TIRANA, Oct. 13, 2022 – Albania has been warned that its current construction boom and the large economic focus on the real estate market carries risks to the country’s financial stability, according to details being released by the International Monetary Fund’s latest mission to Tirana.
The IMF said it welcomed efforts by Albania’s central bank “to address significant data gaps on real estate and construction” and called “for enhanced surveillance of this sector’s impact on financial stability.”
“We call for close monitoring and management of potential risks from the robust credit growth in recent years, including rising FX [foreign currency] lending,” the IMF said in its statement at the conclusion of the mission.
Moreover, the IMF listed real estate as one of the risk factors in Albania’s economy.
“The economy is also vulnerable to … reversal in the rise of real estate prices,” the statement noted
Home prices in Albania have increased by almost 40 percent compared to the same period last year, a spike that has caused concern over affordability, economic stability and worries over sources of funds being used to fuel the ongoing construction boom.
The increase in prices has puzzled some experts as it comes at a time when there is a record level of ongoing construction, according to permit numbers issued by municipalities, primarily Tirana, as well as an increase in emigration, which has shrunk Albania’s population and thus, theoretically demand.
With borrowing rates increasing across the world, Albania included, buying homes should also, theoretically, become more expensive and thus lowering demand and prices, according to economists.
Tirana continues building race
However, theory is yet to be translated into practice in Tirana. According to Instat, the state’s statistics entity, in 2021, the area granted construction permits in the capital was 1.6 million square meters, a record level at least since 2010, when officials started to report the data, of which almost 80 percent were for residential construction, according to Monitor magazine.
The same trend continued in the first half of 2022, with almost 1.2 million square meters of construction permits granted in the capital, or as much as 75 percent of the area granted for the entire year 2022.
Tirana received 70 percent of all areas of permits granted in the country for the relevant period.
Prices, loans and supply continue to grow
Although the supply in the market is constantly increasing, the prices have also shown the same trend, reflecting an increase in construction costs and what experts believe is the infusion of informal or illicit funds into the economy through construction.
According to the Fischer Index of House Prices, calculated by the Bank of Albania, the average price of houses sold during the first six months of 2022 had increased by 28.4 percent compared to the previous six months and by 39 percent compared to a year ago. That marks the highest six-month increase of the index since 2013, when the Bank of Albania first started to publish the data.
In line with these developments, the credit granted by the banking system for construction and real estate has also marked a significant expansion in recent years.
Credit to the construction sector this year marked the highest level in at least the last six years. New credit for the construction sector has increased by 38 percent compared to the same period a year ago. The total value of the construction loan portfolio at the end of July 2022 reached 70.4 billion lek, or about 603 million euros, Monitor reports.
Unaffordable homes increasing emigration
As construction and profits boom for some, the majority of Tirana residents who need a home to start families can no longer afford to buy one with the median wages available in the capital, a factor many young people are citing in their decision to leave the country altogether.
Tirana ranked as the worst major city in Europe and 230 out of 254 in the world in a recent survey, with Albania’s capital taking a big hit in the index specifically due to the unaffordability of its real estate for locals.
Tirana ranks 44th most expensive out of 254 cities and capitals in the ratio of real estate prices to income. Buying an apartment in Tirana is just as expensive relative to income as buying it in London, Milan, Rome or Munich, according to purchase parity data.
