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Regulating housing sector

Regulating housing sector

The emergence of low-cost, condominium housing in Ethiopia’s capital has really changed the way people live in this old nation. Strictly speaking most of these residential condominiums, which are structured as a series of apartment buildings sharing a common area and most of the time enclosed in gated compounds, are evolving to be unique urban centers. The concentration of various goods and services around condos has given a boost to these residential areas, breathing life to the surroundings.

Naturally, the booming residential condos are attracting an army of brokers and agents representing the properties and potential tenants. According to many in the rented-house market, the brokers are now an integral market player speculated to have the power to evict tenants and raise rental price as they see fit. In fact, most of these brokering happens by individuals mostly employed by the condo cooperatives as security guards or in other admin positions, having no licenses or permits for the work that they are doing.

And it suffices to say that what they say pretty much goes. In some instances, the condo cooperatives are the ones stirring the rental market in their jurisdictions; as a result the price of condo units has seen increment by leaps and bounds over the past 15 years.

Well, it appears those practices are about to be history very soon. And it is mostly due to a small legislation which is yet to be ratified by the House of People’s Representatives (HPR): The Real-estate Development and Marketing Proclamation.

The emergence of low-cost, condominium housing in Ethiopia’s capital has really changed the way people live in this old nation. Strictly speaking most of these residential condominiums, which are structured as a series of apartment buildings sharing a common area and most of the time enclosed in gated compounds, are evolving to be unique urban centers. The concentration of various goods and services around condos has given a boost to these residential areas, breathing life to the surroundings.

Regulating housing sector

 

As condos increasingly become chosen residential areas in Addis Ababa their impact on the overall housing demand and the rented housing sub sector is rising. To date, close to 380,000 condominium units have been constructed around the nation and out this 245,000 houses are built and transferred to residents of Addis Ababa. Started off as a low-cost, subsidized residential units developed purely for the low-income section of Addis Ababa, condos quickly become the new sensation of the emerging city.

It did not take time for most of these units to become pure real estate investment assets and for their original owners to overwhelmingly decide to rent out their units. In fact, most original condo owners are said to either sold or rented out their properties without even living in them a day in their life. Temporarily unnerved by this purely market driven phenomenon the authorities decided to curtail condo-owners from selling their properties within the first five years of the handover. That largely failed to encourage owners to actually live in the units, in favor of renting the houses.

Currently, a single-bed low quality condominium apartment in the middle of the city, priced at 1.1 million birr (USD 31,250), is rented for not less than 8000 birr (USD 250/month). Not only that, condos in Addis are sure to appreciate in value every couple of months; and that has made them a preferred asset for investment.       

Naturally, the booming residential condos are attracting an army of brokers and agents representing the properties and potential tenants. According to many in the rented-house market, the brokers are now an integral market player speculated to have the power to evict tenants and raise rental price as they see fit. In fact, most of these brokering happens by individuals mostly employed by the condo cooperatives as security guards or in other admin positions, having no licenses or permits for the work that they are doing. And it suffices to say that what they say pretty much goes. In some instances, the condo cooperatives are the ones stirring the rental market in their jurisdictions; as a result the price of condo units has seen increment by leaps and bounds over the past 15 years.

Well, it appears those practices are about to be history very soon. And it is mostly due to a small legislation which is yet to be ratified by the House of People’s Representatives (HPR): The Real-estate development and marketing proclamation.

The proclamation, as can be understood from the name, mostly and largely deals with the emerging real-estate development market in Ethiopia. However, a small section dedicated to the rental housing sector details perhaps the most consequential stipulation for urban Ethiopia.

In nutshell, the proclamation seeks to regulate, tightly, the burgeoning rented housing subsector in urban areas. To begin with the lords of the condo rental game, the free-rooming brokers and agents are no more allowed to stir the market unless they are properly registered with the authorities and carry agent license. This in itself is hugely consequential since a number of people occasionally dabble with brokering deals in the housing market and pocket considerable amount of money.

According to the proclamation, the agents are not only required to register and pay taxes, but the industry-wide compensation methodology, which relay on percentage cuts from the deal they help conclude, is going to be scrapped. “… And hence the relevant supervisory body should institute a clear system that preferably employ different technics to compensate agents and realtors for their job and not rely on the value of the properties they help market,” the proclamation states. In this, it stipulates a system which takes into account the time spent on the job and the complexities of the entire process.

This is a complete departure from the widely-accepted commission based compensation system applicable to realtors and brokers everywhere in the world. The proclamation also doubles down on its tough stance on brokers and agents proposing a dedicated entity to monitor the activities of these agents and receive complaints from clients, if there is any. It also, ambitiously, proposes an incentive mechanism to encourage both tenants and property owners to come forward when the agents are acting outside of the law.

This new approach is just one of the aspects of the proposed rental market regulation mechanism. By the looks of it, the rental regulation proclamation seeks to accomplish two major things: institute a novice rent control system to Ethiopia and set the terms for tenants-property owner (landlord) relationship.

According to commentators, the second dimension which is tenant-landlord relationship is something that required proper regulation for many years in Ethiopia. Due to lack of proper regulatory mechanism to protect the tenant-landlord relationship, the former has long suffered from the undue pressure in the market. For example, constant evictions and rent revisions experienced by tenants everywhere is said to be the lack of proper regulatory mechanisms to enforce rental contracts. That seems to be why the draft proclamation firmly states that the copy of every rental contract concluded between two parties has to be submitted to the low tier of the government at the proper time.

According to the proclamation, any tenant that has went into a rental contractual agreement with a landlord could not vacate the property before issuing one month notice and fulfilling the terms of the contract. The landlord, in general, cannot request eviction of a tenant as long as two-month notice is not issued prior to the decision. It goes even further to state other conditions that can lead to early termination of rental contracts and safeguards against random and sudden eviction.

Yared Hailemeskel, managing director of YHM Consulting, is of the opinion that rental contract enforcement is generally an important regulation for tenants everywhere. For one, he argues, the bulk of cost of the breakage of rental contract is on the tenant than the landlords. “The tenant has a huge cost by way of moving cost if rental contract ends,” this makes it important for the relevant authorities to protect the interest of the tenants. 

“I say this with general contention to the whole market regulation issue,” Yared argues, adding that regulating tenant-landlord relationships is quite common in many European and Norther American countries.

However, what appears to be a bit controversial is the effort to introduce a rental price control mechanism in Ethiopia as stipulated in the draft proclamation. “…any rental price revision should take into account the appropriate price indexes establishing price floors and ceilings for properties to be publicized by the appropriate bodies…” states the draft proclamation.

Although the proclamation leaves a lot to be worked out by the follow up regulation, the notion of regulating market prices like house rental prices is quite troubling for a number of commentators interviewed by The Reporter.  As far as Yared is concerned it more like scrunching where it does not itch, “the house rental sector is purely driven by market forces that reflect the appropriate structural housing shortages in cities and should not be tampered with at all,” he laments.

In fact another macroeconomist who wants remain anonymous due to his work status goes a bit further to contend that regulating markets and market prices has never been the forte of Ethiopian authorities. “Market regulation needs meticulous information gathering and analysis,” he says, adding that the price regulation attempts in the past have never worked out well for the Ethiopia authorities citing the mishap of the infamous price cap levied on host of consumer goods in 2011.

Yared on his part argues that market prices when curtailed almost always find way to manifest. “Controlling rent would most definitely find some other shadow pricing mechanism to compensate and the problem is such pricing could even contribute to more pressure on rental prices,” he states.

True to form, the practice of rental price control is not very popular instruments in the modern economic world. In fact, they are said to be mechanisms developed out of post WWII demand shocks in Europe and North America affecting housing market. According to experts they are of two types: rent ceilings known as first generation rent controls (barely visible in recent times except some buildings in old cities like New York) and tenancy rent controls.

Literature on the subject matter states that tenancy rent control which is rather better employed in today’s economies is about protecting a sitting tenant from abrupt rent revision before a contact period has elapsed.

Apparently, the proposed rent control mechanism in draft proclamation has a whiff of both rent ceiling and tenancy controls since it states a landlord is still within its right to revise its rental price after the elapse of a particular rental contract period, while limiting the property owner’s freedom in terms of the extent of the price revision. This is where the illusive rent floor and ceiling that is constantly referred to by the proclamation comes into play.

A seasoned macroeconomist, Alemayehu Geda (Prof.), is of the view that the proposed rent ceiling and control is very illusive at best. “The rented housing market in Ethiopia is far too segmented. There is no standardized product as far as Ethiopian housing market is concerned and in this scenario I don’t see how prices can be regulated,” he told The Reporter via a phone interview. The nature of the product (housing) in local rental market is far too segmented, Alemayehu expounds further; “It is a livelihood issue for most in the urban settings.”

Global experiences as well speak of bad outcomes from any of the rent controlling instruments. In fact, the relatively less used rent ceiling has proven to be counter-productive in terms of taming down rental prices. For one, if the mechanisms become effective it would eventually lead to incentivizing people to prefer the rental option more than the house owning option, actual experience from Europe shows. Eventually, this is trouble for the housing sector since this would in effect mean decline in the housing stock and hence upward pressure on rental prices.     

In fact, Alemayehu also agrees that the resultant effect could be an upward pressure on prices as whole since in a country like Ethiopia rent could account for half of the urban household budget. “One thing for sure is when you regulate any product or perhaps tax it even slightly the provider would respond by transferring the shock directly to the customers; given high share of rent in consumer’s price index the overall experiment could end up being inflationary,” he says.

Yared, on the other hand, sees some tax revenue implication with regulating rent. “Now, I see many property owners paying their tax dues without much hustle; imagine if you reduce rental income with controls, the impact would also be felt on the tax returns; people for sure would resort to tax avoidance,” he states.         

“These days there is hardly anyone who is not renting out a living space in one form or the other in urban Ethiopia; this is how most people supplement their income,” Alemayehu continues to argue, adding that trying to regulate such markets would also have some serious welfare implication for the very poor segment of the society.