Ethiopia has witnessed a remarkable surge in housing prices over the past five years. Various factors contribute to this upward trend, including population growth, rapid urbanization, currency depreciation, migration to urban areas (urban influx), and the soaring prices of construction materials. Moreover, economic development and increased income levels have fueled the desire for homeownership, further intensifying the pressure on the housing market. However, it is important to note that these factors alone cannot fully explain the recent surge in housing prices.
The primary driver of housing inflation in Ethiopia lies in the restrictive nature of land ownership policies, an unjust policy inherited from the previous regime. Corruption and artificial price manipulation by developers and homeowners also contribute significantly to this issue.
Together, these factors have hindered the growth of the housing sector in Ethiopia and severely constrained the supply of affordable housing. While the government has made efforts to address this problem through various housing development programs, the gap between supply and demand remains substantial. Nowhere is this imbalance more pronounced than in Addis Ababa, where rapid urbanization has outpaced the construction of new housing units.
RELATED POSTS
To illustrate the extent of housing inflation in Ethiopia, for instance, five years ago, a modest 75-square-meter apartment would cost between two million and eight million birr. However, the current price range for such apartments is between 12 and 40 million birr, depending on the location.
Similar comparisons can be made in other major cities across the country. This drastic increase has rendered homeownership unattainable for many, leading to a growing sense of frustration and economic insecurity among the population.
To shed light on the severity of the situation, we must reflect on a recent land auction conducted by the Addis Ababa City Administration just four months ago.
This auction stands out for two reasons: first, it featured outrageously inflated record bids, and second, it witnessed the highest number of bidders in the city’s history, with over 30,000 residents purchasing the bid documents. Winning bids reached an astonishing 156.3 million birr for a mere 400-square-meter plot.
How can such prices be deemed healthy? Where else have we witnessed such exorbitant figures? Moreover, how can the government overlook these absurd and completely unacceptable prices, which clearly indicate the illness of the economy? Sadly, the dreams of humble residents have been shattered in an instant.
The aforementioned examples underscore the critical role that both the government’s land ownership policy and the artificial inflation imposed by developers and homeowners play in determining the fate of housing inflation in Ethiopia.
The Impacts of the Policy
The land ownership policy in Ethiopia has a profound impact on the housing market. The inability to own land outright has forced individuals to purchase houses at exorbitant prices, essentially buying land in disguise. This practice drives up the overall cost of homeownership and contributes to the lack of honest and competing property developers who can invest in affordable housing projects.
The absence of a competitive land market, coupled with bureaucratic hurdles, has created a skewed housing market where government policies dictate prices instead of market forces.
The Middle-Class Squeeze
Inflated housing prices have a particularly devastating impact on the middle class, which is often considered the backbone of a healthy economy. The middle class is significantly affected by fluctuations in housing prices due to its role as a crucial economic driver. Middle-class individuals aspire to homeownership for stability and wealth accumulation. However, when prices surge, the middle class faces significant obstacles in achieving this goal.
According to established economic principles, high housing prices limit disposable income, reducing the capacity for middle-class families to engage in other forms of economic activity. This phenomenon can lead to reduced consumer spending, lower savings, and constrained investment in education and entrepreneurship.
The rapid housing price inflation has also resulted in inhumane rental fees, comparable to robbery. The unaffordability of both homeownership and rental housing options creates a dire situation for the middle class, impacting their quality of life and limiting their ability to contribute as a productive workforce.
The 2008 Global Financial Crisis
While Ethiopia faces localized challenges, it is worth reflecting on the far-reaching consequences of the infamous 2008 financial crisis that affected financial markets worldwide. The crisis originated in the United States, where a housing bubble fueled by subprime mortgage lending burst, triggering a chain reaction across various sectors of the economy.
One of the key contributors to the crisis was the proliferation of subprime mortgages – loans extended to borrowers with poor credit histories. These risky mortgages were bundled into complex financial products, spreading the associated risks throughout the global financial system.
As housing prices began to decline and homeowners defaulted on their mortgages, the impact reverberated through the banking sector, leading to a widespread crisis.
A notable example is the collapse of Lehman Brothers, a major investment bank. In September 2008, the company filed for bankruptcy, marking one of the largest bankruptcies in US history. The failure of Lehman Brothers sent shockwaves through financial markets, leading to a credit freeze, stock market declines, and a severe economic downturn.
Furthermore, the crisis had a profound impact on the real estate market in the global north, with home values plummeting and foreclosure rates soaring. Many individuals lost their homes, and the broader economic fallout resulted in job losses, business closures, and a pervasive sense of economic insecurity.
A Comparative Analysis: Lessons from the 2008 Crisis
While the current inflation in housing prices in the country might not trigger an economic collapse, there is a probability that, akin to the 2008 crisis, the housing crash will stifle commercial banks in the country.
Drawing a comparative analysis between the two reveals instructive parallels that highlight the significance of the relationship between supply and demand in the housing market. In the 2008 crisis, speculative lending practices, artificially inflated house mortgages, and a housing bubble through complex financial instruments in the US triggered a global economic crisis.
Reflecting on the situation in Ethiopia, there is a concern that Ethiopian banks may be heading down a similar path. With over 85 percent of loans in Ethiopia involving houses as collateral, banks are currently lending money based on artificially inflated house prices. If the housing bubble in Ethiopia bursts, as seen in 2008, banks may face insolvency, leading to a cascading financial crisis within the next three to five years.
This artificially induced housing inflation poses several dangers for the banking sector.
Firstly, high inflation leads to higher borrowing costs. To protect their profits, banks raise interest rates for borrowers and tighten their underwriting, resulting in fewer loans offered to mitigate risk. This stagnates investment in the short run and weakens demand and housing prices further in the long run. Moreover, borrowers may struggle to repay their loans, increasing default risks for banks.
Another risk lies in the impact on collateral value. Artificially inflated house prices lead to overvalued collateral. In case of default, banks may not be able to recover the full value of the loan when the collateral is sold. This can result in significant losses for banks and further strain their financial stability.
Furthermore, Ethiopia has been facing cash shortages and liquidity constraints in recent times. If banks are required to write off a significant number of non-performing loans (NPL’s) due to artificially induced housing inflation, it can further exacerbate liquidity constraints, creating additional challenges for the banking sector.
The wealth transfer effect is another concern. In the event of a burst housing bubble, wealth is transferred from banks to borrowers. However, this wealth transfer primarily benefits borrowers who repay their loans with depreciated money, while wealthier and older households (borrowers) redistribute negative wealth. This redistribution can create economic disparities and burden younger, middle-class households with accumulated but odious debt.
Lastly, housing market booms and busts significantly impact the business cycle of banks and can create massive financial and economic instability. The rapid transition in monetary policy and increased household leverage raise macroeconomic and financial stability risks for the economy as a whole.
Conclusion
The importance of prudent financial practices and regulatory oversight is evident in any case. Lessons from the 2008 global crisis emphasize the need for effective regulation and risk management in the housing and financial sectors. Effective regulation, risk management, and responsible lending practices can help mitigate the risks associated with artificially inflated housing prices and subsequent housing crisis.
Beyond the visible factors contributing to housing inflation, corrupt officials and business people often use houses as a cover to legitimize ill-gotten money, distorting the housing market and eroding trust in regulatory systems.
The current assumption is that the value of houses will not significantly decline, primarily due to limited land supply and growing demand, contributing to the expectation that prices will continue to rise for the foreseeable future. Additionally, banks may have a buffer zone before the housing market reaches its actual market value, reducing the risk of an economic collapse.
However, to ensure these assumptions hold true, it is crucial to establish a price anchor based on empirical data, such as the average income of Ethiopians. Failing to use average income as a primary indicator for determining the actual market price could lead to prolonged social crisis and potential economic collapse.
Furthermore, relying on the assumption that social and political crises will not arise carries its own risks. The government’s substantial borrowing, including borrowing directly from the National Bank, raises concerns about the stability of the housing market and the broader economy.
The best-worst case scenario we can hope for is the Wealth Transfer effect. However, even surviving this scenario could result in a darker future for the upcoming generation, highlighting the urgency for action.
The government and policymakers must remain vigilant in monitoring housing markets, identifying potential risks, and implementing measures to ensure stability in the housing sector. Lessons from past crises, such as the 2008 housing crash, can inform strategies to address housing inflation and promote sustainable and inclusive housing markets.
Re-evaluating land ownership policies, fostering a competitive and transparent housing market, and tackling corruption and money laundering are crucial steps toward achieving long-term stability and affordability.
Considering the involvement of international contractors and developers, particularly those willing to offer long-term payment arrangements, should also be considered to bring fresh approaches and alleviate the current crisis. Protecting local developers is no longer a valid argument in the face of inefficiency and corruption that has persisted for decades.
The inflated housing problems extend beyond economics, affecting the stability of nuclear families.
The inability to afford suitable housing creates stress and uncertainty, straining family relationships. The broader impact on the culture and psyche of the population due to housing insecurity has far-reaching implications for societal well-being.
Addressing these issues and ensuring housing rights require the collective efforts of all stakeholders. The interconnectedness of inflated housing prices, corruption and limited housing options for the middle class calls for collaborative solutions that prioritize stability, justice, and sustainability. This is essential to secure a brighter future for all Ethiopians.
Recognizing housing rights as fundamental human rights and not just a political or economic right, is crucial, demanding the attention and commitment of every stakeholder involved.
Hiruy Tsegaye is the founder and CEO of iMakers Consultants. The views expressed in this article are his own and do not necessarily represent the views of the magazine.
