The danger of land price bubble in Ethiopia

A person who lives in Addis Ababa with a monthly net salary of USD 1,500 (30,000 birr) and saves up to USD 1,000 USD (20,000 birr) every month to buy a mid-scale apartment in the city that is built on a 85 square meter plot and costs about 2.5 million birr will have to save the proposed amount for 10 years. When we come to the reality, there are only a handful of citizens who earn this much salary per month, says Dawit Tadesse.

Is there a bubble in Ethiopian property market? The answer is quite simple. Yes there is! The sky rocketing land price in Ethiopia, especially in Addis Ababa, is no longer a front-page story. The maximum-recorded lease price for a plot per square meter in Addis Ababa is USD 15,500 (307,000 birr). Presently, the average lease price of land per square meter for plots in the center of the city is USD 3,636 (80,000 birr).

A recently released report by Global Property Guide that ranks the world’s most expensive cities in terms of buying price of properties (not land) puts Geneva as the fifth most expensive city to purchase a property (real estate) with an average price of USD 15,250 per square meter. With over 13 million people, Tokyo is the most densely populated city in the world and also one of the top ten most expensive cities. Real estate prices in Tokyo are close to USD 10,000 per square meter.

According to some researchers, the maximum land lease price per square meter in Ethiopia, especially in Addis Ababa, should by no means be greater than or equal to the price of land per square meter of the most developed and more economically active metropolises such as Geneva, Tokyo and London. Hence, they argue that the unjustifiable price increase of land and housing in Addis Ababa is the act of speculators.

This price hike is making Addis Ababa one of the most expensive cities in Sub-Saharan Africa.

Apartment price per square meter in some countries

Countries
1 Sweden
2 Italy
3 Netherlands
4 Denmark
5 South Africa
6 Ethiopia
7 Kenya
8 Tanzania
9 Madagascar
Price/sqm (USD)
8,389
7,116
5,888
5,134
4,214
1, 500
1,188
700
520
 A person who lives in Addis Ababa with a monthly net salary of USD 1,500 (30,000 birr) and saves up to USD 1,000 USD (20,000 birr) every month to buy a mid-scale apartment in the city that is built on a 85 square meter plot and costs about 2.5 million birr will have to save the proposed amount for 10 years. Buying a two-bedroom condominium, which costs about one million birr and is being built by the Ethiopian government, will take the buyer four years. When we come to the reality, there are only a handful of citizens who earn this much salary per month. Currently the average monthly salary per month in Ethiopia on a relaxed estimate is USD 200 (4000 Birr).
This bubble has an impact on the increasing rent price in urban areas, especially Addis Ababa, making life difficult for urbanites. Indeed, the government’s condominium housing project makes a big contribution in solving the housing problem, but solving this big problem is just the tip of the iceberg.
As per the analyses based on a regression of actual prices on a set of supply and/or demand variables, this sky rocketing land and housing price in Ethiopia is not the normal response to basic supply and demand. Rather, it is the speculators that are creating artificial land prices to get high profit and further driving up demand.
 Real estate, buildings and the government condominium project are built with money borrowed from the banks in the expectation that it will rise in value. Under this condition, when the bubble bursts, the value of the property decreases, but not the level of debt.

Some researchers argue that the main causes for the price increase include the government’s land policy (which is a lease system), poor government land administration and information system, and absence of a central and modern property market in Ethiopia. These loopholes create fertile ground for speculators.

If these problems are not resolved soon, the following subsequent macroeconomic slump could happen in Ethiopia as a result of the price bubbles bursting:

  • Episodes of financial instability that have damaging effects on the economy.
  • Financial crises, which lead to lower growth, higher unemployment and higher government debt.
  • Broadening of the gap between the rich and poor.

Finally, if the Ethiopian government is not going to find a solution for the land price bubble, the economic success that has been registered for the past decade will become a thing of the past.

Dawit Tadesse is a graduate of Cranfield and Addis Ababa University, specializing in Accounting and Finance and Economics of Security Studies.