Ethiopia has a growing housing finance sector. As the mortgage market does not yet meet the breadth of the population who might afford a mortgage, most households still finance their housing independently, with savings or non-mortgage credit.
The lowest recorded interest rate on a mortgage in Ethiopia is 14 percent, as of September 2016, and requires at least a 10 percent down payment. The cheapest newly built house by a developer recorded by CAHF is US$ 7 397, which is for a 55 square metre unit. Cement prices are higher than the continental average, at US$ 14 for a 50-kilogram bag.
With an urbanisation rate of 4.78 percent, demand for affordable housing will remain strong, both for rental and purchase. Housing microfinance will play an important role in increasing the supply of housing, and efforts to increase access should be undertaken. The government has engaged in ambitious urbanisation programme, financing the construction and purchase of housing with its Integrated Housing Development Program (IHDP). This is an attempt to address the estimated one-million-unit urban backlog. Dangote Cement recently opened a factory in the country, which will likely decrease cement prices. With a good macroeconomic environment, sound policy, better data and increased access to affordable credit, an enabled housing market can increasingly provide housing that the average household in Ethiopia can afford.
Find out more information on the housing finance sector of Ethiopia, including key stakeholders, important policies and housing affordability:
- Access to Finance
- Housing Affordability
- Housing Supply
- Property Markets
- Housing Policy and Regulations
- Housing Sector Opportunities
Each year, CAHF publishes its Housing Finance in Africa Yearbook. The profile above is from the 2016 edition, which has up-to-date profiles for 51 African countries.Download yearbook
With a population of over 102 million Ethiopia is the second most populous country in Africa, with a projected GDP of 8.1 percent for 2017. This growth has been driven by government investment in infrastructure, as well as sustained progress in the agricultural and service sectors. More than 70 percent of Ethiopia’s population is employed in the agricultural sector, but services have surpassed agriculture as the principal source of GDP.
Based on the UN’s Human Development Report (2016) the country has a very low human development ranking of 170 out of 188 countries. The urban population will reach 30 percent by 2028 and be tripled by 2034, the main drivers of urbanisation include: natural growth; migration to urban centres, the reclassification of villages into towns; and the expansion of urban centres.
The combination of high population and urban growth rates, coupled with a high prevalence of urban poverty has placed enormous strain on Ethiopian cities. To accommodate the rising levels of urbanisation, significant investment in basic infrastructure such as health, education, housing, roads, water and sanitation and recreational facilities is required. Since 2004/05, the government has focused on developing housing, upgrading slums, providing infrastructure and promoting small urban enterprises. The Growth and Transformation Plan (GTP2) for 2015 to 2019 will continue to target infrastructural development with the view of the country being classified as a ‘middle income’ by 2025.
Access to Finance
Following the merger of the Construction and Business Bank with the Commercial Bank of Ethiopia there are now 18 banks in Ethiopia of which 16 are private and two are public. 494 new bank branches were opened in 2016 (of which 363 were private) raising the total branch network to 3187 from 2693. The share of public banks, in total branches declined to 39.5 percent from 41.9 percent last year, indicative of the growing role of private banks. According to National Bank report the total capital of the banking system reached ETB 46.4billion (US$2billion) with private banks accounting for 51.1 percent of that figure. The largest banks are the government-owned Commercial Bank of Ethiopia (CBE) and Development Bank of Ethiopia (DBE) which account for 48.9 percent of the total capital of the banking system in 2016.
The share of private banks in deposit mobilisation increased to 33.6 percent from 32.2 percent last year due to the opening of new branches. CBE alone mobilised 66.1 percent of the total deposits banking system owing to its large branch network. Raising funds through borrowing by the banking system, has not been an important source of resource mobilisation in Ethiopia as virtually all banks were sufficiently liquid aided by increased deposit mobilisation and collection of loans. Consequently, the total outstanding borrowing of the banking system stood at ETB 32.9billion (US$1.41billion) slightly higher than ETB 31.2billion (US$1.33billion) a year ago. Of the total borrowed amount, domestic sources accounted for 89.1 percent and foreign sources the remaining balance. Additionally the number of microfinance institutions (MFIs) remained at 35 while their total capital and total assets increased significantly by 23.5 percent and reached ETB 8.9 billion(US$380million) and by 20 percent reaching ETB 36.7 billion(US$1.57billion), respectively.
Their mobilised deposits grew by 24.3 percent to ETB 18.4 billion (US$786 3illion) and their outstanding credit rose by 15.5 percent to ETB 25.2billion (US$1.08billion). The five largest MFIs namely Amhara, Dedebit, Oromiya, Omo and Addis Credit and savings institutions, accounted for 83.6 percent of the total capital, 92.9 percent of the savings, 88.3 percent of the credit and 89.2 percent of the total assets of MFIs at the end of 2016.
Banks, including DBE disbursed fresh loans to the tune of ETB 88 billion (US$3.76 billion) in 2016.Of the total new loans, about 43.6 percent were made by private banks, and the rest by public banks, about 29 percent of the loans went to industry followed by domestic trade (17.1 percent), housing and construction (15.5 percent), agriculture (15.2 percent) and international trade (10.8 percent) and others (12.4 percent).
The total outstanding credit of the banking system expanded by 20.4 percent and reached ETB 280.3 billion (US$12 billion) at the end of June 2016. Specifically outstanding claims on the private sector rose by 23.8 percent, on public enterprises 21.2 percent and on the central government 6.2 percent. Outstanding credit to industry accounted for 37.8 percent followed by international trade (18.5 percent), domestic trade (10.2 percent), housing and construction (10 percent) and agriculture (7.3 percent). The share of private sector (including cooperatives) in outstanding credit was ETB 179.2 billion (US$7.7 billion or 63.9 percent) depicting a 21.5 percent annual growth.
Recently, government banks like the Commercial Bank and the Development Bank have joined the mortgage market but only in the commercial construction sector. The same is true of the emerging private bank sector. There is limited involvement in residential mortgage by public and private banks because of the perceived high risk and shortage of experience. In recent years, MFIs have become increasingly important players, as they are viewed as effective mechanisms for poverty reduction, the loan policy of MFIs indicates that preference should be given to poor rural farmers and microeconomic activities of rural and urban communities with small cash requirements. MFIs offer a potential area as a source of finance for the poor and low-income earners. According to information obtained from the Association of MFIs in Ethiopia, some relatively big MFIs have started extending small loans for housing.
The World Bank’s 2017 Doing Business Report showed that almost 94739 individuals and 7656 firms were recorded on the public credit registry, yet this represents only 0.2 percent of the population. As a result, Ethiopia continues to underperform with respect to getting credit and is ranked 170th out of 190 countries. Ethiopia’s foreign domestic investment (FDI) is mainly in labour-intensive areas. Although the 32 projects launched in 2015 accounted for only 4.4 percent of total investment in Africa, these made up 18.5 percent of the jobs from the FDI in Africa. Ethiopia has slowly been opening up to foreign investment in the manufacturing and retail sectors.
A major player in the mortgage market is CBE which has grown since the introduction of the Integrated Housing Development Programme’s (IHDP) current project in the capital of Addis Ababa, in which it plays an important role in the provision of mortgage finance. Mortgage rates for the 40/60 development scheme are estimated at 14 percent over a ten year period with a 40 percent down payment.
Housing affordability is more than just a personal trouble experienced by individual households. It has implications not only for housing but also for employment, health, labour market performance, finance, community sustainability, economic development and urban and regional development.
In Ethiopia a major challenge for affordable housing for low-income people is the limited access to housing finance. Following the market-led adjustments implemented Post-1991, subsidised interest rates were removed which significantly increased lending rates. It increased from 4.5 percent for co-operatives and 7.5 percent for individuals to 16 percent for both, severely reducing the opportunity for low-income households to secure a home loan.
A key challenge to housing affordability is the absence of a diversified and flexible housing finance sector.
Traditional construction techniques involving the heavy use of bricks, blockets, and cement are expensive, inefficient, and time consuming. There are few factories producing construction materials, and locally available inputs are in short supply.
The government’s IHDP has compounded the housing affordability issues for lower income residents. Compliance to the financial provisions of the banks has resulted in a housing typology that does not offer incremental stages of construction or the use of alternative building materials. This dependence on specific materials has contributed to rising construction costs and steadily increasing housing prices. In June 2016, the Commercial Bank of Ethiopia and Ministry of Urban Planning and Housing, revealed that the condos in the new 40/60 scheme were an additional ETB4919 (US$210) per square meter from their original price. This price increase is due to rising construction and labour costs which have forced the Ministry of Urban Development, Housing and Construction and Addis Ababa Savings and Houses Development Enterprise to re-evaluate their prices, taking into account the current market, land, water, electricity and building design prices. If the revised prices are reviewed then the cost of two- , three- and four bedroom condos currently valued at ETB614693 (US$26269), ETB636974 (US$27221) and ETB829690 (US$35457) respectively will increase accordingly by the square meter of the apartments. The apartments are 124.97m², 129.5m² or 168.68m² in size. The increased costs of construction, and thus the down payments as well as mortgages have placed additional financial burdens on the poor. As a result, many beneficiaries from low-income groups have rented out their units to more affluent citizens. In turn, the unit owners tend to stay in their original substandard dwellings or have returned to another precarious housing type.
Rapid urbanisation, one of the greatest socio-economic changes during the last five decades or so, has caused the growth of informal housing all around the rapidly expanding cities of the developing world. Despite having one of the lowest proportions of urban population in the world at only 16.7 percent, Ethiopia is rapidly urbanising at an annual growth rate of 3.5 percent.
The existing housing stock, particularly in Addis Ababa, is generally of poor quality, with many settlements being congested and unplanned. Using the UN-HABITAT slum definition, 80 percent of Addis Ababa is a slum with 70 percent of this comprising of government owned rental housing. Only 30 percent of total housing stock is in fair condition, while the remaining 70 percent is in need of total replacement or significant upgrading. According to estimates by the Ministry of Works and Urban Development, the housing deficit in Addis Ababa alone is about 300,000 units. The housing deficit is not just measured by the large number of units that are required today but also in the quality of the housing stock and the extremely small sizes of most available dwelling units. What is even more worrying in this regard is that the problem has worsened between the two censuses surveys of 1994 and 2007.
There are four categories of new residential developments taking place in the housing sector: (a) government-initiated condominium buildings; (b) residential neighbourhoods initiated by developers; (c) owner-built housing dwellings; and (d) new home activity driven by housing cooperatives. In addition, there are two other major categories of housing units in Addis Ababa: kebele-rental housing (very old stock), mainly for those on low incomes, and informal settlements.
- Government-built Condominiums: Recently, the government implemented a new housing project (IHDP) in Addis Ababa, (as well as other cities) which is divided into four different groups based on payment modalities: 10/90, 20/80, 40/60 and housing association. The payment modality for the last one necessitates hundred percent upfront settlements, while the others incorporate 10, 20 and 40 percent down payment mixed with a long-term mortgage plan. The majority of people demanding houses focused on the former of the three alternatives.
The Government Housing Project was planned in two phases. In phase one 947,376 people registered for housing and the governments built 270,146 houses however of the available stock only 182 000 houses were allocated.
Currently there are 88146 condominium units that are under construction disbursed between 18 sites. The new condominium houses that are being built will be 18 storey buildings. According to the latest figures available from the 40/60 housing programme, 154 000 of the 160 000 people registered under the scheme are saving money each month toward acquiring a home. Out of these, 17 600 have paid the full amount and more than 29 000 have paid 40 percent of the total cost. Those who have paid in full will have priority when the condominium units are handed over to the home owners.
- Private sector real estate developers have so far played a minimal role in addressing the housing deficit as all their projects are aimed at high-income households. More than 50 companies are developing real estate in the capital city and surrounding areas. This could be seen as additional market value, over and above the government led development, as the target of real estate developers is rarely addressing the low income societies and it is not a remedy to the housing problems rather to the growing demand of the public. Given that the government cannot address the need for the increasing demand for real estate on its own, it has allowed a number of local private investors to become the major actors in the development of real estate in Ethiopia. To this effect, 215 investors have received business licenses to develop the real estate sector in Ethiopia according to the data available at the country’s trade ministry. There are now 50 of them operating in the market and competing with each other.
- Owner-built housing construction: Self-built housing was by far the most common type of housing delivery approach before the introduction of the IHDP. Though relatively limited now, this building approach is still active in older residential neighbourhoods. Costs for owner-built construction are generally higher and this segment of the market tends to include the full range of housing units from modest homes constructed over extended periods to large and luxurious homes often built by raising or replacing older properties.
- Housing co-operatives are the primary mode of housing construction in Addis, constituting over half of the city’s total formal sector housing stock. Co-operatives in Ethiopia, similar to many other countries, are formed by groups of people who come together as an entity to perform the function of a ‘developer’. In the absence of an active private sector presence in real estate development, the cooperatives are clearly filling the gap. They are recognised as legal entities by the government, and allocated land upon which to design and construct their development. The city administration has registered more than 500 housing cooperatives. The minimum membership in a housing cooperative is 14 while the maximum is 24. Many cooperatives members are middle-income, based on employer associations such as Ethiopian Airlines or other state-owned companies
According to the World Bank’s 2017 Doing Business Report Ethiopia is ranked 176th out of 190 economies on the ease of dealing with construction permits. Regarding registering property, seven procedures are required; it takes 52 days and costs 6.1 percent of the property value. As such, Ethiopia stands at 133rd in the ranking of 190 economies on the ease of registering property.
Ethiopia has a federal system of government constituted by nine regional states and two city administrations, with a dual land tenure system (for urban and rural land). Land in Ethiopia is the property of the state and can generally be acquired only on the basis of a lease. Private ownership of land is prohibited. In many residential urban areas, there are freehold plots owned by private individuals outside of the lease system, but even for these plots of land, the owners technically own only the buildings on the land and not the land itself (which remains public property). Transfer of any freehold with or without a property on it triggers the immediate conversion into the lease system. This means that the transferee is required by law to enter into a lease agreement with the relevant government authority. Once acquired through a lease, the land cannot be mortgaged or sold, but the lease value of the land (the down payment and annuity paid) and the fixed assets on that land may be mortgaged or transferred to third parties.
Land administration is delegated under the constitution to the regions (for rural land) and to city governments and municipalities (for urban land). Accordingly, regional governments and municipal administrations are authorised to lease rural and urban land under their respective laws. In the city suburbs, the Government reserves what it calls a land bank for investors, which, having compensated the landholders, it provides to investors engaging in real estate development. An investor who acquires land under a lease has to enter into a land lease agreement with the Government and obtain a lease holding certificate issued in its name. The minimum lease down payment is 10 per cent of the total lease payment. The remaining balance of the lease amount is to be paid in equal annual installments over the payment term. Interest is to be paid on the remaining balance, in line with the prevailing interest rate on loans offered by the Commercial Bank of Ethiopia.
The lease contracts normally include provisions to regulate when construction will start, how long it will take till completion, the payment schedule, grace period, rights and obligations of the parties, as well as other relevant details. The down payment of the lease price must be paid prior to signing the contract. The duration of an urban land lease for real estate development is 60 years for Addis Ababa and 70 years for other cities and towns in Ethiopia. 
Housing Policy and Regulations
Housing in Ethiopia is not considered as a shelter only but an asset, means of social security and indicator of social status. There were no housing policies as such but simple laws. The current slums and housing problems are the result of accumulated deficits of policies and practices for several years.
The Federal Ministry of Works and Urban Development is the government department responsible for the provision of housing. In recent years urbanisation has resulted in unprecedented levels of growth with the development and expansion of Addis Ababa and other cities. The urban development policy and strategies are aimed at promoting the role of urban areas, within the overall national development plan. The policy and strategy is further articulated in the IHDP which makes provision for affordable and low cost housing, empowering urban residents through property ownership, job creation, income generation and improvement of quality of urban environmental infrastructural development, etc and the urban renewal program.
Under the strong vision and leadership of the Ministry of Urban Development, Housing and Construction, commendable progress has been made in shaping urban developments in Ethiopia. That being said, while the government has an urban- development Policy, it does not have a consolidated strategy.
A number of policies govern the housing sector, including the following:
- Urban Development Policy (2005): Formulated by the Council of Ministers of the Federal Democratic Republic of Ethiopia to link together the small-scale efforts made by regional governments and cities since 2000.
- The Federal Rural Land Administration and Land Use Proclamation No.456/2005: Enacted for the purpose of ensuring tenure security, strengthening property rights of farmers, sustainably conserving and developing natural resources, establishing land data base, and establishing an efficient land administration in the country.
- Expropriation of Landholdings for Public Purposes and Payment of Compensation and Council of Ministers Regulation No.135/2007: The Federal Constitution vests in the government the power to expropriate private property in the public interest, provided it pays compensation prior to acquisition and in an amount commensurate with the value of the seized property.
- Ethiopian Building Proclamation 624/2009 formal sector: A legal document outlining the building regulations and requirements, for use by local authorities to ensure building standards are maintained in their jurisdiction. Parts of Ethiopia are located in an earthquake zone and a code exists to ensure buildings resist maximum predicted earthquake loads. The codes are only used and enforced in buildings developed in the formal sector.
- Regulation No.15/2004: Outlines the establishment of the Addis Ababa City Government Housing Development Project office and outlines its duties and responsibilities.
- Regulation No.12/2004: Outlines the condominium regulations for Addis Ababa city, regulating further details to Proclamation No.370/2003.
- Ethiopian Building Proclamation 624/2009 outlines building regulations and requirements utilised by local authorities to ensure compliance within the formal sector.
- Proclamation no.555/2007 defining the mandate of the Agency for the management of Government Housing maintenance, rent collection and property administration.
Housing Sector Opportunities
Ethiopia’s investment policy encourages foreign investment in the real estate sector, and there have been an increasing number of foreign investors in this sector. Chinese developers are at the forefront of this trend. For instance, Tsehay Real Estate’s Poli Lotus International Centre and Sinomark Real Estate’s 21-tower Royal Garden developments are examples of Ethiopia’s biggest real estate schemes. However most of the private real estate developers in Ethiopia are local investors.
Private investment in the real estate sector is expected to grow in the coming years. There are a number of factors driving this. These include (i) overall economic growth (as real GDP has grown by an average of 10.8 per cent per annum in the last 10 years); (ii) demographics (the urban population continues to rise and the population of Addis Ababa is expected to more than double by 2040 reaching an expected eight million); (iii) a long history of unmet housing demand; (iv) the expansion of city roads, infrastructure and other major roadways (Addis Ababa’s urban metro system which is the first in Sub-Saharan Africa, the improvement of numerous regional roads, and the wider reach of electricity and water services to the edges of the city); and (v) tax and investment incentive schemes, involving a broadening of investment areas, extended lease periods, and reduced income tax.