Property Price in Addis

A Market Nether Logic Nor Theory Explains

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

In a properly functioning property market, the trend in house prices is somehow anchored to some economic fundamentals such as real income and rental value. Defying these economic fundamentals, the price of houses, particularly in the capital, is soaring to an alarming level. What is surprising is that the increase in rent is far behind the growth in property value, considerably squeezing the yield (rent/property value). This indicates that there is something serious that has gone terribly wrong.

The past few years have been marked by a 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 devastating civil war and political instability across the country have wrecked economic havoc.

Ironically, in the midst of 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 economic reality the majority of the people are living in. The situation has now become unexplainable because neither logic nor theory has sufficient reasons to justify.

The capital city, long known for its significant housing deficits, has been facing alarmingly growing housing needs. This exacerbates the already fermenting housing crisis in the metropolis. Political instability across the country has driven the well-offs to the capital as it is considered as a safe haven by millions. Rural-to-urban migration, searching for better opportunities, which have been going on for decades, continues. The overwhelming governmental attention to beautify the capital is another pull factor. On the other hand, housing supply has always lagged far behind 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 slowdown in the building of low-cost houses by the government contributed to the widening gap between housing demand and supply.

It’s to be taken seriously—population has also been growing alarmingly in Ethiopia, further increasing the demand for homes. In the past two decades, Ethiopia’s population has increased by about 50 million. Together with the growing economy and improved purchasing power of millions, the need for houses has skyrocketed. 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 persistently high inflation, driving the price of land and housing further up. Persistent high inflation, feeding inflation expectations, is encouraging flight from money to real assets. In a situation where there is a lack of investment options, the flight to real assets is a means of hedging against the evils of inflation. The more the inflation gathers momentum, the more land and house prices react.

The alarming increase in house and land prices, particularly in prime areas of the capital, has been fostered by two main factors. Firstly, negative real borrowing rates, caused by high inflation and government intervention in the banking industry, have encouraged those who have access to bank credits to take out loans to acquire properties as it is considered as easy way of making money. Secondly, the larger savings of banks are being shifted to acquisition of properties.

Related to bank lending, with the advent of new banks joining the industry, more loans and advances will be given out for property acquisition due to competitive pressures. The result will be the driving of property values further up.

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

The upshot of this situation is the building up of a property bubble, and the accumulation of enormous resources in land and properties, which should be useful for productive purposes. The prices of houses are completely detached from the incomes of the population. This means house ownership is becoming a distant dream for most urban dwellers even with modest incomes. Additionally, the wealth disparity created between house-owners and non-owners in urban areas is becoming so wide—perhaps with lasting consequences.

The current situation also has negative repercussions to the financial standing of banks. The conversion of larger savings to properties will cause a considerable strain on the liquidity of banks. If this process continues, banks will reach a point where they will struggle to deal with their day-to-day operations.

As banks are relying on overvalued properties for their securities, any reduction in values of properties would undermine the recovery of their loans and advances. This has been the case in the United States in 2008. The financial crisis began with cheap credit and lax lending standards by the banks that fuelled a 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 policy makers do not seem if they have truly comprehended the scale of the problem and sufficiently prepared to respond with the right mix of policies that would address the house and land price bubble. This is inevitably going to cause serious economic repercussions sooner or later. The government should watch these developments closely and address the problem with utmost urgency. Taming inflation by any means and dampening inflationary expectation is very important. This will reduce the flight to real assets, protect the savings of banks, and downscale speculative borrowing. Controlling inflation is a further benefit—it will reduce the building cost of houses.

Increasing housing supply and reducing the pressure on the capital is another area which requires a lot of work. More political perhaps, it’s high time that government pays its undivided attention to understand the complex reasons as to why thousands of people are migrating to the city on a regular basis. Serious land reform is also very important to avail more land parcels for the building of a sufficient number of houses. Encouraging other cities and urban areas to expand their housing stocks and create jobs as well as removing security impediments to the mobility of people would reduce the pressure on the capital.

11th Year • Oct 2022 • No. 111

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