Problems and prospects ofhousing development in Ethiopia

Abraham TesfayeCommercial Bank of Ethiopia, Addis Ababa, Ethiopia

Abstract

Purpose The purpose of this paper is to give an analysis of the problems and prospects of housingdevelopment in Ethiopia with particular emphasis on the city of Addis Ababa.

Design/methodology/approach The methodology employed here is a descriptive analysis wherethe source of the data is mainly secondary data. Basic statistical tools are employed in the analyses ofthe data.

Findings There is a substantial imbalance between the demand for and supply of housing units inAddis Ababa. Accumulated demand for residential housing on the one hand and the low supply ofresidential land on the other have pushed prices beyond the reach of the majority of the residents in thecountry including Addis Ababa. Overcoming the housing problem, hence, requires efforts in threemain areas: housing demand; housing supply; and institutional framework. Improving the conditionsin these areas, in turn, requires the combined efforts of the government of Ethiopia, regionaladministrations and donor agencies taking the view that overall development of the economy is crucialfor the housing development in Ethiopia.

Research limitations/implications The article is limited to discussions on housing developmentsin Addis Ababa, though a brief introduction is given regarding the housing conditions in other majorurban towns in the country.

Originality/value This article specifically discusses the housing problem in Addis Ababa. So farno attempt has been made to link the strategy of the government of Ethiopia with housing problems inAddis Ababa.

Keywords Ethiopia, Housing, Supply and demand

Paper type General review

1. IntroductionUrbanization is a development phenomenon that comes about with the development ofa countrys economy in general and industrialization in particular. It follows that therate of urbanization is considered to be one of the indicators of a countrys economicdevelopment. The rate of urbanization is directly related to the demand for houses. It isexpected that as a country becomes more urban, more houses will be needed toaccommodate the increasing population in urban centers. The practice, however, doesnot support this in that the acceleration in urbanization is not accompanied by theprovision of adequate housing. This is one of the reasons for the development ofinformal settlements, which provide housing to most low-income groups(UN-HABITAT, 2002). In Kenya, for instance, it was reported that rapidurbanization is placing an enormous strain on an already stretched urbaninfrastructure, housing stock and services, and resulting in the proliferation ofinformal housing settlements (www.citiesalliance.org).

Various factors have been pointed out in relation to this divergence between theinadequate availability of housing on the one hand and the rapid urbanization on theother. In addition to the low level of economic development, the lack of genuine political

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Property ManagementVol. 25 No. 1, 2007

pp. 27-53q Emerald Group Publishing Limited

0263-7472DOI 10.1108/02637470710723245

will to address the issue in a fundamentally structured, sustainable and large-scalemanner is commonly cited (UN-HABITAT, 2002). Other factors can also be made inrelation to this. The absence of urban policy (including housing policy), which is crucialfor successfully narrowing the gap between urbanization and housing development, isan important factor.

After the literature review on the theoretical and practical approaches in addressinghousing problems in section two, the situation of housing development in Ethiopia ingeneral is discussed in section three. Section four focuses on the discussion onassessment of the housing sector in Addis Ababa. Section five reviews the prospects inhousing development in Addis Ababa. Finally, section six concludes the paper.

2. Housing financeHousing loans are loans of a long-term nature provided for the construction ofindividual houses and business premises. The common practice is to provide housingloans to that section of the population that earns moderate to high incomes, provisionof housing loans operates through specialized institutions (mortgage banks), and overa long-term. It is only in rare cases that commercial banks are called upon to engage inmortgage financing.

Mortgage institutions customarily provide housing finance to the middle andhigh-income segment of the population. This does not exclude, however, cases wherethese institutions offer long-term loans to lower income groups who can offer clear landtitle and certifiable income. This trend is outside the actual situation in developingcountries including Ethiopia where the poor, low-and even middle-income majority ofthe population cannot afford a loan even for the least expensive, commercially builthousing units. In Ghana, for instance, only 5 percent of those who want to own a housecan do so from their own resources, 60 percent would need some form of financialassistance, and the remaining 35 percent are not capable of owning and building ahouse in their lifetime (Derban, 2002).

At least three major reasons can be singled out for the inability of the majority of thepopulation in developing countries to get access to housing loans. These are absence ofgood collateral; informality and instability of income; and lack of information onborrowers (Erhard, 1999).

The underdevelopment of the real estate market, and hence the absence of realmarket prices makes it difficult to determine the value of a mortgage. In other words, itis difficult to assume that the mortgaged object will be sold at a price that equals atleast the outstanding debt. It is also difficult, in most of the cases, to finddocumentation on income (salary statements, financials statements, etc.). Even if it ispossible, the information obtained will be manipulated for reasons of tax evasion orother reasons. Financing possibilities are often limited because of the peculiar nature ofthe sector. Banks tend to offer short-term credit to large enterprises with betterinformation and financial strength. Instability in income combined with long maturity,makes housing finance a very risky business for commercial banks. The instability ofincome is a problem as the borrower might cease repayment due to lack of income at alater stage of the loan term thus increasing the financial institutions portfolio inarrears (Erhard, 1999). The fact that housing loans are of long-term duration creates amaturity mismatch for commercial banks since their sources of funds are of short-termduration repayable at demand.

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Credit risk is another risk that is linked to housing finance. This arises as aresult of the high magnitude of the housing loans in comparison to the income ofthe borrower, and the less developed regulatory and legal frameworks formortgage loans recovery. The argument is that banks, in case of default, will be ina difficult position to easily convert mortgaged property into liquid funds withoutentering into a lengthy and costly legal procedure (www.unchs.org). The narrowreal estate market is another problem for loan recovery making it difficult todispose of a defaulters assets.

Because of this, housing finance programs are required to exert large effortstowards straightening households, housing and property issues, (www.citiesalliance.org). Housing and property issues include the set of laws, regulations, processes andinstitutions that define whether and how poor households can acquire land and build ahome upon it. Household issues include the income levels of poor households relative tothe cost of housing and households ability to finance the necessary steps in acquiringland and building a home. Laws and regulations define the activities of financialservices, the number of providers that serve the poor and the appropriateness of thehousing finance products relative to the needs and means of the poor are alsoimportant issues. These are the enabling environments for the development of housingmicro-finance and for the increasing ability of low-income households to have access tohouses. 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 theexpanding 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 tolend to developers, who acquire big tracts of land, build houses and then sell completedhouses to individual buyers. Loans are provided to developers for a period of two tothree years. Mortgage institutions are permitted to provide long-term loans toindividuals to purchase units from developers, or in a few cases to build their owncomplete houses. With regard to the financing scheme, the following are suggested asthe major lessons for commercial banks:

. land security does not have to mean full legal title. Potential housing lenders canservice poor households with secure tenure not based solely on full legal title;

. mortgage guarantees in Kenya and many developing countries providesubstantially less security for lenders than in developed markets given the risksinvolved in terms of instability of income, high foreclosure costs, weak resalemarket for repossessed properties and liquidity risk;

. progressive building increases affordability given poor households limitedincomes and high costs of land, building and housing; and

. instituting regulations that reflect how the poor build houses can encouragelenders to develop innovative products, improve the quality of the guaranteestaken by these institutions and allow the poor to improve their living conditions.

Different approaches to housing finance are, therefore, required, as access to smallamounts of credit, with short-term maturities, can be useful if the poor and low-incomegroups are to be supported. These require profound risk evaluation, financing throughpublic mortgage institutions, and financing through micro-finance institutions.

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One of the approaches proposed is the substitution of collateral by a profound riskevaluation (Erhard, 1999). The risk evaluation bases the credit on a sound appraisal ofthe borrowers willingness and capacity to repay (i.e. cash flow analysis). It considersthe incomes and expenses of the house and business of the loan applicant andcrosschecking these with other sources of information like neighbors, employers,suppliers, etc. Banks do not use this approach, as the information on which to base thecash flow analysis is weak and unreliable.

The other is financing through public mortgage institutions. These usually provideloans at interest rates below the market or even the inflation rate, using funds frombudget allocations and captive savings in the public sector, such as reserves ofinsurance institutions and pension funds (www.unchs.org). This, which is a sort ofcredit guarantee scheme, will increase the capacity of the mortgage institutions toprovide adequate loans to households who often rely on their own savings andinformal loans from friends and relatives.

Housing finance can also be offered through micro-finance institutions. The featuresof micro-finance such as small incremental loans, short repayment periods, marketrates and innovative forms of collateral such as peer group lending and alternativeforms of titles of land present another form of lending mechanism available to lowincome group of the population. Micro-finance for housing is the provision of smallloans to low and moderate-income households typically for self-help improvementsand expansion, but also for new construction of basic core units (Derban, 2002).

3. The state of housing conditions in EthiopiaAs a demographic phenomenon, the movement of people from rural to urban areas isunavoidable. This is, however, only one form where urbanization can take place.Others include growth of existing urban localities and annexation of new territories toexisting 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 eventuallyface one of these types of phenomenon growth.

Despite its long urban history, Ethiopia remains one of the least urbanized countriesof Sub-Saharan Africa (SSA). In 1994, Ethiopias urban population stood at 9,019,000accounting for 15 percent of the total population (CSA, 1998a). Although the nationscapital dominates the urban hierarchy with 29 percent of the total urban population,other towns have been growing more rapidly since 1975 (PADCO, 1998). Different ratesof urbanization have contributed to the development of radically different spatialstructures in the towns. In some towns like Addis Ababa, urbanization hasoverwhelmed the capacity of the municipal governments to lead the housingdevelopment process (PADCO, 1998).

In the urban areas, shortage of housing is one of the major problems that call forimmediate action. The majority of houses in Ethiopia are below qualitative standardand lack adequate space. The extent of provision for water supply, electricity, anddrainage is very minimal. These affect the lives and health of people living in thesehouses. All these will continue in the future unless major improvements are made inthe housing markets and in the expansion and improved provision of infrastructureand services.

During the Imperial era, urban land and housing was largely the property of thefeudal elite. At this time, more than 60 percent of the residential real estates were rental

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units. In this situation, widespread speculation by landlords and housing suppliers ledto increasing land prices and little investment in new dwelling units for low-or-middleincome households.

Following the 1974 revolution, the Derg adopted a command system to economicproduction and provision of public services. In this regard, the government wasdirectly involved in the supply of housing and created and managed the cooperativehousing delivery system. Consequently, land, infrastructure, building materials andhousing finance were provided on a subsidized basis (PADCO, 1998).

The primary instrument for implementing the Dergs housing policy was theproclamation on government ownership of urban land and extra houses (ProclamationNo. 47/1975), which effectively eliminated private sector rental or sale of real estatedevelopment. This legislation nationalized all urban land and housing units notoccupied by owners. As per this proclamation, kebeles were responsible for theadministration of urban land and housing; rent collection from tenants paying lessthan Birr 100 per month; and maintenance of existing housing units. In this way, thekebeles gained control of 93.87 percent (142,095 units) of the total government ownedhousing stock of 151,372 in Addis Ababa (1994 housing census). Most of the unitsoutside the kebeles control were placed under the protection of the Agency for theAdministration of Rental Houses (AARH).

With low public sector production rates of housing, the Derg organized andsupervised housing cooperatives to respond to housing requirements. To encouragethe development of the cooperative system, the Derg intervened with a wide range ofincentives. These include the following (PADCO, 1998):

. Land was allocated without charge for the construction of owner-occupieddwelling units. The maximum plot size for cooperative housing was 500 squaremeters during the 1975-1986 period, when Proclamation 292/1986 lowered theceiling 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 housingconstruction agencies, i.e. AARH and the municipalities, were given priorityaccess 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 leastBirr 250 per month at substantially below market interest rates. During1975-1986, interest rates were 10 percent for housing purchase, and 9 percent forconstruction regardless of the type of the developer. As of July 1986, the Housingand Saving Bank began lending to cooperatives and public housing enterprisesat 6 percent for purchasing and 4.5 percent for construction. The correspondingreduced rates for private individuals were 8 percent and 7 percent.

This package of incentives for cooperative housing development resulted in asignificant 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 urbanareas. Addis Ababa alone accounted for 85 percent of the total membership. Over the1975-1992, the cooperative movement produced a total of 40,539 housing units(PADCO, 1998). This means about 2,252 housing units were constructed annually.

Housingdevelopment in

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Despite this effort, total planned housing production satisfied a small portion of thedemand for the period. Various factors contributed to this poor performance. Minimumsalary requirements for mortgage loans eliminated a large percentage of the urbanpopulation. The processes of forming a cooperative, securing a loan, and acquiring abuilding permit were slow and administratively cumbersome. In addition, there isacute shortage of building materials, whose production of rationing greatly extendedthe 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 moremarket-oriented approach to housing development. With the introduction of the urbanland lease holding proclamation in 1993, the government defined leasehold as thetenure form of choice. The period of lease varies from 99 years for owner occupiedholding to 50 years for commercial and other uses. Although the law gave the regionsthe authority to establish the lease rates, it is stipulated that land leases should be soldvia auction. Land to be used for social services and low-cost houses may be leased freeof charge (Proclamation No. 80/1993).

Several regional governments have followed the Federal governments legislations.Region 14 administrations Urban Land Lease Holding Regulation No. 3/1994 declaredthat urban land should be used for business activities and residential construction.

In addition to the land lease law, other measures have contributed to theliberalization of the housing market. Subsidies on the sale of building materials havebeen removed, interest rates for housing construction have been set at market rates,etc. Despite these moves towards a market-oriented housing sector, there is currentlyno comprehensive housing policy at the Federal or city level.

This study focuses on Addis Ababa, but highlighting the general picture of thehousing conditions in the major towns of Ethiopia is important to appreciate the extentof the problem in Ethiopia as a whole. This study is largely based on the housingassessment report produced by PADCO in 1998. It is assumed that the housingsituations at the time of this report still holds at present despite recent good progressby the Addis Ababa Administration. This is to mean that the current housing problemin Addis Ababa has exacerbated as compared to the situation at the time of thePADCO 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 smalltowns with the highest annual increase exhibited in Gambella (see Table I). It followsthat towns with the highest urban growth rate have also the highest increase in thenumber of households.

The low level of income of the population in developing countries (includingEthiopia) is one factor that limits the development of housing. People in these countrieshave little to save for the construction of houses.

On average, urban residents in Ethiopia spend about 49 percent of their income tofulfill their basic requirements (see Table II). This figure even goes as far as 70 percentand 79 percent in Mekele and Bahir Dar, respectively. This is indicative of the fact thatthe majority of the urban population in Ethiopia does not have adequate income tobuild its own house. One can argue that where do the people spend the remainingportion of their income if not housing. It is not the percentage share of their income thatmatters but the level of their income, which is extremely low to rent a house let alone beable to pay a loan.

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Pop

ula

tion

Hou

seh

old

s

Siz

est

rate

gy

Cit

yor

tow

n19

8419

94A

nn

ual

%ch

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8419

94C

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ge

inh

ouse

hol

ds

An

nu

al%

chan

ge

Met

rop

olis

Ad

dis

Ab

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1,43

2,11

12,

084,

588

3.8

264,

765

404,

768

140,

003

4.3

Lar

ge

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ns

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77,2

3712

7,84

25.

216

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26,5

1310

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5.1

Bah

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,980

96,1

406.

510

,291

20,8

5710

,566

7.3

Mek

elle

59,3

5996

,938

5.0

13,7

3122

,493

8,76

25.

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60,2

5576

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2.4

14,6

9518

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3,40

72.

1M

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was

sa36

,367

69,1

696.

66,

716

14,9

588,

242

8.3

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24,5

4758

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9.1

6,46

212

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6,00

06.

8S

mal

lto

wn

sG

amb

ella

4,26

718

,263

15.6

1,06

74,

356

3,28

915

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6,49

512

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6.5

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13,

223

1,13

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4,04

911

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2,82

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11.4

Tot

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755,

667

2,65

1,85

34.

233

6,87

353

0,55

719

3,68

44.

6

Source:

PA

DC

O,

1998

Table I.Populations and number

of households by studycities, 1984-1994

Housingdevelopment in

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33

Mea

nh

ousi

ng

exp

end

itu

res

Tow

nM

edia

nin

com

eM

edia

nex

pen

d.

Bas

icn

eed

sex

pen

d.

%in

com

eO

wn

ers

%in

com

eR

ente

rs%

inco

me

Tot

al%

inco

me

Ad

dis

Ab

aba

391

382

197

5038

1014

236

8421

Naz

reth

343

278

157

4621

618

518

5B

ahir

Dar

204

275

162

798

439

1926

13M

ekel

le23

631

916

670

62

6226

3515

Har

er39

936

222

155

143

277

246

Aw

assa

347

307

173

5028

827

827

8Ji

jig

a35

531

022

764

41

257

144

Gam

bel

la41

242

220

750

174

205

184

Asa

yit

a38

336

725

266

123

3810

246

Aso

sa37

630

216

843

144

328

236

Tot

al31

831

919

349

206

5517

3912

Note:

Bir

ris

the

offi

cial

curr

ency

ofE

thio

pia

,1

US

$

Br:

8:6

Source:

PA

DC

O,

1998

Table II.Household income andexpenditure by studytown (in Birr)

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The increase in the cost of raw materials (mainly cement, wood and sheet metal) alsoconstitutes a bottleneck to the housing development in Addis Ababa and other majortowns in Ethiopia. The price of cement, wood and sheet metal increases annually by 20percent, 43 percent and 55 percent, respectively during 1993-1995 (see Table III). Thepresent situation is also not different as price escalation is normally observedespecially in cement and sheet metal productions-largely in response to the highdemand. The recent effort by the Addis Ababa Administration to produce largenumbers of housing units has led to a sharp price rises in cement and otherconstruction materials, suggesting that large scale housing units production would behamstrung by supply constraints in construction materials.

4. Assessment of the housing sector in Addis Ababa4.1 Demographic conditions and housing demand in Addis AbabaHousing demand is determined primarily by demographic conditions (populationgrowth, average family size of households and new household formation). According tothe 1994 population and housing census, Addis Ababas population stood at 2,084,588,accounting for 23.1 percent of the urban population. Between 1994 and 2002, thepopulation of Addis Ababa rose by 26.93 percent (an average growth rate of 3.36percent per year), and by 2002, the citys population stood at 2,646,000, accounting for25.7 percent of the urban population. In absolute terms, Addis Ababa added 561,412persons during this period, which is an annual increase of over 70,000 persons. Thefactors that related to this phenomenon are the high rates of fertility and highrural-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 102.9percent in 1996 to 101.6 percent in 2000 demonstrating enhancing burden on the ruralworking age population. Looking at dependency ratio by age category in 2000, theeconomically unproductive rural population in the age of 15 to 64 constitutes about 48percent of the total dependent population. These are unemployed people who arebelieved to be the major source of rural urban migration in search of work as almosthalf of the economically dependent population is in the working age group. Thissituation can further increase the demand for housing.

Although population growth shows the demand for housing, the rate of increase inhouseholds 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 (seeTable IV). This has contributed to the increase in the number of households in the cityby more than 14,255 per year. Given this increase, the citys housing demand is

Size category Cement Wood Sheet metal

Addis Ababa 28 71 55Large towns 14 35 50Medium-sized towns 25 44 60Small towns 17Total 20 43 55

Source: PADCO, 1998

Table III.Average annual price

increase of selected rawmaterials by town size

category (1993-1995)

Housingdevelopment in

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increasing. Accommodating this increased demand will require additional housingdevelopment and construction in the city.

Another important factor that needs to be considered when we talk about demandfor housing is affordability, the share of income households must devote to acquirerental or owner-occupied houses.

A large proportion of households (92.5 percent) fell in the lower and medium incomecategory (see Table V). A 1996 study also shows that the monthly median income inAddis Ababa was Birr 391 (PADCO, 1998).

Data obtained from the CSA showed that in 2000, 35.9 percent of the total income ofurban households goes to total food. In the case of Addis Ababa, the share of totalhousehold income spent on food accounts for 33.4 percent, showing that from the smallamount of income, expenditure on food takes one-third-leaving very little income thatcan be spent on housing rent or purchase.

Lower income translates to proportional decreases in housing budgets and to alower percentage of income allocated to housing. The resulting absolute decrease inhousing resources reduces effective demand, and therefore limits the performance ofthe housing sector. The study made by PADCO (1998) showed that housing cost toincome ratio is 13.9 times for chika construction, and 29.2 times for concrete blockunits. The ratio implies that households would need to save 14 to 29 times of theirincome to be able to make a cash purchase of housing without the support of long-termfinancing, suggesting that housing affordability is extremely low. The same study alsorevealed 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. Thissuggests that the housing market is in a state of imbalance, with housing prices andcosts standing at levels well above most dwellers ability to pay.

In general, although population and household formation has been rising, this hasnot been simultaneously supplemented by the increase in the number of houses due to

Categories of income (in Birr) Percentage of households

Below 2,000 43.02,000-12,599 49.512,600 or more 7.6

Source: CSA Household income, consumption and expenditure Survey 2001

Table V.Percentage distribution ofurban annual householdsincome category (2000)

Population Households

1994 2002Annual %

change 1994 2002Changes inhouseholds

Annual %change

2,084,588 2,646,000 3.36 404,768 518,823 114,055 3.52

Note: Number of households for the year 2002 is calculated based on the 2002 total population of thecity (CSA, 2002) and on the average household size given by the 1994 population and housing census(5.10) and assuming that it remains the same for Addis Ababa for the year 2002

Table IV.Population and numberof households in AddisAbaba (1994 and 2002)

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low level of affordability. Information obtained from the city administration-housingagency showed that including those units, which require replacement, there were atotal of 299,000 housing units demand backlog in 2003. Meeting this demand alonerequires producing large number of housing units annually.

4.2 Land provision and housing supplyLand is an important component of housing development. The current land supplysystem, to a large extent, is characterized by lease holding through auction andnegotiation. Following the Urban Land Lease Holding Regulation, the Addis Ababaadministration established the lease office and began implementation of the leasesystem early in 1995.

The land delivery system in Addis Ababa is underdeveloped. Information obtainedfrom the Addis Ababa City Administration (1994) cooperative organization office andthe citys administration Housing Agency showed that between 1994 and 2003, about4,147 plots of residential land have been delivered to individuals forming cooperatives.

Housing production is impeded primarily by a severe shortage of servicedresidential plots. The low supply of residential land in relation to demand has pushedprices beyond the reach of the large majority of the city dwellers. The price ofacquiring use rights to residential plots has risen much faster than the inflation rate inrecent years as a result of stagnant production and low availability.

4.3 Construction costs, building material availability and supply of housingThe study by PADCO shows that the public sector dominates the production of corebuilding materials in the country while the distribution is largely dominated by theprivate sector. The public sector is the only producer of cement and timber. It is clearthat production is too low to meet demand. The low availability of some domesticallyproduced materials is a function of low production rates. As a result, prices tend toincrease due to shortage, as well as due to high demand.

The cost of construction materials is increasing from time to time. The prices ofcement and wood, both produced domestically have been rising. Recently, the price ofsheet metal imported for the construction of metal doors and windows has also climbeddramatically.

Though concrete quantitative figures arenot available, the current price ofconstruction materials is higher than it was some eight years ago, owing to increasedproduction costs, as a result of increased charges for production inputs like electricity,water, etc. The increased cost of imported inputs also rose dramatically, with largeimpacts 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 AddisAbaba exhibits that prices have increased, on average, by 3.4 percent for the last eightyears (see Table VI). This is calculated by taking the 1995/1996 prices of thesematerials as an initial amount. Decreases in prices have registered only twice in the lastseven years.

Concrete building material production firms report that rising cement prices havepushed up the price of their products. The increasing devaluation of the birr (rise inexchange rate) had an impact on the prices of imported building materials in the earlyyears of the reform program. Another contributing factor to increasing prices of

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building materials is the value added tax (VAT), which is applicable to consumers ofconstruction materials as well.

Generally the significant increase in raw material prices, from cement to wood andto sheet metal is pushing prices upward. Consequently, an increasing tendency hasbeen observed in the construction prices from time to time, which has an adverseimpact on the supply of buildings.

Data on construction cost gathered from contractors indicate that some seven yearsago, chika units were built for Birr 545 per meter square, while the cost of hallowconcrete block units was 1,042 Birr per square meter (see Table VII). However, thesefigures are likely to have escalated this time because of both supply and demandfactors.

Information obtained from the city administration-housing agency shows that theexisting average construction cost on different construction alternatives is 1,250 Birrper square meter, exhibiting more than a 57 percent increase in the construction costincurred per square meter (see Table VIII).

In sum, lower availability and the high cost of construction materials inhibit thesupply of housing by driving up the selling price and rent of finished houses.Productivity in the production of construction materials remained low. The technologyin the production of construction materials has not changed much. Cement shortagecontinues to be the bottleneck for the rising construction activities in the city as well asin the country.

Yearly averagePeriod Index Growth rate (%)

1995/1996 1001996/1997 110.3 10.31997/1998 109.6 20.61998/1999 * 110 0.41999/2000 118.7 7.92000/2001 130.6 102001/2002 96.7 2262002/2003 100.2 17.62003/2004 107.5 7.3Average growth rate 3.4

Note: * Data for 1998/1999 are estimated based on the 1996/1997 and 1997/1998 figuresSource: CSA Statistical abstracts

Table VI.Price indices for houserent, constructionmaterials, water, fuel andpower for Addis Ababa

Mean m2 Chicka construction cost

Mean m2 HCBconstruction cost

(Birr)

Average annualcost increase

(%)

545 1,042 41

Source: PADCO (1998)

Table VII.Construction cost anddevelopment process datain Addis Ababa (1995)

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4.4 The quality and condition of housing units in Addis AbabaA 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 isbecause it does not take into account the need to replace dilapidated units, and relieveovercrowding, which will cast a more negative light on the quantitative performance ofthe housing sector.

The absolute size of a house provides only a crude measure of the extent of availabilityof shelter in a society. It tells nothing about the quality of a housing unit. The quality of aresidential housing unit is necessary to appreciate the extent to which the existinghousing conditions are regarded as socially desirable in terms of structural quality, ratesof occupancy, and other facilities of life. Besides, knowledge about the materials used forthe construction of walls, roofs and floors may be of special significance for theassessment of the durability of the housing unit, demand for construction materials, etc.

Information obtained from the citys municipal housing agency revealed that theexisting housing conditions are far from optimal. Most of the citys housing units arebelow standard and deteriorating. Housing quality is low and declining, and housingunits have limited access to services.

The large share of the housing stock is also made from non-durable materials and aconsiderable portion lack basic facilities (see Table IX). The type of constructionmaterials in which the housing units are made is such that 82 percent are chicka houses

Housing typologyDetails % Details %

Building height Construction materialNon storied (G 0) 97 WallDetached 39 Mud and wood 82Attached 58 Stone, bricks/HB 13Multi-storied 3 Others 5Detached 1 FloorAttached 2 Mud 53Housing facilities Wood tile 18Details Cement/concrete 21Have toilet 74.1 Others 8Have no toilet 25.9

Source: Computed from CSA Data and Information Obtained from Addis Ababa Master PlanRevision Office

Table IX.Selected indicators for

housing characteristics inAddis Ababa

Average construction cost in m2 forChicka and HCB units * 1995

Average construction cost inm2 on different construction

alternatives 2002Average absolute change

1995-2002

794 1,250 456

Note: Birr is the official currency of Ethiopia, 1 US$ Br:8:6Source: PADCO (1998) and own calculation

Table VIII.Construction cost and

development process datain Addis Ababa: 2002 (in

Birr)

Housingdevelopment in

Ethiopia

39

(i.e. their wall is made of wood and mud). Housing units whose walls are constructedfrom stones and mud constitute about 13 percent. Moreover, 53 percent of the unitsfloor is soil, and 60 percent of them do not have ceilings.

In addition to the above, the condition under which amenities are available provesthe low quality of the housing stock of the city. In this regard, 26 percent of the housingunits do not have kitchens. Those housing units that do not have any type of toiletsconstitute one fourth of the total housing units, and 19 percent of them have sharedtoilet rooms. Only 4 percent of the total housing stock have pipe line water within theunits 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 housingstock is in a state of dilapidated condition. A housing survey undertaken 13 years backindicates that at that time one-third of government houses in Addis Ababa have beenbeyond repairable. Now thirteen years have elapsed since this survey was made, andno considerable work has been done in maintaining these houses during this time.Information gathered from the Addis Ababa city administration-policy study and plancommission further demonstrated that an estimated 60 percent of the citys center isruined. Housing units under the kebele administration in particular are ruined.

In Addis Ababa, there is a considerable difference in the age of unplanned andplanned units. This is most likely due to the fact that most of the unplanned units wereconstructed prior to the Derg and that there were far fewer planned units in existenceprior to 1975.

Unplanned units are smaller than planned units in terms of the size of the house, thenumber of rooms and the size of the plot (see Table X). Although the age of most of thegovernment owned housing units and low resistance of the construction material theyare built contribute to the poor condition of the housing stock of the city, very lowmaintenance rates (frequency) and very low expenditures on maintenance by thepublic sector remains the primary cause (of what?).

Overcrowding is a serious problem in the city. About 60 percent of the totaldwelling units in the city have less than three rooms (see Table XI).

4.5 Ownership of land, dwelling and other buildingsAccording to the results of the welfare monitoring surveys, around half of thehouseholds own land and dwellings and/or other buildings which can use them ascollaterals 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 buildingsexceeds the proportion that lost this asset during the indicated timespan. Similarly, the

Planned Unplanned Total

Age of unit 27 17 23Size of unit (m2) 34.7 48.7 39.0Number of rooms 2.6 3.2 2.8Plot size (m2) 239 326 279

Source: PADCO (1998)

Table X.Unplanned and plannedhousing stock by age, sizeof unit, number of roomsand size of plots (meanvalue) 1995

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proportion of households that acquired land exceeds those that have lost land in thethree survey years. The rate, however, is decreasing.

The number of households which have acquired dwellings and/or other buildingsand who gained land have declined in 2000 when compared with 1998, suggesting thatland and housing delivery has declined. Alternatively, the number of households hasincreased by more than the increase in available land and affordability of householdsto gain land or acquire housing or other buildings.

4.6 Tenancy statusTenure refers to the arrangements under which an individual occupies their living orbusiness quarters. Tenure information collected for living quarters shows thedistinction between rented and owner occupied units.

According to the 2000 survey by the CSA, nearly equal proportions of households inurban areas live in rented houses as those who live in their own houses. About 48percent 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 includeshouseholds residing with their relatives, and in rent free houses.

The distribution of households by tenure in Addis Ababa is such that a higherproportion of households (57.0 percent) lives in rented houses, followed by those wholive in their own houses (see Table XIV).

4.7 Housing financeThe lack of functioning mortgage markets in Ethiopia impedes the emergence of bothsavings institutions and long-term financing facilities. Risk bearing financing is

Survey yearOwnership 1996 1998 2000

Own dwelling and/or other buildings 57.4 50.1 49.6Own land 57.1 51.3 53.2Changes in ownership over 12 monthsHouseholds which lost dwellings and/or otherbuildings 1.5 1.1 0.6Households acquired a dwelling and/or otherbuildings 4.4 4.7 1.3Households which lost land 2.3 3.0 0.3Households which gained land 4.2 4.1 1.1

Source: Welfare monitoring survey 2001, Vol. II

Table XII.Percentage distribution of

urban households byownership of land and

dwelling or otherbuildings and changes in

ownership by surveyyear

Type of unit %

One room houses 31Two room houses 29Three room houses 19Units which have four and above rooms 21

Source: Addis Ababa City Administration Housing Agency

Table XI.Housing units by number

of rooms (% of total)

Housingdevelopment in

Ethiopia

41

provided in other countries by venture capital institutions. In the short to mediumterm, it is unlikely that such institutions, which are capable of mobilizing substantialresources 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 bankthat specializes in the provision of housing finance is the Construction and BusinessBank. Moreover, the commercial banks favor short-term loans. The low degree ofpenetration of formal housing finance institutions means that the housing financingsector has a minimal impact on the development of the broader financial system. Thefinancial sector is also characterized by high interest rates, stringent collateralrequirements and other impeding requirements.

Given the weakness of the formal financial sector and the high expenditure thathousing requires, many urban households have had to enter into the informal financialnetwork to build or upgrade their dwellings units. Personal savings, family borrowingsand an active network of informal sector organization such as rotating savingsassociations (ekubs) currently fill the financial gap for homebuilders.

Following the onset of the financial reform program in early 1990s, the Housing andSaving Bank became the Construction and Business Bank in September 1994. TheConstruction and Business Bank is established as a universal bank in line with thedictates of Regulation No. 203/1994 issued by the council of ministers to cater forbanking services, mainly financing loans for construction, repair, modification andacquisition of residential and non-residential buildings, for construction sectoractivities and for the development of hotels and tourism. It also provides business

YearTenancy status 1996 1998 2000

Owned 52.0 46.9 47.8Rented 41.0 45.5 44.9Rent free 6.9 6.0 4.9Others 0.1 0.3 1.3Not stated 1.4 1.0

Source: CSA, Welfare Monitoring Survey 2001

Table XIII.Percentage distribution ofurban households bytenancy status andsurvey year

Type of tenure

Owned RentedFree ofcharge Other Not stated Total

n % n % n % n % n % n %

Addis Ababatotal 144,232 35.6 230,981 57.0 20,081 5.0 8,654 2.1 1,080 0.3 405,028 100.0Addis Ababarural 5,242 89.5 94 1.6 400 6.8 84 1.4 36 0.6 5,856 100.0Addis Ababaurban 138,989 34.8 230,887 57.8 19,682 4.9 8,570 2.1 1,044 0.3 399,172 100.0

Source: CSA, Welfare Monitoring Survey 2001

Table XIV.Distribution ofhouseholds by type oftenure 2000

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loans to meet the working capital requirements of commercial and industrial activities.The bank also has the mandate to offer foreign banking services. The authorizedcapital of the Construction and Business Bank was stipulated to be Birr 71.8 million, ofwhich Birr 63.9 million is paid-up as of June 2000.

Generally, penetration by the formal banking institutions into the urban housingfinance market has been minimal over the past four decades. According to a surveymade by PADCO/WASS/NUPI (1996), only 10 percent of households used the publicsector housing bank as the primary source of funding for residential construction, andonly 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 Dergperiod (see Table XVI). While overall penetration has declined with time, the highestcoverage was attained during the Derg period, where 20 percent of the householdsborrowed from the Housing and Savings Bank to build their unit. This figure is largelythe result of subsidized interest rates which were as low as 4.5 percent for cooperativemembers beginning 1986, which made the public route very attractive for housebuilders. But at any rate, personal savings remained the key source of finance forhousing in Ethiopia.

The overall low levels of penetration from the formal housing finance sector are theresult of both government policy and cultural preference. On the one hand,requirements for mortgage loans from the CBB and its predecessor have historicallyexcluded 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 17square meters in size at an interest rate of 10.5 percent for a period of 20 years. Thisentails a monthly payment of Birr 96, or a monthly salary of Br. 480, assuming that 20percent 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 toborrow from the only formal sector financial institution offering mortgage loans at that

Period HSB bank Private lender Personal source Other

Imperial era 3.3 0.0 94.3 2.4Derg 20.3 1.3 75.2 3.3EPRDF 9.7 0.0 83.9 6.5Total 9.7 0.5 86.8 3.1

Source: Household Survey, PADCO/WASS/NUPI (1996)

Table XVI.Percentage distribution of

household sources offunds for dwelling unit

construction in AddisAbaba

Period HSG bank Private lender Personal source Other

Imperial era 12.8 0.0 84.6 2.6Derg 7.3 0.0 89.1 3.6EPRDF 6.3 0.0 93.8 0.0Total 5.5 0.7 91.1 2.7

Source: Household Survey, PADCO/WASS/NUPI (1996)

Table XV.Percentage distribution of

household sources offunds for plot acquisition

in Addis Ababa

Housingdevelopment in

Ethiopia

43

time. On the other hand, many households that can afford to borrow under CBB termschoose to rely on informal funding channels. Traditional aversion to interest-bearingloans leads these households to borrow funds on an interest-free basis from friends andrelatives or rely on personal savings for house construction, as evidenced by the data inTable XVII.

This does not, however, mean that the demand for formal mortgage loans, assumingthat land becomes more available, is low. Rather, it indicates that the demand forhousing finance will continue to be satisfied by both formal and informal channels.Moreover, as more and more urban households are integrated into the wage economyand the banking system, the traditional aversion to borrowing from institutions whichcharge interest will probably decrease, shifting more effective demand over to theformal financial sector.

The CBB is the only retail bank in Ethiopia specializing in the provision of financefor the housing sector. Information obtained from the CBB reveals that before 1995, theBank gave mortgage loans amounting to Birr 407.1 million, below market interest ratefor the construction of 26,912 residential houses (see Table XVII). Of these units, 14,881houses (55.3 percent) were built by borrowers whose monthly income was below 500Birr, demonstrating the Banks role in supporting the financial needs of the middleincome group of society for housing construction.

Nevertheless, after 2002, the number of loans extended for the construction ofresidential houses has declined. The information from the Bank further shows that thefollowings 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 borrowerswho 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 theconstruction of 3,386 residential houses. In general, since its establishment, the CBBhas extended a total of Birr 598.8 million mortgage loans for the construction of morethan 30,000 residential units.

The CBB has the mandate to extend short and medium term business loans, since itwas restructured in 1994, but its performance still mainly depends on extending longterm construction loans. It extends mortgage loans to employees of governmental andnon-governmental organizations depending on their salary and age. The duration ofthe loans may reach up to 30 years.

Year 1980-1984 1985-1989 1990-1994 1995-1999 2000-2004 Total

Loan extended 111,702 133,211 162,211 124,127 66,782 598,814

Note: Birr is the official currency of Ethiopia, 1 US$ Br:8:6Source: CBB

Table XVII.Loans extended for theconstruction ofresidential units by theCBB (in 000 of Birr)

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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, includingloans to housing cooperatives at 4.5 percent. Initiated in mid-1986, these 20-yearbelow-market rate loans will continue to be a drag on the CBBs earning for years. Thisis the problem with low and fixed interest rates, which could have been avoided if thebank were to adopt a variable lending rate.

5. Prospects of housing development in Addis AbabaThe data presented in this report suggests that the citys housing market is underconsiderable stress. There is a substantial imbalance in the demand for and the supplyof housing. Supply of housing has not kept pace with the rapidly growing populationand rate of urbanization. On the other hand, demand has been growing quite rapidly,mainly driven by rapid urbanization, high population growth and householdformation. However, it has to be considered that the market for the housing sector ishighly segmented and far from uniform depending on the need, quality andcomplexity? of houses as well as the location of the houses.

Shortage of residential building is especially acute for low-income households thataccount for over 80 percent of the citys population. The general impression is thatdemand is extremely high for those less complex houses that come largely from lowerand middle-income households. Demand for more complex and high quality buildingsmostly comes from higher income groups of the society who represent less than 10percent 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 supplydeficit and high household formation rate, the demand for housing is extremely high.But because there are a few residential plots available for new construction, productionis very low. It is this imbalance between supply and demand that pushes prices out ofthe reach of most households.

5.1 Housing need assessmentThe assessment of future housing need hinges upon demographic forecasts. Futurehousing need arises from two demographic components: the natural one and the socialone. In order to evaluate the increased need due to natural demographic movement, oneis supposed to calculate the increase of households due to the formation of new entitiesnet of terminations. The assessment of the social demographic movement concerns theestimate of migration flows, either international or domestic (rural-urban andurban-urban migration).

The assessment of previously unmet housing need appears to be a more complexissue, especially when it is true that, as in the case of Ethiopia, a large proportion of thepopulation lives below standard conditions. In this case, as noted above, the highlysubjective establishment of quantitative and qualitative standards, and their possiblechange may imply a marked variation in the overall figures.

The first factor creating unmet housing need is traditionally calculated through theevaluation of the existing phenomenon of overcrowding (UN, 1967, p. 9). This aspectanalyzes the relationship between the number of households and housing units.

Here one assumes that the quantitative figure is established by a one-to-one ratiobetween housing units and households. In the case of cohabitation, the number ofhouseholds will exceed the number of housing units. In general terms, cohabitation can

Housingdevelopment in

Ethiopia

45

be voluntary or forced (because there is not enough housing to accommodate all of thehouseholds or because some households cannot afford the cost of an independentdwelling). Assuming that the standard to be pursued is that of one household perhousing unit, the number of households exceeding the number of housing units is anindication of previously unmet needs.

A second factor of housing need stems from qualitative below standard housingunits. We can divide qualitative standards in two categories: those concerning theconstruction materials, and those concerning supply of essential facilities such asrunning water, toilet, bathing facilities, and electricity. When facilities such aselectricity and running water are absent, what is needed is readjustment of existinghousing stock, but does not require any replacement of the housing units or adding of anewly built room.

As a consequence, data gathered on these aspects of quality of living give usefulinformation about standard of dwellings. This is because they are useful indicators ofthe 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 dynamicswhich result from natural and social movements. The natural movement is based onthe difference between birth and death rates as factors of population, and on thedifference between the household formation and dissolution. The social movementrefers to migration, and this is based on the forecast of population transfers.

Currently no surveys or estimates exist to evaluate the quantity of forcedcohabitation, as distinct from voluntary cohabitation, and would be useful becauseonly the former deals with unsatisfied housing needs (see Table XVIII). However, thebelief is that most cohabitation is forced due to lack of housing units and/or the lack ofeconomic means to access the housing market.

A study made by NUPI Group Huit (1988) showed that in 1990, around one-third ofgovernment houses in Addis Ababa were beyond repair and indicated that if regularmaintenance is not undertaken, the figure would go up to 50 percent (NUPI, 2003).Information obtained from the city administrations housing agency also exhibited alow rate and level of maintenance on most government owned houses resulting inmany units remaining in poor and irrepairable conditions.

A study by PADCO (1998) further revealed that the average age of housing units inthe city in 1995 was 23 years. Hence, the age of the units and the low rate and level ofmaintenance as well as low resistance of construction materials in which most of thehousing units are made reduced the durability of most units. It was assumed that 45percent of the 1994 stock of government housing units were in an irrepairablecondition, suggesting the need to be replaced by new units.

Housing need to relieve overcrowdednessNumber of housing units (1) Number of households (2) Number (3) (2)-(1) % 4 3:(2) 100374,742 404,768 30,026 7.4

Source: Population and Housing Census 1994

Table XVIII.Distribution ofcohabitating householdsby housing unit needed,1994

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In order to determine the number of housing units needed to replace those dilapidatedhouses, 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 ofmajor structural repair. It is, therefore, assumed that all of the housing units that are inpoor conditions need to be replaced by new units. This constitutes a new demand forhousing in the city (see Table XX).

5.1.1 Future housing need. As already noted, future need is determined by theincrease in the number of households. In order to estimate the magnitude of housingunits needed to accommodate the increase in the number of households, the followingassumptions have been considered (see Table XXI):

. According to the 1994 population and housing census, Addis Ababas populationstands at 2,084,588, which suggests about 404,768 households. The census alsoshows that average household size is 5.10. We assume that this averagehousehold size will remain constant throughout the projection period 1994-2010.

Particulars Year Total/average

Number of dwelling units (CSA, 1994) 1994 374,742City population (CSA, 1994) 1994 2,084,588Average household size (CSA, 1994) 5.10Number of households (CSA, 1994) 1994 404,768Annual population growth 1994-2010 3.36%Total population end year 2010 3,537,205Projected average household size 5.10Number of households 2010 693,570Total new households 288,802Annual new households 18,050Household/dwelling units (CSA, 1994) 1994 1.08Desired households/dwelling units 2010 1.00

Source: CSA and own computation

Table XXI.Projection of demand fordwelling units for newly

formed households(1994-2010)

Housing units inpoor condition

Irrepairablehousing units

Housing units neededto replace dilapidated houses

Total HSG units 1994 (1) (2) 3 1 (2)374,742 138,280 11,242 149,522

Source: CSA and own computation

Table XX.New housing unitsrequired to replacedilapidated houses

Good % Fair % Poor % Irrepairable %

25.5 34.6 36.9 3.0

Source: Household Survey, PADCO/WAAS/NUPI, 1996

Table XIX.Housing condition in

Addis Ababa 1995

Housingdevelopment in

Ethiopia

47

. Information from CSA shows that in 2002, the citys population stood at2,646,000. This shows that between 1994 and 2002, Addis Ababas populationrose by 561,412 at an average growth rate of 3.36 percent per year. We assumethat this average growth rate of the citys 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 willbe 1.0.

Based on these estimates, the total number of projected new housing units required toaccommodate newly formed households, replace dilapidated houses and relieveovercrowding are calculated in Table XXII.

The housing need assessment shows the existence of a huge demand for housingunits, which, one way or the other suggests the existence of potentialities for mortgagefinancing.

5.1.2 Housing need by income category. In order to assess the affordability and theneed that arises from the different income categories of the houses, we assumed theproportion 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 of2001.

Accordingly, the proportions of total housing need that arise from households inthese income categories are presented below (see Table XXIII).

5.2 City government housing projectionThe Addis Ababa city government has planned to reduce the citys housing shortageby one-third, and create a condition that benefits the low- and middleincome group ofthe citys residence. In view of this, the administration has planned to construct 100,000houses in three years time.

Particulars n

Total new dwelling units required to accommodatenewly formed households 288,802Annual new dwelling units required to accommodatenewly formed households 18,050Total dwelling units required to replace dilapidatedhouses 149,522Annual dwelling units required to replacedilapidated houses 9,345Total housing units required to relieveover-crowdedness 30,026Annual housing units required to relieveover-crowdedness 1,877Total new dwelling units required 468,350Annual new dwelling units required 29,272

Source: CSA and own computation

Table XXII.Overall residential unitsneed assessment

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Information obtained from the Administration Housing Agency further showed thatabout 2.5 to 3 billion Birr is required to accomplish the development plan in the nextthree years. Of these, around 1.05 billion Birr is covered by the city administration, andthe 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 900million Birr is needed in the second year. Of these, 350 million Birr (39 percent) is theshare of the citys 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 (seeTable XXIV).

The city administrations financial need for the construction of the plannedresidential houses from outside sources is huge. This creates the opportunity formortgage finance that may involve formal sector banks in financing the housingsector. In addition, the revised master plan of the city has proposed improvements ofhousing finance through, among others, development of a housing construction andsavings association, extension of loan guarantees and expansion of micro financeprograms for housing. Moreover, the city administration has also planned to form ahousing development fund. These are intended to improve access to finance forconstruction of houses in Addis Ababa at affordable prices.

5.3 Governments poverty reduction strategy and the role of the Commission for AfricaThe Ethiopian economy is predominantly agrarian. Agriculture accounts for almost 85percent of total employment and over 85 percent of total exports. Considering the shareof the major economic sectors in the GDP of Ethiopia, the share of agriculture has been39.4 percent in 2002/2003 fiscal year while that of the service and industry sectors has

Particulars n

Total new dwelling units required 468,350Annual new dwelling units required 29,272Total housings required by low income group 374,680Annual housings required by low income group 23,417Total housings required by medium income group 60,885Annual housings required by medium income group 3,805Total housings required by high income group 32,784Annual housings required by high income group 2,049

Source: CSA and own computation

Table XXIII.Housing need by income

category

Total requirement Amount to be covered by AA city administration Financing gap

First year 490 250 240Second year 900 350 450Third year 1,272 450 822Total 2,662 1,050 1,512

Note: Birr is the official currency of Ethiopia, 1 US$ Br:8:6Source: Addis Ababa City Administration and own computation

Table XXIV.Finance gap for

construction of housingunits in Addis Ababa(amount in millions of

Birr)

Housingdevelopment in

Ethiopia

49

been 48.7 percent respectively. Among the three economic sectors, the service sectorgrowth in share of GDP has been 2.05 percent in 2002/2003 while the contribution ofagriculture has decreased by 12.17 percent as compared to the 2001/2002 share (seeTable XXV).

There is limited saving and investment in Ethiopia. This has been the majorconstraint for full utilization of the countrys human and natural resources. TheEthiopian governments Poverty Reduction Strategy Paper (PRSP) which was madeofficial in 2002, had the overall objective of reducing poverty while maintainingmacroeconomic stability (FDRE, 2002). The PRSP focuses on agriculture on whichmore than 85 percent of the Ethiopian population depends. According to this strategicpaper, the development of agriculture means the increase in agricultural income, whichin turn means the increase in industrial production as a result of which the income ofthe urban household will improve following employment opportunities in the city andtowns. This will eventually overcome one of the major problems of housingdevelopment: The affordability issue assuming that the other problems related tohousing will also be dealt with.

The PRSP has put forward strategic actions to enhance urban development andmanagement (FDRE, 2002). Among these, the following are important:

. strengthen urban governance which includes among others formulation of urbandevelopment policy;

. infrastructure provision which includes among others upgrading of the existingold and dilapidated houses; and

. alleviating and mitigating housing problems, which are directly or indirectlyrelated to affordability (either to buy, construct or rent a house, from the market),by formulating housing development policy, conducting a housing cooperativestudy with the view to promote the development of housing cooperatives andimprove housing affordability via introducing appropriate housing standardsthat consider local resource capacities and requirements.

Achieving the overall objective of poverty reduction and the specific tasks as related tourban development and management which in the final analysis mitigates the housingproblem in Addis Ababa are unlikely to be achieved without the support of externaldevelopment finance complemented by debt relief and support for foreign investment.The Commission for Africa, which recognizes poverty and stagnation as the greatesttragedy of our time in its recent report, is believed to be the best way for Africas (andhence Ethiopias) problem to be recognized and the necessary aid and debt relief to begranted by donor governments and agencies. This is a good prospect for thedevelopment of the Ethiopian economy which can supply houses on a low-cost basisand for the prosperity of those people who can allocate a significant portion of theirexpenditure on housing development.

6. ConclusionThe main impact of the policies followed in the past 10 years is the underdevelopmentof the housing sector. Overall housing developments fell far short of demand.Moreover, an efficient housing delivery system has not been designed andimplemented.

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50

Am

oun

tof

GD

P(i

nm

illi

ons

ofB

irr)

GD

Pg

row

th19

98/1

999

1999

/200

020

00/2

001

2001

/200

220

02/2

003

1999

/200

020

00/2

001

2001

/200

220

02/2

003

Ag

ricu

ltu

re68

73.5

070

24.7

078

31.7

075

86.0

066

63.0

02.

2011

.48

23.

132

12.1

7In

du

stry

1700

.90

1731

.30

1818

.10

1923

.10

2018

.00

1.79

5.01

5.78

4.93

Ser

vic

es67

29.7

073

56.3

077

05.2

080

57.8

082

22.9

09.

474.

744.

582.

05T

otal

1529

4.10

1611

2.30

1735

4.40

1756

6.90

1690

3.90

5.4

7.71

1.22

23.

77

Source:

Nat

ion

alB

ank

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pia

,A

nn

ual

Rep

ort

2002

/200

3

Table XXV.Amount and growth

trend of GDP of Ethiopiaby economic sector

(1998/1999-2002/2003)

Housingdevelopment in

Ethiopia

51

Housing affordability in the city is extremely low. The main reason for pooraffordability is an unresponsive supply side. As a result of the supply deficit and highhousehold formation rate, the demand for housing is extremely high. However, sincethere are few residential plots available for new construction, production is very low. Itis this imbalance between supply and demand that pushes prices out of the reach ofmost households.

Another reason for low affordability is that household incomes are low. Accordingto 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 mosthouseholds have little money available for housing expenditure. The combination oflow production and a generally unaffordable building construction means that thecitys residential land delivery system cannot satisfy demand and, unless revised, willcontribute to act as the major constraint on housing development of the city.

There is a good prospect for housing development in Addis Ababa. The cityadministration recently constructed low-cost houses targeted at low to middle incomeearners in the city and this serves as a short-term solution to the problems. Thegovernment of Ethiopia is currently implementing the PRSP, which includes urbandevelopment and management as one of its strategic tasks. This will serve as amedium to long-term solution to the housing problem in Ethiopia generally and the cityof Addis Ababa in particular. However, much depends on the willingness of donorgovernments and the international community to finance these development objectivesand I see a bright future in this regard after the release of the Commission for Africasfinal report which, in my opinion, can be the best route for getting Africa (and henceEthiopia) out of the poverty trap.

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 onregions, 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 Bosniaand Hercegovina: the experience of developing an appropriate credit technology.

Federal Democratic Republic of Ethiopia (2002), Ethiopia: sustainable development and povertyreduction 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 ProclamationNo. 80/1993.

Gebeyehu, A., Brazzoduro, M. and Gebremedhin, B. (2001), Housing Conditions and Demand forHousing in Urban Ethiopia, Roma, Addis Ababa, October.

Kebede, G. (1985), Urban growth and the housing problem in Ethiopia, Cities, Vol. 2 No. 3.

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Lea, M. and Chiquier, L. (n.d.), Providing long-term financing for housing: the role of secondarymarkets, World Bank working paper, United Nations Development Programme.

Merrill, S.R., Margo, S. and Kozlowski, E. (1999), The feasibility of estimating the demand forresidential 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 authorAbraham Tesfaye can be contacted at: abrahamtesfaye@yahoo.com

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