For many Addis Abebans, the real estate market has been the latest get-rich-quick trend. Indeed, a multitude pack of homeowners and investors have become wealthier as they watched their property values increase or their investment properties sell for multiples of what they paid for them just a few years ago.
 

But the run-up in real estate (especially office buildings) may be ending and the housing market’s “extraordinary boom” may collapse as it has historically done in the infamous Florida Real Estate Craze.
 

Wilkepedia, the online encyclopedia,  defines a real estate bubble or property bubble as a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid speculative increases in the valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements, followed by decreases (also known as a house price crash or a market correction) that can result in many owners holding negative equity (a mortgage debt higher than the value of the property).
 

Just like any type of economic bubble, it is difficult for many to identify except in hindsight, after the crash. The Economist sites “the worldwide rise in house prices is the biggest bubble in history”, and real estate bubbles are believed to exist in many parts of the world, especially in many areas of the United States, Great Britain, Australia, New Zealand, Ireland, Spain, South Africa , India and China. The crash of the Japanese asset price bubble from 1990 on has been very damaging to the Japanese economy and the lives of many Japanese who have lived through it, as is also true of the recent crash of the real estate bubble in China’s largest city, Shanghai.
 

Housing and office building estates have flourished beyond belief against a shortage of everything from cement and iron bars to gravel and sand. Several factors have been responsible for the urban revolution and estate and price boom.
 

The most important factor driving estate development and rental rates is on the demand side: income. We have witnessed a growing number of rich people (although still in the minority) who want to live in only a few metropolitan areas, primarily those on Bole; displacing hitherto wealthy underclass of the past regime. But in addition to increasing demand for pricier homes, supply of new homes has been constrained.
 

Focused on supply and demand factors for the rise of residential real estate prices, we turn our spotlight on speculative investor sentiment. Since the early 1990s the rate of growth for housing prices has risen every year. This has created an investor psychology in the nouveau riche millionaires that crowd the trendy cafés and pubs of Addis and the raw meat alleys of Nazareth.
 

Local and not national — not even city-wide — factors are driving prices of residential house markets. Local trends have caused a divergence in both median home prices and home price growth in different sub-city markets, with Bole and Old Air Port residential markets benefiting the most. Home prices have appreciated more than 1000% since 1990 in places such as Bole. Many houses across the city’s ‘Beverly Hills’ have reached historic peaks bordering on lunacy; in terms of price-to-income and price-to-rents.
 

Investors have benefited from the housing boom because of low interest rates (one of the lowest in the continent) and in the wake of  bank loans that have fueled office space market explosion.  Over the long haul, interest rates and house prices have not been correlated. When interest rates change (as they do once in a blue moon), there have typically been no dramatic fall in house prices, even though mortgage debt service payments increase, and vice versa. One reason that house prices may continue to increase despite rising interest rates is that homeowners are still expecting the market to skyrocket.

The lease policy and land sales and management strategies of the city may have a lot do with the building craze too. As prime areas were made available for lease by the city; local investors quickly put their hands in this competition to swallow all prime estates of the city at prices unprecedented in the history of Addis or for that matter much of the developing world.
 

This hunger to get their hands on the most valued estates was indeed a driving force that created an inertia that culminated in the initiation of constriction of hundreds of office building and custom service buildings. While real estate markets are often treated as a block, there are many different sectors within these markets, and commercial real estate is very different from residential real estate.
 

The commercial market has been completely transformed since early 2002, when then Mayor Arkebe took over and overhauled everything. It operates under different rules than it did in prior economic cycles. What has changed most dramatically is the interplay between the public and private markets. Prices in the commercial real estate market are influenced primarily by two factors. The first is the increase in market capitalization which has injected more liquidity of the development and commercial banks into the market.

The other factor influencing commercial real estate prices has been the low interest rates. Massive capital flows into commercial real estate in recent years were linked to both low interest rates and the concomitant lack of investment alternatives in the market. Nonetheless, it will be hard to imagine events aligning as well in the near future. Developments in commercial real estate make it difficult to predict how the market will now respond in a rising interest rate environment. Interest rates have been a primary driver in commercial real estate over the last five years. However, the relationship is now shifting as fundamentals in the commercial market improve.
 

While few would dispute these assessments, what’s in store for real estate is difficult to predict. Robert Shiller, an economics professor at Yale University and the author of Irrational Exuberance, which anticipated the stock market crash of 2000, asserts that the recent, unprecedented spike in US home prices reflects the damp, invisible hand of investor psychology. What’s been driving up the price of single-family homes, he notes, is “like the psychology of the stock market in the 1990s — and it is probably very unstable.”
 

Similarly, the real story that explains how the commercial real estate market in Addis has changed goes back two decades; when the mixed economic policy of the late 80’s gave investors free land and cheap capital to build homes and offices.  In the late 1980s, investors bought real estate with negative leverage, in which the initial yield on real estate was typically lower than the cost of the debt they were taking on.
 

This was largely true of the socialist policy of the government that restricted rentals; but nonetheless it was a hedge against runaway inflation as any measure to restructure the exchange rate would have had devastating consequences in their Birr value (the black market rate was 1 dollar to five Birr while the official rate was dollar to 2.07 Br). Hence as a lot of new supply (hotels – such as Plaza, Axum, Yordanos to site a few) and office and diplomatic mission buildings (such as South African and Japan Embassies) entered the commercial estate market, the correlation between real estate and inflation changed. What changed since then, however, is that the financing of deals in commercial real estate shifted from private to more corporate markets.
 

In terms of transparency and governance, housing investment in the 1990s were the poster child for how not to do the right things. There was no transparency – no building codes followed, haphazard congestion of buildings, lack of open spaces and parking in buildings, etc.
 

They were totally private markets with virtually no stringent requirements in terms of ratings as the city administration peddled land as they saw fit. Consequently, as legions of the nouveau riche dove into the housing market in recent years, seeking to profit from rising home prices, those same investors could just as suddenly rush for the exits.

The larger economic concern is that the bulk of most homeowners’ wealth is tied up in their home (very often held as collateral). Even if the housing markets in Addis’s different geographies face different prospects over the near term, many investors run the risk that their real estate investments and hence their financial well-being could decline. For instance, if the government decides to rid off some of nationalized homes; there would undoubtedly be a price crash not seen in the past two decades.

To protect their financial health, homeowners need a way to hedge the risk that home values will change — or to diversify their exposure to real estate in other markets. A liquid futures market for office space and residential home price risk could open the door for additional hedging products. Expanding the residential real estate market’s investment and hedging products could also alter the investment cycle.

Indeed the new management of Addis Ababa must mount itself on an irreversible trajectory to laying the foundation to evolve a self-governing and enterprising building society. This is especially important in our metropolis when the policy imperatives involve trying to change attitudes that have rendered the city uninhabitable.  
 

The nexus between the old and the new, between letting go of the old habits and adopting the new order, is most often where rules are bent, and habit and routine are replaced with periods of chaos; as it is the case now. What ever our City’s leaders choose to be, they must have the zeal, diligence, greatness of spirit, consistency and moral strength to transform the building industry into a vibrant agency with a moral code.

Indeed, there is no more gripping rationale nor a mission so utterly entrenched in the building codes and investment procedures than a governance regime regulating Addis’s infrastructure development. This is especially significant as new international organizations are migrating to Addis in search of proximity with regional institutions; as a political capital of Africa and economic and power hub of the Horn and the unique calm of Addis offers to its dwellers.