Thursday, July 25, 2024
BusinessProperty craze causes economy to sputter

Property craze causes economy to sputter

For more than 25 years, Amin Abdella (PhD), a member and sectorial director at the Ethiopian Economics Association, has been researching Ethiopian markets. He never stopped finding the market bizarre at times and confusing most of the time. For him, the Ethiopian economy cannot be explained by conventional economic terms and theories.

“Even the most fundamental principles of economics tell you that as fuel prices rise, car prices should fall. However, never in Ethiopia,” he said.  

Amin is aware of the situation in Ethiopia, where the public would not benefit from inflation if they continued to save their money in banks at low interest rates. He cites political unpredictability and instability as the main causes of the multi-factored market disruptions, which leads to speculation and irrational buying of fixed assets.

Consumers are buying fixed assets at inflated costs and obtaining foreign currency to cope with the devaluation of the birr as a result of the vanishing desire to start and operate a business. As the value of the forex undoubtedly rises, bank executives and experts feel what is happening may also be dollarization.

The sharp surge of foreign exchange on the black market is one of the major recent events. The official exchange rate is 52.5 birr to USD one, but black market rates have risen to over 90 birr in just a week, widening the gap to more than 75 percent, a historic high.

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The domino effect of the Birr’s devaluation lingers, manifesting in the economy and, investors are heavily investing on hard currency, properties, and other durable goods. The birr has lost more than 100 percent of its value in the last four years, causing supply-side shortages and market distortions. Headline inflation also reached 30 percent last month, up from 10.6 percent when the government decided to change its exchange policy in 2018 and transition to a market-led regime.

On the other hand, the average savings deposit rate in banks has slightly increased, from seven percent in 2018 to eight percent currently. But that is not enough to offset the growing inflationary pressure.

As there is no end in sight to the birr’s continuous slump, investors are currently placing their money on tangible properties whose value keeps appreciating. Housing, dollars, patches of land, cars, gold, and other durable goods are currently the top priorities for people with disposable incomes. High demand and poor supply are causing price bubbles for these items now, according to experts.

“Everybody is now scrambling to buy foreign currency or invest their birr in property or other durable goods. As inflation surges, nobody wants to keep birr on hand or in bank accounts. As inflation keeps growing and birr’s value drops, the appetite for birr is diminishing,” Eshetu Fantaye, president of Ahadu Bank, said.

The strong demand to invest in properties, rather than depositing money in banks, is leading to a spike in the price of property, hard currency, and durable goods. Biruk Shimelis, deputy general manager at Flintstone Homes, says the appreciation rate of property values is much higher than the devaluation rate.

“In particular, the housing appreciation rate this year is appalling. As nobody knows where the devaluation will stop, nobody knows where the end of the housing price bubble is,” Biruk said.

The standard housing sales price currently is between 100,000 and 300,000 birr per square meter. This is a dramatic increment from around 30,000 birr per square meter last year. This is for real estate housing.

Currently, a studio condo is being sold for 1.9 million birr, up from 700,000 birr last year. The price of a two-room condo at Jemo lately fetched 4.2 million birr, which was three million birr three months ago.

The demand for vehicles also remains high, despite the government lifting fuel subsidies. The Indian-made Suzuki Dzire 2022 model car is fetching 2.2 million currently, an increase from a million birr over a year ago.

The car dealership owner, Abraham, whose last name is withheld, runs his business in the Atobis Tera neighborhood, Addis Ababa. His shop has recently been flooded with consumers willing to pay whatever price is demanded.

Abraham and his brother sell different types of used minibuses of Toyota brands; locally known as Dolphins and 5L. For a reason he could not explain, he had seen several visitors in his shop during the last three months, and even more visitors to his neighbor’s shop that sells brand new cars, including the Suzuki Dzire.

Three months ago, they were selling a good-condition 2011 model D4D 15-seat minivan in their store for around 2.2 or 2.3 million birr. This vehicle is known locally as the Dolphin and is typically utilized for transportation. This has now gone up by at least 500,000 birr. The price of the 12-seat Toyota 5L minibus has similarly jumped from a million birr just three months ago to 1.4 million birr today.

The brothers purchase secondhand automobiles from owners in the country and resell them in their Addis Ababa workshop. Recently, they haven’t had much experience procuring as many vehicles from owners as possible.

“I don’t think anybody now wants to sell their property and have cash on their hand,” Abraham said.

Neway Megerssa, the founding president of the recently established Siinqee Bank, blames players in the financial industry for playing a big role in causing the rush to acquire properties. As banks use the opportunity to make a profit and avail more funds since the business is less risky and profitable, the price of properties has reached new heights.

People frequently purchase fixed-assets that are scarce to the general public and are in severe supply during periods of economic and political uncertainty, according to Neway, who studied economics and previously served at a few other banks as well.

“Should there be a prospect of making enough supplies of such properties in the market with their actual market values, all the banks as well as the borrowers are going to be in trouble,” he warned. “But for sure, it might not happen in a short period of time given Ethiopia’s vast demand.”

For the war economy, which has been experiencing stagflation for almost two years now, there is no quick antidote. Even if the government stops the devaluation where it is now, experts say reducing inflation to a single digit will most likely take years.

“In principle, a property market bubble will stop at some point after reaching its maximum. But this bubble is not going to drop after a certain point when supply improves. But that may not hold true in our case, as the devaluation is continuing and the birr is losing fast in the exchange market, a situation that is causing inflationary pressure,” Biruk said.

To make things worse, experts say investors’ disinterest in keeping their money in birr is already wreaking havoc on the whole economy.

“The price bubble does not stop at property. It has a domino effect on other services and goods,” Biruk added. “The economy is in its worst shape and is now like a car that has lost its brakes.”

Contributed by Ashenafi Endale and Samuel Bogale

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