Investing in prime residential Real Estate has generally been a hot topic in Addis Ababa. After all, there are several people that have made a killing doing it. The turmoil surrounding the COVID-19 virus seems to have slowed down this momentum, buyers and sellers are currently assessing the consequences of this event. For now, the industry is facing an acute working capital crisis which is essential to restart the business and keep it moving. As for housing prices they have not dropped significantly in the way some may have expected; clearly the future of the market remains uncertain.
First, a look at how the Real Estate industry evolves…
The Real Estate cycles when left to work through the markets typically transition through the following supply and demand phases. In the expansion stage supply peaks and prices somewhat max out to then stabilize gradually; at this stage a transition takes place in the market where buyers chase premium properties and push price levels even higher. In the recession cycle, when typically there is income disruption, people can’t earn enough to provide for their families, and satisfy their debt obligations. This is the phase where the Real Estate cycle begins to contract.
An event like the COVID-19 crisis would dramatically reduce most home transactions; and although some prices have been lowered here and there, there is no dramatic move in prices. But what one can see, and what has not been seen before, is that this time sellers are more inclined to negotiate.
How do Ethiopian house buyers respond to an event like this? Would the market become risky for investors over the next two to three years?
The way investors and consumers engage in dealing with the COVID-19 crisis will determine how quickly the country will recover from the economic downturn to reach 2018-2019 levels very quickly. Anecdotal evidence suggests, high value house price levels remain high right now, while demand has already started to collapse. It would appear that home sellers are reluctant to decrease pricing as aggressively as potential buyers are exiting the market. Eventually, the lack of real demand will prompt price levels to contract to attract interested buyers. As we’ve seen in many places, when prices start to decline – a vicious cycle begins where potential buyers wait out the bottom offers because they know the dynamics of the markets have changed in their favor.
When large numbers of people or businesses suddenly lose their sources of income, this creates a significant disruption in the supply/demand side of the Real Estate market. How extensive is this disruption in AA? We don’t know. What we know, is it’s hard for prices to move when there aren’t as many housing transactions to make prices move in aggregate. It’s also hard for prices to move as long as there is no pressure on Real Estate firms from banks pulling out capital or asking repayment of loans. Real Estate companies will continue trying to seek peak price levels even when sales activity continues to decrease. How can that be??
Simple supply and demand theory suggests when prices are high and buyers begin to lose faith in future price increases – the cycle shifts from rising price levels to falling price levels as buyers begin to wait out the better deals and wait for the bottom in the markets to setup.
At this stage, given the virus crisis, the erratic nature of ethnic politics in Addis Ababa – in addition to a potentially explosive national election, plus the recent banking regulatory requirements and the reluctance of foreigners to move until there’s a vaccine – the housing market is on pause – buyers and sellers have left the market, transactions have dropped in response, and prices aren’t moving.
So what’s next?
From both theory and experience, we know that the more you let the market determine your price the better off the economy will be. But can the market fix the housing sector? Not really. At a minimum you need government to develop policies encouraging developers to build housing that the modern economy demands. The Government needs to avail land for developers to build affordable housing and vibrant neighborhoods. It also needs to provide subsidy and incentives for affordable housing. In short, free-market solutions although desirable must take into consideration the complex interrelationship of people’s culture, building costs, wages and the economy in general.
Finally, one sensible recommendation for those with money on hand waiting to capitalize for when house prices come down: Don’t despair there is a slight advantage in your favor! It could be twelve to eighteen months before you see the best opportunities