russian government (effective March 2025) could cause especially migrants (and Russian citizens of Armenian origin) to return to Armenia, they would bear the consequences of the shrinking labor market for construction workers, namely Armenians.

Possible Scenarios to Expect in the Period 2025-2027

We expect two scenarios: realistic and worst-case. Under both scenarios, the deteriorating Russian economy would hit the industry. However, in a realistic scenario, we expect a currency crisis and its aftermath to be less severe for the economy than in a worst-case scenario.

If the expected economic downturn in Russia severely hits the economy of Armenia, namely the beneficiaries and the households eligible for PIT return, especially those who work in the industries that primarily export goods and services to Russia (including logistics companies and tourism industry-related companies, and companies that serve the contracts of those companies) could face serious financial difficulties while servicing the mortgage loans (namely repaying principal amounts). This, in turn, could hit the financial institutions of Armenia (namely commercial banks of Armenia). The number of non-performing loans could also seriously increase (in terms of amounts), and under the worst-case scenario, banking crises could be expected. Real estate prices could seriously decline around 30-40%, drastically causing a decline in housing demand and severely hitting developers.

Authors: Anna Makaryan, Ph.D., Hamlet Mkrtchyan, Verej Isanians, Ph.D., Nexus Intellect Research NGO. 

[1] Decision of the Government of Armenia N 205-N dated February 19, 2015. Retrieved from:  https://www.arlis.am/documentview.aspx?docID=96164 (in Armenian).

[2] Source: Statistical Committee of Armenia.

[3] Tax Code of Armenia, Article 160.

[4] Source: State Revenue Committee of Armenia

[5] Source: Statistical Committee of Armenia.

[6] Source: Zarkerak.am, Link

[7] Source: Hetq.am, Link.

[8] Source: Armenpress.am, Link.

[9] Ibid.

[10] Source: Statistical Committee of Armenia.

[11] Source: Factor.am, Link

[12] Ibid.

[13] Source: Zarkerak.am, Link