The constructions sector, one of the leading sectors of economic growth in Albania during 2008 and a long standing pillar of the social and economic development of the country, is facing today an unprecedented crisis. Over 4000 new apartments are reported to be unsold in Tirana, the capital and major city of the country and the constructors have appealed to the government to reduce the VAT tax.
Expressing a tendency that is being reported in some of the major countries of Europe facing today the global market crisis, the sale delays in Albania are being prolonged, but the prices are being generally maintained to what are considered high levels compared to the purchasing- power of the average Albanians. According to local media, prices for new apartments in Tirana vary between 450 to 1700 euros per square meter. Older apartments in key positions in the capital can go for higher prices. The average wages are reported to be around 250 euros per month while unemployment rates are formally and informally high in Albania. State jobs are being considered as generally lower-risk and bigger-income jobs, while the private sector, which can selectively offer better wage possibilities to higher qualified employees, is still a restricted and developing sector. Another part of the population is self-employed and has fluctuating revenue.
Demographic and socio –
economic changes
During the last decades, the constructions sector has durably been in a boom. Until its fall in the beginning of the 90-ies, the former communist regime fought and prohibited the principle of private propriety.. The state controlled and regulated the movement of people and in order to meet the needs of the growing population constructed state-owned, massive, and impersonal lodgings throughout Albania. With the fall of the communist regime, private propriety was rehabilitated. The migration of people within the country was liberated and large demographic movements have since been confirmed with a tendency of encircling Tirana and other major cities, as well as the tendency of leaving the country to seek better employment and life possibilities abroad. This progressively created a dynamic situation for the constructions sector as well as a chaotic urban and peri-urban setting. Many new apartments have been constructed and sold throughout the country in the past years, especially in the capital and major cities or in turistic and coastal sites like Durr쳬 Golem, Kavaj묠Vlor뮠New life conditions and better comfort were becoming available in the constructions market and progressively, with the demographic growth, the splitting-off of the families and population movements within the country, the lodging needs made the constructions sector become a leader in Albanian economy. Part of the former sales in the construction business have been carried out through credit investment, via bank loans. But the recent global crisis of the banking sector has affected crediting in Albania. The crushing majority of banks in Albania are externally-owned and have no Albanian shares. As the mother banks are facing difficulties in their overall activity in their home countries and in the world, a credit crunch is being reported in Albania as well, though in the past interest rates in Albania have been extremely high and the reimbursement balance before the crisis exceptionally positive.
Sales deceleration
The global economic crisis seems to affect the sales of apartments in Albania. The prices are felt to be very high and the two last years an increase has been observed. This increase seems to have reached a stabilization point with no further progression but with no signs of substantial price curb as yet. Out of the numerous reasons quoted to explain the crisis, some associate the situation in Albania to the global situation, some others are more specific to the market context in Albania. One argument stresses that a major part of the needs has already been met and that there is a deceleration in demographic movements within the country as well as a generation gap in the demographic growth. This means that the splitting-off of families has almost been completed for the last generation and that a new generation will split at a later time. Another argument refers to the shrinking purchasing-power of Albanian emigrants abroad and by way of consequence of their families in Albania. Besides, in the money-raising market the loan policies of the banks are becoming more restricted and interest rates that have always been high in Albania are tending to further increase. This constrictive situation is associated with a psychological hampering of any individual economic initiative. Part of this initiative draw-back comes as a result of the economic crisis being felt in Albania in the private sector with the progressive dismissal of hundreds of workers, bad business climate and shrinking of investment yields. The other part is induced from the political risk of power change after the nearing elections of the 28th of June 2009, that could bring job uncertainty in the state sector for another though smaller category of employees, as well as economic policy changes. In this particular global and local context, the possible home buyers or investors are falling out of the market for economic as well as psychological reasons.
Sale price essentials
Another hampering psychological factor is that the actual prices met in the lodging market are felt to be high or extremely high. After a chaotic urban development in the main cities, few construction permits were released in Tirana for almost a year. By the beginning of 2008 a selected handful of construction permits had been issued and it is thought that this restriction, motivated by needs of controlled urban development, was expensively moneyed to obtain the permits. This may have increased the costs of the constructors who are at the same time facing less available space to build. On the other hand, the direct proprietors of the available land and the constructor usually agree to have a number of apartments and stores attributed to the land proprietors’ families. This has the advantage of not representing a preliminary moneyed investment cost, but adds however to the cost of each other apartment that is available for sale. These factors pressure pricing policies. The cost of construction is admittedly thought to reach between 230 to 430 euros per square meter.
The construction cost of the apartments that are attributed to the land proprietors’ families report their full weight to the construction cost of the apartments that will be on sale. At the same time, though informal and not transparent, the cost of obtaining a construction permit is also thought to partake in the global cost that influences the pricing of the goods and of the benefit margins.
In the last years, to determine the state fiscal policy as regards the selling of apartments, the government has published a reference price-list as a reference for selling an apartment in a required zone and, since, bases his taxation on the listed values. This measure is thought to have come in order to prevent sales being conducted full price and declared half price. After it has come in use, it is felt though as an economic or psychological obligation to sell at higher prices than formerly, since sometimes state reference index prices seemed higher than former market values. Though it does not directly concern new constructions’ prices, it is supposed to have raised overall real estate market prices in the former years, thus providing a better accompanying context for the increase of new construction prices. This index was later modified by the government and the index values are now reported lower than before. Corrections are also reported in order to better harmonize market and reference prices, but these modifications are yet largely ignored and seem to have produced up to now no psychological effect
Inflation expressed in the national money lek or even in euros is another economic factor that may have contributed to the former price increase and that may subsequently refrain price reductions, though it seems to be less active than the other factors. A tendency of carrying out all operations in euro or sometimes even dollars is being reinforced, leaving the lek far behind in the real estate transactions. After having obtained a handful of construction permits, the constructors in Tirana began building and partook in Albania’s economic growth for 2008 by investing money in constructions and employing construction workers. But in the newly-created situation, the stock of apartments that is being constituted does not allow economies of scale to develop thus selling cheaper but more. Since the constructors are selling less, they might tend to sell at even more expensive prices.
Crisis and economic policies
In this context where they are selling less and making up stocks, the constructors are asking for a reduction of the VAT tax. The government has asked in return for a reduction of the sale prices.
The question is whether the VAT tax reduction is asked to enlarge benefit margins by selling at the same price or to help reduce the price by reporting VAT tax reduction? A reduction in the selling price would not automatically reduce the VAT tax since the government reports that this tax has been abolished on sales of the new constructions but is maintained for acquiring construction materials and construction tools.
The deepening of the crisis might inflect the behaviour of either of the actors. The state badly needs tax income to finance its engagements in infrastructure building. The construction sector has been one of the most dynamic in the country, normally offering a high potential of tax collection. Construction may have been and may still continue to be the highest employing sector. It might become vital for the Albanian state and economy to preserve this sector from bankruptcy. On the other hand, crisis might induce the constructors to sell close to the cost price, but even this might not guarantee that they will obtain the much wanted sales. The interest rates and the loan restrictions, the psychological factors refraining people from entering the market may still be a persistent obstacle to the sales.
In comparison, the old apartments that are sold by the proprietors usually go for much higher prices than the newly constructed ones and are generally in more favourable zones of the city. No data seem to be available as to their sales rates during the past months. Their prices do not seem to have lowered and part of this scattered stock is still paying the loans. A reduction in prices from the constructors in the context of a prolonged crisis might lead to a fall of the global real estate prices.
As a general observation, the more effective tax-collecting policy of the ruling government and of the other local actors is working better results for the state or municipalities budget and it translates better in infrastructure investment. But this sometimes overburdens fragile enterprises economically or psychologically and makes business and employment climate gloomier. This might affect future sales and constructions. More active and risky individual economic initiatives are usually induced by a more liberal fiscal orientation and more liberal economic policy which in turn help create a more liquid economy.
Box 1
Sometimes real estate is considered as a consumer’s good. More realistically it is part of an investment scheme. With an average income of 200 to 250 euros per month per each member, and with one salary entirely dedicated to the reimbursement of the credit and the other salary for current needs, an average Albanian family with no children would require at least 20 to 22 years to liquidate a credit-financed acquisition of a 70 square meters sold at 500 euros per square meter. (eg. 12 wages of 250 euros per year = 3000 euros x 20 years = 60000 euros. Cost at sale without interest 35000 euros. Allowance for interest rates, energy bills, bigger surface or higher square meter value = 25000 euros). During the 20 years the family may be expected to have children and new needs to be financed and family members may be expected to lose jobs. Alternatively they might be expected to increase their income and possibly benefit from inflation and money erosion. If they were to be allowed only 30 % of their income to finance acquisition that would make 30 % of 400 or 500 euros, respectively 120 and 150 euros. (Eg. 1: 120 euros x 12 months = 1440 euros x 41,6 years = 60000 euros / 1440 euros per year x 24,3 years = 35000 euros. No interest and other expenditure allowance.) This means that they would require between 30 to 42 years to pay-off their debt. It also shows that the interest rate and other expenditure variables are an important composite of a real estate investment scheme. Interest rates as high as 8 % have been observed in Albania formerly. (Eg. 2: 150 euros x 12 months = 1800 euros x 33,3 years = 60000 euros / 1800 euros per year x 19,4 years = 35000 euros. No interest and other expenditure allowance.) This means that they would require between 25 to 34 years to reimburse their debt and shows that the interest rate and other expenditure variables are crucial in a real estate investment scheme.
These examples were taken making an association between
average income and lower price per square meter. If this economic reasoning would become true that would lead to another demographic movement of the population, this time within the cities, from better zones to less favourable whereabouts. In wanting to keep the standards, the calculations should associate average income with average selling price. That would be 250 euros per month of income to 1075 euros per square meter (1700 + 450 / 2 = 1075). This would make buying practically impossible for an average Albanian, that is the majority of the population. The average price seems to be out of scope with the average situation of the Albanian population. For the lower selling prices the benefit margin seems to be quite low but it is difficult to evaluate the benefit marging for the higher selling prices since they are generally located on better zones and might cost more to obtain construction permit and land rights to construction. If we were to express costs as generally admitted cost of construction + cost of obtaining land rights + cost of obtaining the permit construction, the lower sale price quoted by the press of 450 euros per square meter seems to be in reduced margin position (230 euros per square meters admittedly lower cost + n (= 230 euros x square meters allowed for the land proprietor families / by the total of square meters on sale) + N (= opaque cost of obtaining the construction permit / total of square meters on sale) + M (= opaque possible margin) = 450 euros per square meters. The distance from the admittedly known data is only 220 euros per square meter (450 – 230 = 220). These 220 euros support all the other costs and might yield or not a benefit margin.
Box 2
The higher sale price quoted by the press of 1700 euros per square meter might be in excessive margin position unless the opaque costs of obtaining the construction permit are excessive in themselves [430 euros per square meters (= admittedly higher construction cost) + n (= 430 euros x square meters allowed for the land proprietor families / by the total of square meters on sale) + N (= opaque cost of obtention of the construction permit / total of square meters on sale) + M (= opaque possible marge] = 1700 euros per square meters. The distance from the admittedly known data is 1270 euros per square meter (1700 – 430 = 220). These 1270 euros support all the other costs and should theoretically yield a comfortable benefit margin.
Interest rates are usually not considered as a crucial part of the problem and banks are not usually summoned to lower interest rates. Carefully considered sale price reduction might produce in numerous cases less interest than interest rate reduction. On the other hand, hiring rates are not considered in comparison to sale prices. To rent 70 square meters in Tirana might cost as an average 150 to 180 euros per month. This is too close to the wages average and in 20 years this would equal 36000 to 43200 euros, that is something close to the lower sale prices for the new constructions. By being in a measure to have better zoning choice and comfort choice, hiring might be at this time a better alternative to buying with an obligation to “migrate” to a different and perhaps less favourable zone of the city. This might help continue flood even more the stock of lower priced unsold apartments, a stock that could have otherwise been affordable for acquisition.
