Problems and prospects of housing development in Ethiopia
The Authors
Abraham Tesfaye, Commercial Bank of Ethiopia, Addis Ababa, Ethiopia
Abstract
Purpose – The purpose of this paper is to give an analysis of the problems and prospects of housing development in Ethiopia with particular emphasis on the city of Addis Ababa.
Design/methodology/approach – The methodology employed here is a descriptive analysis where the source of the data is mainly secondary data. Basic statistical tools are employed in the analyses of the data.
Findings – There is a substantial imbalance between the demand for and supply of housing units in Addis Ababa. Accumulated demand for residential housing on the one hand and the low supply of residential land on the other have pushed prices beyond the reach of the majority of the residents in the country including Addis Ababa. Overcoming the housing problem, hence, requires efforts in three main areas: housing demand; housing supply; and institutional framework. Improving the conditions in these areas, in turn, requires the combined efforts of the government of Ethiopia, regional administrations and donor agencies taking the view that overall development of the economy is crucial for the housing development in Ethiopia.
Research limitations/implications – The article is limited to discussions on housing developments in Addis Ababa, though a brief introduction is given regarding the housing conditions in other major urban towns in the country.
Originality/value – This article specifically discusses the housing problem in Addis Ababa. So far no attempt has been made to link the strategy of the government of Ethiopia with housing problems in Addis Ababa.
Article Type:
General review
Keyword(s):
Ethiopia; Housing; Supply and demand.
Journal:
Property Management
Volume:
25
Number:
1
Year:
2007
pp:
27-53
Copyright ©
Emerald Group Publishing Limited
ISSN:
0263-7472
1. Introduction
Urbanization is a development phenomenon that comes about with the development of a country's economy in general and industrialization in particular. It follows that the rate of urbanization is considered to be one of the indicators of a country's economic development. The rate of urbanization is directly related to the demand for houses. It is expected that as a country becomes more urban, more houses will be needed to accommodate the increasing population in urban centers. The practice, however, does not support this in that the acceleration in urbanization is not accompanied by the provision of adequate housing. This is one of the reasons for the development of informal settlements, which provide housing to most low-income groups (UN-HABITAT, 2002). In Kenya, for instance, it was reported that rapid urbanization is placing an enormous strain on an already stretched urban infrastructure, housing stock and services, and resulting in the proliferation of informal housing settlements (www.citiesalliance.org).
Various factors have been pointed out in relation to this divergence between the inadequate availability of housing on the one hand and the rapid urbanization on the other. In addition to the low level of economic development, the lack of genuine political will to address the issue in a fundamentally structured, sustainable and large-scale manner is commonly cited (UN-HABITAT, 2002). Other factors can also be made in relation to this. The absence of urban policy (including housing policy), which is crucial for successfully narrowing the gap between urbanization and housing development, is an important factor.
After the literature review on the theoretical and practical approaches in addressing housing problems in section two, the situation of housing development in Ethiopia in general is discussed in section three. Section four focuses on the discussion on assessment of the housing sector in Addis Ababa. Section five reviews the prospects in housing development in Addis Ababa. Finally, section six concludes the paper.
2. Housing finance
Housing loans are loans of a long-term nature provided for the construction of individual houses and business premises. The common practice is to provide housing loans to that section of the population that earns moderate to high incomes, provision of housing loans operates through specialized institutions (mortgage banks), and over a long-term. It is only in rare cases that commercial banks are called upon to engage in mortgage financing.
Mortgage institutions customarily provide housing finance to the middle and high-income segment of the population. This does not exclude, however, cases where these institutions offer long-term loans to lower income groups who can offer clear land title and certifiable income. This trend is outside the actual situation in developing countries including Ethiopia where the poor, low-and even middle-income majority of the population cannot afford a loan even for the least expensive, commercially built housing units. In Ghana, for instance, only 5 percent of those who want to own a house can do so from their own resources, 60 percent would need some form of financial assistance, and the remaining 35 percent are not capable of owning and building a house in their lifetime (Derban, 2002).
At least three major reasons can be singled out for the inability of the majority of the population in developing countries to get access to housing loans. These are absence of good collateral; informality and instability of income; and lack of information on borrowers (Erhard, 1999).
The underdevelopment of the real estate market, and hence the absence of “real” market prices makes it difficult to determine the value of a mortgage. In other words, it is difficult to assume that the mortgaged object will be sold at a price that equals at least the outstanding debt. It is also difficult, in most of the cases, to find documentation on income (salary statements, financials statements, etc.). Even if it is possible, the information obtained will be manipulated for reasons of tax evasion or other reasons. Financing possibilities are often limited because of the peculiar nature of the sector. Banks tend to offer short-term credit to large enterprises with better information and financial strength. Instability in income combined with long maturity, makes housing finance a very risky business for commercial banks. The instability of income is a problem as the borrower might cease repayment due to lack of income at a later stage of the loan term thus increasing the financial institution's portfolio in arrears (Erhard, 1999). The fact that housing loans are of long-term duration creates a maturity mismatch for commercial banks since their sources of funds are of short-term duration repayable at demand.
Credit risk is another risk that is linked to housing finance. This arises as a result of the high magnitude of the housing loans in comparison to the income of the borrower, and the less developed regulatory and legal frameworks for mortgage loans recovery. The argument is that banks, in case of default, will be in a difficult position to easily convert mortgaged property into liquid funds without entering into a lengthy and costly legal procedure (www.unchs.org). The narrow real estate market is another problem for loan recovery making it difficult to dispose of a defaulters' assets.
Because of this, housing finance programs are required to exert large efforts towards straightening households, housing and property issues, (www.citiesalliance.org). Housing and property issues include the set of laws, regulations, processes and institutions that define whether and how poor households can acquire land and build a home upon it. Household issues include the income levels of poor households relative to the cost of housing and households' ability to finance the necessary steps in acquiring land and building a home. Laws and regulations define the activities of financial services, the number of providers that serve the poor and the appropriateness of the housing finance products relative to the needs and means of the poor are also important issues. These are the enabling environments for the development of housing micro-finance and for the increasing ability of low-income households to have access to houses. The Kenyan experience is worth mentioning in this regard (www.citiesalliance.org).
In Kenya, there is a large housing demand as a result of the mismatch between the expanding urban population on the one hand, and limited housing stock on the other. There is also a strong micro enterprise finance sector. Commercial banks are allowed to lend to developers, who acquire big tracts of land, build houses and then sell completed houses to individual buyers. Loans are provided to developers for a period of two to three years. Mortgage institutions are permitted to provide long-term loans to individuals to purchase units from developers, or in a few cases to build their own complete houses. With regard to the financing scheme, the following are suggested as the major lessons for commercial banks:
- land security does not have to mean full legal title. Potential housing lenders can service poor households with secure tenure not based solely on full legal title;
- mortgage guarantees in Kenya and many developing countries provide substantially less security for lenders than in developed markets given the risks involved in terms of instability of income, high foreclosure costs, weak resale market for repossessed properties and liquidity risk;
- progressive building increases affordability given poor households' limited incomes and high costs of land, building and housing; and
- instituting regulations that reflect how the poor build houses can encourage lenders to develop innovative products, improve the quality of the guarantees taken by these institutions and allow the poor to improve their living conditions.
Different approaches to housing finance are, therefore, required, as access to small amounts of credit, with short-term maturities, can be useful if the poor and low-income groups are to be supported. These require profound risk evaluation, financing through public mortgage institutions, and financing through micro-finance institutions.
One of the approaches proposed is the substitution of collateral by a profound risk evaluation (Erhard, 1999). The risk evaluation bases the credit on a sound appraisal of the borrower's willingness and capacity to repay (i.e. cash flow analysis). It considers the incomes and expenses of the house and business of the loan applicant and crosschecking these with other sources of information like neighbors, employers, suppliers, etc. Banks do not use this approach, as the information on which to base the cash flow analysis is weak and unreliable.
The other is financing through public mortgage institutions. These usually provide loans at interest rates below the market or even the inflation rate, using funds from budget allocations and captive savings in the public sector, such as reserves of insurance institutions and pension funds (www.unchs.org). This, which is a sort of credit guarantee scheme, will increase the capacity of the mortgage institutions to provide adequate loans to households who often rely on their own savings and informal loans from friends and relatives.
Housing finance can also be offered through micro-finance institutions. The features of micro-finance such as small incremental loans, short repayment periods, market rates and innovative forms of collateral such as peer group lending and alternative forms of titles of land present another form of lending mechanism available to low income group of the population. Micro-finance for housing is the provision of small loans to low and moderate-income households typically for self-help improvements and expansion, but also for new construction of basic core units (Derban, 2002).
3. The state of housing conditions in Ethiopia
As a demographic phenomenon, the movement of people from rural to urban areas is unavoidable. This is, however, only one form where urbanization can take place. Others include growth of existing urban localities and annexation of new territories to existing cities. In addition, natural increases determine the growth of an urban center. Some of the urban centers in Ethiopia have already faced and others will eventually face one of these types of phenomenon growth.
Despite its long urban history, Ethiopia remains one of the least urbanized countries of Sub-Saharan Africa (SSA). In 1994, Ethiopia's urban population stood at 9,019,000 accounting for 15 percent of the total population (CSA, 1998a). Although the nation's capital dominates the urban hierarchy with 29 percent of the total urban population, other towns have been growing more rapidly since 1975 (PADCO, 1998). Different rates of urbanization have contributed to the development of radically different spatial structures in the towns. In some towns like Addis Ababa, urbanization has overwhelmed the capacity of the municipal governments to lead the housing development process (PADCO, 1998).
In the urban areas, shortage of housing is one of the major problems that call for immediate action. The majority of houses in Ethiopia are below qualitative standard and lack adequate space. The extent of provision for water supply, electricity, and drainage is very minimal. These affect the lives and health of people living in these houses. All these will continue in the future unless major improvements are made in the housing markets and in the expansion and improved provision of infrastructure and services.
During the Imperial era, urban land and housing was largely the property of the feudal elite. At this time, more than 60 percent of the residential real estates were rental units. In this situation, widespread speculation by landlords and housing suppliers led to increasing land prices and little investment in new dwelling units for low-or-middle income households.
Following the 1974 revolution, the Derg adopted a command system to economic production and provision of public services. In this regard, the government was directly involved in the supply of housing and created and managed the cooperative housing delivery system. Consequently, land, infrastructure, building materials and housing finance were provided on a subsidized basis (PADCO, 1998).
The primary instrument for implementing the Derg's housing policy was the proclamation on government ownership of urban land and extra houses (Proclamation No. 47/1975), which effectively eliminated private sector rental or sale of real estate development. This legislation nationalized all urban land and housing units not occupied by owners. As per this proclamation, “kebeles” were responsible for the administration of urban land and housing; rent collection from tenants paying less than Birr 100 per month; and maintenance of existing housing units. In this way, the “kebeles” gained control of 93.87 percent (142,095 units) of the total government owned housing stock of 151,372 in Addis Ababa (1994 housing census). Most of the units outside the kebeles' control were placed under the protection of the Agency for the Administration of Rental Houses (AARH).
With low public sector production rates of housing, the Derg organized and supervised housing cooperatives to respond to housing requirements. To encourage the development of the cooperative system, the Derg intervened with a wide range of incentives. These include the following (PADCO, 1998):
- Land was allocated without charge for the construction of owner-occupied dwelling units. The maximum plot size for cooperative housing was 500 square meters during the 1975-1986 period, when Proclamation 292/1986 lowered the ceiling to 250 square meters. Typical plot sizes over the 1975-1991period, however, were 175 square meters for middle and low-income cooperatives.
- Building materials were also subsidized. Cooperatives and government housing construction agencies, i.e. AARH and the municipalities, were given priority access to construction materials from government retail enterprises at a cost, which on the average was less than 65 percent of the market value.
- Mortgage loans were also made to cooperatives with households earning at least Birr 250 per month at substantially below market interest rates. During 1975-1986, interest rates were 10 percent for housing purchase, and 9 percent for construction regardless of the type of the developer. As of July 1986, the Housing and Saving Bank began lending to cooperatives and public housing enterprises at 6 percent for purchasing and 4.5 percent for construction. The corresponding reduced rates for private individuals were 8 percent and 7 percent.
This package of incentives for cooperative housing development resulted in a significant increase in both the supply of and demand for housing. From 1986 to 1992, about 2667 cooperatives with a total membership of 69,775 were organized in 26 urban areas. Addis Ababa alone accounted for 85 percent of the total membership. Over the 1975-1992, the cooperative movement produced a total of 40,539 housing units (PADCO, 1998). This means about 2,252 housing units were constructed annually.
Despite this effort, total planned housing production satisfied a small portion of the demand for the period. Various factors contributed to this poor performance. Minimum salary requirements for mortgage loans eliminated a large percentage of the urban population. The processes of forming a cooperative, securing a loan, and acquiring a building permit were slow and administratively cumbersome. In addition, there is acute shortage of building materials, whose production of rationing greatly extended the period necessary to build. Average construction time ranged from two to five years (PADCO, 1998).
Since the transition in 1991, the government has sought to introduce a more market-oriented approach to housing development. With the introduction of the urban land lease holding proclamation in 1993, the government defined leasehold as the tenure form of choice. The period of lease varies from 99 years for owner occupied holding to 50 years for commercial and other uses. Although the law gave the regions the authority to establish the lease rates, it is stipulated that land leases should be sold via auction. Land to be used for social services and low-cost houses may be leased free of charge (Proclamation No. 80/1993).
Several regional governments have followed the Federal governments legislations. Region 14 administration‘s Urban Land Lease Holding Regulation No. 3/1994 declared that urban land should be used for business activities and residential construction.
In addition to the land lease law, other measures have contributed to the liberalization of the housing market. Subsidies on the sale of building materials have been removed, interest rates for housing construction have been set at market rates, etc. Despite these moves towards a market-oriented housing sector, there is currently no comprehensive housing policy at the Federal or city level.
This study focuses on Addis Ababa, but highlighting the general picture of the housing conditions in the major towns of Ethiopia is important to appreciate the extent of the problem in Ethiopia as a whole. This study is largely based on the housing assessment report produced by PADCO in 1998. It is assumed that the housing situations at the time of this report still holds at present despite recent good progress by the Addis Ababa Administration. This is to mean that the current housing problem in Addis Ababa has exacerbated as compared to the situation at the time of the PADCO study and the author of this paper shares the issues rose in the study report.
The increase in urban population has been quite rapid in the medium and small towns with the highest annual increase exhibited in Gambella (see Table I). It follows that towns with the highest urban growth rate have also the highest increase in the number of households.
The low level of income of the population in developing countries (including Ethiopia) is one factor that limits the development of housing. People in these countries have little to save for the construction of houses.
On average, urban residents in Ethiopia spend about 49 percent of their income to fulfill their basic requirements (see Table II). This figure even goes as far as 70 percent and 79 percent in Mekele and Bahir Dar, respectively. This is indicative of the fact that the majority of the urban population in Ethiopia does not have adequate income to build its own house. One can argue that where do the people spend the remaining portion of their income if not housing. It is not the percentage share of their income that matters but the level of their income, which is extremely low to rent a house let alone be able to pay a loan.
The increase in the cost of raw materials (mainly cement, wood and sheet metal) also constitutes a bottleneck to the housing development in Addis Ababa and other major towns in Ethiopia. The price of cement, wood and sheet metal increases annually by 20 percent, 43 percent and 55 percent, respectively during 1993-1995 (see Table III). The present situation is also not different as price escalation is normally observed especially in cement and sheet metal productions-largely in response to the high demand. The recent effort by the Addis Ababa Administration to produce large numbers of housing units has led to a sharp price rises in cement and other construction materials, suggesting that large scale housing units production would be hamstrung by supply constraints in construction materials.
4. Assessment of the housing sector in Addis Ababa
4.1 Demographic conditions and housing demand in Addis Ababa
Housing demand is determined primarily by demographic conditions (population growth, average family size of households and new household formation). According to the 1994 population and housing census, Addis Ababa's population stood at 2,084,588, accounting for 23.1 percent of the urban population. Between 1994 and 2002, the population of Addis Ababa rose by 26.93 percent (an average growth rate of 3.36 percent per year), and by 2002, the city's population stood at 2,646,000, accounting for 25.7 percent of the urban population. In absolute terms, Addis Ababa added 561,412 persons during this period, which is an annual increase of over 70,000 persons. The factors that related to this phenomenon are the high rates of fertility and high rural-to-urban migration flows.
A Welfare Monitoring Survey report of the Central Statistical Authority (1998b) showed that the dependency ratio in the rural areas exhibited a rising trend from 102.9 percent in 1996 to 101.6 percent in 2000 demonstrating enhancing burden on the rural working age population. Looking at dependency ratio by age category in 2000, the economically unproductive rural population in the age of 15 to 64 constitutes about 48 percent of the total dependent population. These are unemployed people who are believed to be the major source of rural urban migration in search of work as almost half of the economically dependent population is in the working age group. This situation can further increase the demand for housing.
Although population growth shows the demand for housing, the rate of increase in households is believed to provide a direct measure of potential housing demand.
The number of households in Addis Ababa increased by more than 0.16 percent (see Table IV). This has contributed to the increase in the number of households in the city by more than 14,255 per year. Given this increase, the city's housing demand is increasing. Accommodating this increased demand will require additional housing development and construction in the city.
Another important factor that needs to be considered when we talk about demand for housing is affordability, the share of income households must devote to acquire rental or owner-occupied houses.
A large proportion of households (92.5 percent) fell in the lower and medium income category (see Table V). A 1996 study also shows that the monthly median income in Addis Ababa was Birr 391 (PADCO, 1998).
Data obtained from the CSA showed that in 2000, 35.9 percent of the total income of urban households goes to total food. In the case of Addis Ababa, the share of total household income spent on food accounts for 33.4 percent, showing that from the small amount of income, expenditure on food takes one-third-leaving very little income that can be spent on housing rent or purchase.
Lower income translates to proportional decreases in housing budgets and to a lower percentage of income allocated to housing. The resulting absolute decrease in housing resources reduces effective demand, and therefore limits the performance of the housing sector. The study made by PADCO (1998) showed that housing cost to income ratio is 13.9 times for chika construction, and 29.2 times for concrete block units. The ratio implies that households would need to save 14 to 29 times of their income to be able to make a cash purchase of housing without the support of long-term financing, suggesting that housing affordability is extremely low. The same study also revealed that rent to income levels in privately owned rental units are much higher, ranging from 23.7 percent in planned areas to 47.4 percent in unplanned areas. This suggests that the housing market is in a state of imbalance, with housing prices and costs standing at levels well above most dwellers’ ability to pay.
In general, although population and household formation has been rising, this has not been simultaneously supplemented by the increase in the number of houses due to low level of affordability. Information obtained from the city administration-housing agency showed that including those units, which require replacement, there were a total of 299,000 housing units demand backlog in 2003. Meeting this demand alone requires producing large number of housing units annually.
4.2 Land provision and housing supply
Land is an important component of housing development. The current land supply system, to a large extent, is characterized by lease holding through auction and negotiation. Following the Urban Land Lease Holding Regulation, the Addis Ababa administration established the lease office and began implementation of the lease system early in 1995.
The land delivery system in Addis Ababa is underdeveloped. Information obtained from the Addis Ababa City Administration (1994) cooperative organization office and the city's administration Housing Agency showed that between 1994 and 2003, about 4,147 plots of residential land have been delivered to individuals forming cooperatives.
Housing production is impeded primarily by a severe shortage of serviced residential plots. The low supply of residential land in relation to demand has pushed prices beyond the reach of the large majority of the city dwellers. The price of acquiring use rights to residential plots has risen much faster than the inflation rate in recent years as a result of stagnant production and low availability.
4.3 Construction costs, building material availability and supply of housing
The study by PADCO shows that the public sector dominates the production of core building materials in the country while the distribution is largely dominated by the private sector. The public sector is the only producer of cement and timber. It is clear that production is too low to meet demand. The low availability of some domestically produced materials is a function of low production rates. As a result, prices tend to increase due to shortage, as well as due to high demand.
The cost of construction materials is increasing from time to time. The prices of cement and wood, both produced domestically have been rising. Recently, the price of sheet metal imported for the construction of metal doors and windows has also climbed dramatically.
Though concrete quantitative figures arenot available, the current price of construction materials is higher than it was some eight years ago, owing to increased production costs, as a result of increased charges for production inputs like electricity, water, etc. The increased cost of imported inputs also rose dramatically, with large impacts on the sector. Since recently, there is a sharp growth in construction activities, both in the city and other towns.
A look at the price indices for rent, construction materials, fuel and energy for Addis Ababa exhibits that prices have increased, on average, by 3.4 percent for the last eight years (see Table VI). This is calculated by taking the 1995/1996 prices of these materials as an initial amount. Decreases in prices have registered only twice in the last seven years.
Concrete building material production firms report that rising cement prices have pushed up the price of their products. The increasing devaluation of the birr (rise in exchange rate) had an impact on the prices of imported building materials in the early years of the reform program. Another contributing factor to increasing prices of building materials is the value added tax (VAT), which is applicable to consumers of construction materials as well.
Generally the significant increase in raw material prices, from cement to wood and to sheet metal is pushing prices upward. Consequently, an increasing tendency has been observed in the construction prices from time to time, which has an adverse impact on the supply of buildings.
Data on construction cost gathered from contractors indicate that some seven years ago, chika units were built for Birr 545 per meter square, while the cost of hallow concrete block units was 1,042 Birr per square meter (see Table VII). However, these figures are likely to have escalated this time because of both supply and demand factors.
Information obtained from the city administration-housing agency shows that the existing average construction cost on different construction alternatives is 1,250 Birr per square meter, exhibiting more than a 57 percent increase in the construction cost incurred per square meter (see Table VIII).
In sum, lower availability and the high cost of construction materials inhibit the supply of housing by driving up the selling price and rent of finished houses. Productivity in the production of construction materials remained low. The technology in the production of construction materials has not changed much. Cement shortage continues to be the bottleneck for the rising construction activities in the city as well as in the country.
4.4 The quality and condition of housing units in Addis Ababa
A comparison of housing production and increases in the number of households, however, presents only a partial picture of the housing conditions in the city. This is because it does not take into account the need to replace dilapidated units, and relieve overcrowding, which will cast a more negative light on the quantitative performance of the housing sector.
The absolute size of a house provides only a crude measure of the extent of availability of shelter in a society. It tells nothing about the quality of a housing unit. The quality of a residential housing unit is necessary to appreciate the extent to which the existing housing conditions are regarded as socially desirable in terms of structural quality, rates of occupancy, and other facilities of life. Besides, knowledge about the materials used for the construction of walls, roofs and floors may be of special significance for the assessment of the durability of the housing unit, demand for construction materials, etc.
Information obtained from the city's municipal housing agency revealed that the existing housing conditions are far from optimal. Most of the city's housing units are below standard and deteriorating. Housing quality is low and declining, and housing units have limited access to services.
The large share of the housing stock is also made from non-durable materials and a considerable portion lack basic facilities (see Table IX). The type of construction materials in which the housing units are made is such that 82 percent are chicka houses (i.e. their wall is made of wood and mud). Housing units whose walls are constructed from stones and mud constitute about 13 percent. Moreover, 53 percent of the units' floor is soil, and 60 percent of them do not have ceilings.
In addition to the above, the condition under which amenities are available proves the low quality of the housing stock of the city. In this regard, 26 percent of the housing units do not have kitchens. Those housing units that do not have any type of toilets constitute one fourth of the total housing units, and 19 percent of them have shared toilet rooms. Only 4 percent of the total housing stock have pipe line water within the units' premise. Moreover, 90 percent of the houses do not have bathrooms. Generally, the quality of housing units in the city is very poor.
With regard to the state of the housing condition, the larger portion of the housing stock is in a state of dilapidated condition. A housing survey undertaken 13 years back indicates that at that time one-third of government houses in Addis Ababa have been beyond repairable. Now thirteen years have elapsed since this survey was made, and no considerable work has been done in maintaining these houses during this time. Information gathered from the Addis Ababa city administration-policy study and plan commission further demonstrated that an estimated 60 percent of the city's center is ruined. Housing units under the kebele administration in particular are ruined.
In Addis Ababa, there is a considerable difference in the age of unplanned and planned units. This is most likely due to the fact that most of the unplanned units were constructed prior to the Derg and that there were far fewer planned units in existence prior to 1975.
Unplanned units are smaller than planned units in terms of the size of the house, the number of rooms and the size of the plot (see Table X). Although the age of most of the government owned housing units and low resistance of the construction material they are built contribute to the poor condition of the housing stock of the city, very low maintenance rates (frequency) and very low expenditures on maintenance by the public sector remains the primary cause (of what?).
Overcrowding is a serious problem in the city. About 60 percent of the total dwelling units in the city have less than three rooms (see Table XI).
4.5 Ownership of land, dwelling and other buildings
According to the results of the welfare monitoring surveys, around half of the households own land and dwellings and/or other buildings which can use them as collaterals for loans in addition to investments on the free plots of land (see Table XII). The proportion of households that have acquired dwelling unit and/or other buildings exceeds the proportion that lost this asset during the indicated timespan. Similarly, the proportion of households that acquired land exceeds those that have lost land in the three survey years. The rate, however, is decreasing.
The number of households which have acquired dwellings and/or other buildings and who gained land have declined in 2000 when compared with 1998, suggesting that land and housing delivery has declined. Alternatively, the number of households has increased by more than the increase in available land and affordability of households to gain land or acquire housing or other buildings.
4.6 Tenancy status
Tenure refers to the arrangements under which an individual occupies their living or business quarters. Tenure information collected for living quarters shows the distinction between rented and owner occupied units.
According to the 2000 survey by the CSA, nearly equal proportions of households in urban areas live in rented houses as those who live in their own houses. About 48 percent are owner-occupiers and about 45 percent live in rented houses (see Table XIII). Close to 6 percent of the households are shown to live in rent free houses. This includes households residing with their relatives, and in rent free houses.
The distribution of households by tenure in Addis Ababa is such that a higher proportion of households (57.0 percent) lives in rented houses, followed by those who live in their own houses (see Table XIV).
4.7 Housing finance
The lack of functioning mortgage markets in Ethiopia impedes the emergence of both savings institutions and long-term financing facilities. Risk bearing financing is provided in other countries by venture capital institutions. In the short to medium term, it is unlikely that such institutions, which are capable of mobilizing substantial resources to finance the housing sector will be developed in Ethiopia.
There is a shortage of capital for investment in the housing sector as the only bank that specializes in the provision of housing finance is the Construction and Business Bank. Moreover, the commercial banks favor short-term loans. The low degree of penetration of formal housing finance institutions means that the housing financing sector has a minimal impact on the development of the broader financial system. The financial sector is also characterized by high interest rates, stringent collateral requirements and other impeding requirements.
Given the weakness of the formal financial sector and the high expenditure that housing requires, many urban households have had to enter into the informal financial network to build or upgrade their dwellings units. Personal savings, family borrowings and an active network of informal sector organization such as rotating savings associations (ekubs) currently fill the financial gap for homebuilders.
Following the onset of the financial reform program in early 1990s, the Housing and Saving Bank became the Construction and Business Bank in September 1994. The Construction and Business Bank is established as a universal bank in line with the dictates of Regulation No. 203/1994 issued by the council of ministers to cater for banking services, mainly financing loans for construction, repair, modification and acquisition of residential and non-residential buildings, for construction sector activities and for the development of hotels and tourism. It also provides business loans to meet the working capital requirements of commercial and industrial activities. The bank also has the mandate to offer foreign banking services. The authorized capital of the Construction and Business Bank was stipulated to be Birr 71.8 million, of which Birr 63.9 million is paid-up as of June 2000.
Generally, penetration by the formal banking institutions into the urban housing finance market has been minimal over the past four decades. According to a survey made by PADCO/WASS/NUPI (1996), only 10 percent of households used the public sector housing bank as the primary source of funding for residential construction, and only 6 percent used the same source to purchase their plot of land (see Table XV).
The time series analysis shows that penetration by the CBB rose during the Derg period (see Table XVI). While overall penetration has declined with time, the highest coverage was attained during the Derg period, where 20 percent of the households borrowed from the Housing and Savings Bank to build their unit. This figure is largely the result of subsidized interest rates which were as low as 4.5 percent for cooperative members beginning 1986, which made the public route very attractive for house builders. But at any rate, personal savings remained the key source of finance for housing in Ethiopia.
The overall low levels of penetration from the formal housing finance sector are the result of both government policy and cultural preference. On the one hand, requirements for mortgage loans from the CBB and its predecessor have historically excluded a certain percentage of the urban population. A study made by PADCO (1998) showed that the CBE at that time provided mortgage loans on new houses of at least 17 square meters in size at an interest rate of 10.5 percent for a period of 20 years. This entails a monthly payment of Birr 96, or a monthly salary of Br. 480, assuming that 20 percent of income is allocated to housing. The study further showed that at that time, 62 percent of households in Addis Ababa make less than Birr 480 per month. Therefore, almost two-thirds of the urban population in the capital could not afford to borrow from the only formal sector financial institution offering mortgage loans at that time. On the other hand, many households that can afford to borrow under CBB terms choose to rely on informal funding channels. Traditional aversion to interest-bearing loans leads these households to borrow funds on an interest-free basis from friends and relatives or rely on personal savings for house construction, as evidenced by the data in Table XVII.
This does not, however, mean that the demand for formal mortgage loans, assuming that land becomes more available, is low. Rather, it indicates that the demand for housing finance will continue to be satisfied by both formal and informal channels. Moreover, as more and more urban households are integrated into the wage economy and the banking system, the traditional aversion to borrowing from institutions which charge interest will probably decrease, shifting more effective demand over to the formal financial sector.
The CBB is the only retail bank in Ethiopia specializing in the provision of finance for the housing sector. Information obtained from the CBB reveals that before 1995, the Bank gave mortgage loans amounting to Birr 407.1 million, below market interest rate for the construction of 26,912 residential houses (see Table XVII). Of these units, 14,881 houses (55.3 percent) were built by borrowers whose monthly income was below 500 Birr, demonstrating the Bank's role in supporting the financial needs of the middle income group of society for housing construction.
Nevertheless, after 2002, the number of loans extended for the construction of residential houses has declined. The information from the Bank further shows that the followings are the major reasons for the decline in housing loans:
- poor and weak supply of plots of land for housing construction;
- increase in the cost of construction materials;
- increase in the minimum own contribution required by the CBB from borrowers who desires to construct houses (from 5 percent to 20 percent); and
- low fund and capital base of the CBB.
Since 1994, the bank extended loans amounting to Birr 190.9 million that is used for the construction of 3,386 residential houses. In general, since its establishment, the CBB has extended a total of Birr 598.8 million mortgage loans for the construction of more than 30,000 residential units.
The CBB has the mandate to extend short and medium term business loans, since it was restructured in 1994, but its performance still mainly depends on extending long term construction loans. It extends mortgage loans to employees of governmental and non-governmental organizations depending on their salary and age. The duration of the loans may reach up to 30 years.
It is currently making long-term mortgage loans at an interest rate of 8.5 percent. However, it is still carrying in its books loans made at lower interest rates, including loans to housing cooperatives at 4.5 percent. Initiated in mid-1986, these 20-year below-market rate loans will continue to be a drag on the CBB's earning for years. This is the problem with low and fixed interest rates, which could have been avoided if the bank were to adopt a variable lending rate.
5. Prospects of housing development in Addis Ababa
The data presented in this report suggests that the city's housing market is under considerable stress. There is a substantial imbalance in the demand for and the supply of housing. Supply of housing has not kept pace with the rapidly growing population and rate of urbanization. On the other hand, demand has been growing quite rapidly, mainly driven by rapid urbanization, high population growth and household formation. However, it has to be considered that the market for the housing sector is highly segmented and far from uniform depending on the need, quality and complexity? of houses as well as the location of the houses.
Shortage of residential building is especially acute for low-income households that account for over 80 percent of the city's population. The general impression is that demand is extremely high for those less complex houses that come largely from lower and middle-income households. Demand for more complex and high quality buildings mostly comes from higher income groups of the society who represent less than 10 percent of the city population seems less acute compared to the former.
Housing affordability in the city is extremely low. However, as a result of the supply deficit and high household formation rate, the demand for housing is extremely high. But because there are a few residential plots available for new construction, production is very low. It is this imbalance between supply and demand that pushes prices out of the reach of most households.
5.1 Housing need assessment
The assessment of future housing need hinges upon demographic forecasts. Future housing need arises from two demographic components: the natural one and the social one. In order to evaluate the increased need due to natural demographic movement, one is supposed to calculate the increase of households due to the formation of new entities net of terminations. The assessment of the social demographic movement concerns the estimate of migration flows, either international or domestic (rural-urban and urban-urban migration).
The assessment of previously unmet housing need appears to be a more complex issue, especially when it is true that, as in the case of Ethiopia, a large proportion of the population lives below standard conditions. In this case, as noted above, the highly subjective establishment of quantitative and qualitative standards, and their possible change may imply a marked variation in the overall figures.
The first factor creating unmet housing need is traditionally calculated through the evaluation of the existing phenomenon of overcrowding (UN, 1967, p. 9). This aspect analyzes the relationship between the number of households and housing units.
Here one assumes that the quantitative figure is established by a one-to-one ratio between housing units and households. In the case of cohabitation, the number of households will exceed the number of housing units. In general terms, cohabitation can be voluntary or forced (because there is not enough housing to accommodate all of the households or because some households cannot afford the cost of an independent dwelling). Assuming that the standard to be pursued is that of one household per housing unit, the number of households exceeding the number of housing units is an indication of previously unmet needs.
A second factor of housing need stems from qualitative below standard housing units. We can divide qualitative standards in two categories: those concerning the construction materials, and those concerning supply of essential facilities such as running water, toilet, bathing facilities, and electricity. When facilities such as electricity and running water are absent, what is needed is readjustment of existing housing stock, but does not require any replacement of the housing units or adding of a newly built room.
As a consequence, data gathered on these aspects of quality of living give useful information about standard of dwellings. This is because they are useful indicators of the amount of intervention needed to promote adequate supply of essential facilities, but do not affect unmet housing needs in terms of housing units.
As already mentioned, future housing need depends on the population dynamics which result from natural and social movements. The natural movement is based on the difference between birth and death rates as factors of population, and on the difference between the household formation and dissolution. The social movement refers to migration, and this is based on the forecast of population transfers.
Currently no surveys or estimates exist to evaluate the quantity of forced cohabitation, as distinct from voluntary cohabitation, and would be useful because only the former deals with unsatisfied housing needs (see Table XVIII). However, the belief is that most cohabitation is forced due to lack of housing units and/or the lack of economic means to access the housing market.
A study made by NUPI Group Huit (1988) showed that in 1990, around one-third of government houses in Addis Ababa were beyond repair and indicated that if regular maintenance is not undertaken, the figure would go up to 50 percent (NUPI, 2003). Information obtained from the city administration's housing agency also exhibited a low rate and level of maintenance on most government owned houses resulting in many units remaining in poor and irrepairable conditions.
A study by PADCO (1998) further revealed that the average age of housing units in the city in 1995 was 23 years. Hence, the age of the units and the low rate and level of maintenance as well as low resistance of construction materials in which most of the housing units are made reduced the durability of most units. It was assumed that 45 percent of the 1994 stock of government housing units were in an irrepairable condition, suggesting the need to be replaced by new units.
In order to determine the number of housing units needed to replace those dilapidated houses, Analysis is based on a household survey conducted by PADCO/WAAS/NUPI (1996) on the housing conditions (see Table XIX).
The survey shows that housing units, which are in a poor condition, are in need of major structural repair. It is, therefore, assumed that all of the housing units that are in poor conditions need to be replaced by new units. This constitutes a new demand for housing in the city (see Table XX).
5.1.1 Future housing need
As already noted, future need is determined by the increase in the number of households. In order to estimate the magnitude of housing units needed to accommodate the increase in the number of households, the following assumptions have been considered (see Table XXI):
- According to the 1994 population and housing census, Addis Ababa's population stands at 2,084,588, which suggests about 404,768 households. The census also shows that average household size is 5.10. We assume that this average household size will remain constant throughout the projection period 1994-2010.
- Information from CSA shows that in 2002, the city's population stood at 2,646,000. This shows that between 1994 and 2002, Addis Ababa's population rose by 561,412 at an average growth rate of 3.36 percent per year. We assume that this average growth rate of the city's population will hold up to 2010.
- The census data shows that the household/dwelling unit ratio is 1.08. However, we assume that the desired household/dwelling unit ratio by the year 2010 will be 1.0.
Based on these estimates, the total number of projected new housing units required to accommodate newly formed households, replace dilapidated houses and relieve overcrowding are calculated in Table XXII.
The housing need assessment shows the existence of a huge demand for housing units, which, one way or the other suggests the existence of potentialities for mortgage financing.
5.1.2 Housing need by income category
In order to assess the affordability and the need that arises from the different income categories of the houses, we assumed the proportion of low income, medium income and high income household to be 80:13:7. This is based on the CSA household income, consumption and expenditure survey of 2001.
Accordingly, the proportions of total housing need that arise from households in these income categories are presented below (see Table XXIII).
5.2 City government housing projection
The Addis Ababa city government has planned to reduce the city's housing shortage by one-third, and create a condition that benefits the low- and middle–income group of the city's residence. In view of this, the administration has planned to construct 100,000 houses in three years' time.
Information obtained from the Administration Housing Agency further showed that about 2.5 to 3 billion Birr is required to accomplish the development plan in the next three years. Of these, around 1.05 billion Birr is covered by the city administration, and the rest is going to be covered by different sources. In this regard, during the first year, it is planned to mobilize a sum of 490 million Birr, 51 percent of which (250 million Birr) will be covered by the city administration. The plan further shows that a sum of 900 million Birr is needed in the second year. Of these, 350 million Birr (39 percent) is the share of the city's administration. In the third year, a total of 1.272 billion is required, 35 percent of which (450 million Birr) is to be covered by the city administration (see Table XXIV).
The city administration's financial need for the construction of the planned residential houses from outside sources is huge. This creates the opportunity for mortgage finance that may involve formal sector banks in financing the housing sector. In addition, the revised master plan of the city has proposed improvements of housing finance through, among others, development of a housing construction and savings association, extension of loan guarantees and expansion of micro finance programs for housing. Moreover, the city administration has also planned to form a housing development fund. These are intended to improve access to finance for construction of houses in Addis Ababa at affordable prices.
5.3 Government's poverty reduction strategy and the role of the Commission for Africa
The Ethiopian economy is predominantly agrarian. Agriculture accounts for almost 85 percent of total employment and over 85 percent of total exports. Considering the share of the major economic sectors in the GDP of Ethiopia, the share of agriculture has been 39.4 percent in 2002/2003 fiscal year while that of the service and industry sectors has been 48.7 percent respectively. Among the three economic sectors, the service sector growth in share of GDP has been 2.05 percent in 2002/2003 while the contribution of agriculture has decreased by 12.17 percent as compared to the 2001/2002 share (see Table XXV).
There is limited saving and investment in Ethiopia. This has been the major constraint for full utilization of the country's human and natural resources. The Ethiopian government's Poverty Reduction Strategy Paper (PRSP) which was made official in 2002, had the overall objective of reducing poverty while maintaining macroeconomic stability (FDRE, 2002). The PRSP focuses on agriculture on which more than 85 percent of the Ethiopian population depends. According to this strategic paper, the development of agriculture means the increase in agricultural income, which in turn means the increase in industrial production as a result of which the income of the urban household will improve following employment opportunities in the city and towns. This will eventually overcome one of the major problems of housing development: The affordability issue assuming that the other problems related to housing will also be dealt with.
The PRSP has put forward strategic actions to enhance urban development and management (FDRE, 2002). Among these, the following are important:
- strengthen urban governance which includes among others formulation of urban development policy;
- infrastructure provision which includes among others upgrading of the existing old and dilapidated houses; and
- alleviating and mitigating housing problems, which are directly or indirectly related to affordability (either to buy, construct or rent a house, from the market), by formulating housing development policy, conducting a housing cooperative study with the view to promote the development of housing cooperatives and improve housing affordability via introducing appropriate housing standards that consider local resource capacities and requirements.
Achieving the overall objective of poverty reduction and the specific tasks as related to urban development and management which in the final analysis mitigates the housing problem in Addis Ababa are unlikely to be achieved without the support of external development finance complemented by debt relief and support for foreign investment. The Commission for Africa, which recognizes poverty and stagnation as the greatest tragedy of our time in its recent report, is believed to be the best way for Africa's (and hence Ethiopia's) problem to be recognized and the necessary aid and debt relief to be granted by donor governments and agencies. This is a good prospect for the development of the Ethiopian economy which can supply houses on a low-cost basis and for the prosperity of those people who can allocate a significant portion of their expenditure on housing development.
6. Conclusion
The main impact of the policies followed in the past 10 years is the underdevelopment of the housing sector. Overall housing developments fell far short of demand. Moreover, an efficient housing delivery system has not been designed and implemented.
Housing affordability in the city is extremely low. The main reason for poor affordability is an unresponsive supply side. As a result of the supply deficit and high household formation rate, the demand for housing is extremely high. However, since there are few residential plots available for new construction, production is very low. It is this imbalance between supply and demand that pushes prices out of the reach of most households.
Another reason for low affordability is that household incomes are low. According to a 1996 study, the monthly median income in Addis Ababa was Birr 391 (PADCO, 1998). Expenditure on basic needs such as food is also very high implying that most households have little money available for housing expenditure. The combination of low production and a generally unaffordable building construction means that the city's residential land delivery system cannot satisfy demand and, unless revised, will contribute to act as the major constraint on housing development of the city.
There is a good prospect for housing development in Addis Ababa. The city administration recently constructed low-cost houses targeted at low to middle income earners in the city and this serves as a short-term solution to the problems. The government of Ethiopia is currently implementing the PRSP, which includes urban development and management as one of its strategic tasks. This will serve as a medium to long-term solution to the housing problem in Ethiopia generally and the city of Addis Ababa in particular. However, much depends on the willingness of donor governments and the international community to finance these development objectives and I see a bright future in this regard after the release of the Commission for Africa's final report which, in my opinion, can be the best route for getting Africa (and hence Ethiopia) out of the poverty trap.
Table IPopulations and number of households by study cities, 1984-1994
Table IIHousehold income and expenditure by study town (in Birr)
Table IIIAverage annual price increase of selected raw materials by town size category (1993-1995)
Table IVPopulation and number of households in Addis Ababa (1994 and 2002)
Table VPercentage distribution of urban annual households income category (2000)
Table VIPrice indices for house rent, construction materials, water, fuel and power for Addis Ababa
Table VIIConstruction cost and development process data in Addis Ababa (1995)
Table VIIIConstruction cost and development process data in Addis Ababa: 2002 (in Birr)
Table IXSelected indicators for housing characteristics in Addis Ababa
Table XUnplanned and planned housing stock by age, size of unit, number of rooms and size of plots (mean value) 1995
Table XIHousing units by number of rooms (% of total)
Table XIIPercentage distribution of urban households by ownership of land and dwelling or other buildings and changes in ownership by survey year
Table XIIIPercentage distribution of urban households by tenancy status and survey year
Table XIVDistribution of households by type of tenure – 2000
Table XVPercentage distribution of household sources of funds for plot acquisition in Addis Ababa
Table XVIPercentage distribution of household sources of funds for dwelling unit construction in Addis Ababa
Table XVIILoans extended for the construction of residential units by the CBB (in '000 of Birr)
Table XVIIIDistribution of cohabitating households by housing unit needed, 1994
Table XIXHousing condition in Addis Ababa 1995
Table XXNew housing units required to replace dilapidated houses
Table XXIProjection of demand for dwelling units for newly formed households (1994-2010)
Table XXIIOverall residential units need assessment
Table XXIIIHousing need by income category
Table XXIVFinance gap for construction of housing units in Addis Ababa (amount in millions of Birr)
Table XXVAmount and growth trend of GDP of Ethiopia by economic sector (1998/1999-2002/2003)
References
Addis Ababa City Administration (1994), Urban Land Lease Holding Regulation No. 3/1994, .
Central Statistical Authority (1998a), “Population and Housing Census 1994, analytical report on regions”, Addis Ababa, .
Central Statistical Authority (1998b), “Statistical abstract”, various issues, .
Derban, W.K. (2002), “Micro finance for housing for low/moderate income households in Ghana”, .
Erhard, M. (1999), “Long-term housing loans to low and medium income households in Bosnia and Hercegovina: the experience of developing an appropriate credit technology”, .
Federal Democratic Republic of Ethiopia (2002), “Ethiopia: sustainable development and poverty reduction program“, Addis Ababa, .
PADCO (1998), “Ethiopia housing”, Sector Study, .
PADCO Inc./WAAS/NUPI (1996), “Housing Survey Report”, Ethiopia Housing Sector Study, .
UN-HABITAT (2002), “Housing for the poor: policies and constraints in developing countries”, .
Further Reading
Federal Democratic Republic of Ethiopia (1993), Urban Land Lease Holding Proclamation No. 80/1993, .
Gebeyehu, A., Brazzoduro, M., Gebremedhin, B. (2001), Housing Conditions and Demand for Housing in Urban Ethiopia, Roma, Addis Ababa, October, .
Kebede, G. (1985), “Urban growth and the housing problem in Ethiopia”, Cities, Vol. 2 No. 3, .
Lea, M., Chiquier, L. (n.d.), “Providing long-term financing for housing: the role of secondary markets”, World Bank working paper, United Nations Development Programme, .
Merrill, S.R., Margo, S., Kozlowski, E. (1999), “The feasibility of estimating the demand for residential mortgage credit in Poland”, .
National Bank of Ethiopia (2004), “Annual Report 2002/03”, .
“The enabling environment for housing finance in Kenya” (n.d.), available at: www.citiesalliance.org, .
“Urban shelter: housing finance” (n.d.), available at: www.unchs.org, .
Corresponding author
Abraham Tesfaye can be contacted at: abrahamtesfaye@yahoo.com