Property Price in Addis Ababa

A Market Neither Logic nor Theory Explains

The most bizarre aspect of the Ethiopian economy is the constant surge in the prices of properties, particularly in Addis Ababa and other major towns. The fast price growth trajectory, which started almost two decades ago, has increased momentum in recent years.

In a properly functioning property market, housing price trends are anchored to some economic fundamentals such as real income and rental value. Defying these economic fundamentals, the price of houses, particularly in the capital, has been soaring to an alarming level, though there is a recent change in the dynamics. Surprisingly, the rent increase is far behind the growth in property value, considerably squeezing the yield (rent/property value). This situation indicates that something serious has gone wrong in the market that calls for policy intervention.

The past few years have been marked by worsening economic and political situation. Macroeconomic imbalances manifested in severe shortages of foreign currencies, fast depreciation of the Ethiopian local currency (ETB) and inflationary pressures combined with the adverse effects of the COVID pandemic, devastating civil war and political instability across the country have wreaked economic havoc to unprecedented levels.

Ironically, amid such tragic events, the capital has seen house and land prices surge, unobserved in its history. The increase in house prices is so high that it is completely divorced from the economic reality of most people. The situation has become unexplainable because neither logic nor theory has sufficient reasons to justify the absurdity.

The capital city, known for its significant housing deficits, has been facing alarmingly growing housing needs. The shortage happens because the city’s population has increased because of an influx of people from rural and other towns searching for better economic opportunities and safe havens. This problem exacerbates the already fermenting housing crisis in the metropolis because of years of underinvestment in the sector. Political instability across the country has driven the well-off to the capital as millions consider it a haven. Rural-urban migration, searching for better opportunities, which has been going on for decades, has continued. The overwhelming government’s attention to beautifying the capital is another pull factor. On the other hand, housing supply has always lagged far behind the demand as the government took the lion’s share of house building and land is owned by the government and meagrely availed to builders. Furthermore, the government’s slowdown in constructing low-cost houses contributed to the widening gap between housing demand and supply.

It’s to be taken seriously; Ethiopia’s population has been alarmingly growing, increasing the demand for houses. Ethiopia’s population has increased by about 50 million in the past two decades. The need for houses has skyrocketed with the growing economy and improved purchasing power of millions. Unfortunately, there has never been a prompt policy intervention to take this as an opportunity to accelerate the country’s development.

In such a political and social atmosphere, the country has been hit by persistent inflation, driving the price of land and housing further up. Persistent high inflation, feeding inflation expectations, encourages flight from money to tangible assets. In a situation where there is a lack of investment options, the flight to tangible assets is a means of hedging against the evils of inflation. The more the inflation gathered momentum, the more land and house prices reacted.

The alarming increase in house and land prices, particularly in prime areas of the capital, has been fostered by two main factors. Firstly, negative, accurate borrowing rates, caused by high inflation and government intervention in the banking industry, have encouraged those with access to bank credits to take out loans to acquire properties, which is an easy way of making money. Secondly, banks’ more significant savings shifted to acquiring properties.

Related to bank lending, with new banks joining the industry, the hope was that these banks would give more loans and advances for property acquisition due to competitive pressures. However, with the credit cap the National Bank of Ethiopia put last August to lower the volume of money circulating in the economy, more finance is needed for the real estate sector.

The other issue is that house owners hang on to their properties during high inflation and inflationary expectations, believing the value of money would decline further. Fewer properties would be available for sale, driving the value of properties extremely high.

The upshot of this situation is building up a property bubble and accumulating enormous resources in land and properties, which should be used for productive purposes. The prices of houses are entirely detached from the incomes of the population. It means house ownership is becoming a distant dream for most urban dwellers, even those with modest incomes. Additionally, the wealth disparity created between house owners and non-owners in urban areas is becoming so vast that it may have lasting consequences.

The current situation also has negative repercussions on the financial standing of several banks. The conversion of more significant savings to properties has already caused a considerable strain on banks’ liquidity. If this process continues, the banks will reach a point where they will need help to deal with their day-to-day operations. They might even face a severe liquidity crisis, which have become comen in recent months with depositors unable to withdraw their cash.

As banks rely on overvalued properties for their securities, any reduction in the values of properties would undermine the recovery of their loans and advances. This problem happened in the United States in 2008. The financial crisis began with cheap credit and lax lending standards by the banks that fuelled the housing bubble across the country. When the bubble burst later on, several banks, even though they were highly capitalised, were left holding trillions of dollars of worthless investments. The Great Recession that followed has cost many middle-class citizens in the US their jobs, dear savings, and only homes.

What makes the situation in Ethiopia extremely alarming is that policymakers need to comprehend the scale of the problem truly and are sufficiently prepared to respond with the right mix of policies that would address the house and land price bubble. It is inevitably going to cause severe economic repercussions sooner or later. The government should watch these developments closely and address the problem immediately. Taming inflation by any means and dampening inflationary expectations is very important. This situation will reduce the flight to tangible assets, protect banks’ savings, and scale down speculative borrowing. Controlling inflation has further benefits. It will reduce the building cost of houses.

Increasing the housing supply and reducing the pressure on the capital is another area which requires a lot of work. More politically, it’s high time that the government gives an undivided attention to understanding why thousands of people are migrating to the city regularly. Serious land reform is fundamental to avail more land for building a sufficient number of houses. Encouraging other towns and urban areas to expand their housing stocks, create jobs, and removing security impediments to the mobility of people would reduce the pressure on the capital.

12th Year • February 2024 • No. 126