The signs of a building bubble are there. Will it happen?

2023-08-31 11:26:00, Aktualitet CNA

The construction boom, especially in the capital, has raised concerns about a potential bubble in the real estate sector. Although construction bubbles are difficult to predict, economists use several leading indicators that signal whether the housing market is becoming oversupplied. One of them is that of the increase of the built surface in relation to the increase of the population. What is happening in Tirana?

From January 1, 2016 to the end of last year in Tirana, a total of construction permits were granted for 6 million and 485 thousand square meters of housing. Average 925 thousand square meters per year. These are only building permits for residential purposes, not including those for commercial business buildings or hotels.

The graph in the picture illustrates two indicators. The blue curve shows the area approved for construction in relation to the increase in the population of Tirana according to years. In short, the area in square meters of permits approved for each new resident added to Tirana.

In 2016, the population of Tirana increased according to INSTAT by 14 thousand 100 inhabitants. For the same year, KKT and the Municipality of Tirana granted construction permits for 141,000 square meters of housing. Which means 10 square meters for every added resident.

In 2022, the population of Tirana increased by 6500 inhabitants. For the same year, KKT and the Municipality gave permission for 1 million and 808 thousand square meters of construction, or 278.1 square meters for each added resident.

The second curve in orange shows the average square meters of living space that a citizen of the European Union has today. So today in Europe, each resident has an average of 30 square meters of living space where they live.

As the graph clearly shows, after 2018 Tirana is building much more than it has population flow. And the gap is widening year after year, reaching a record last year, where for every resident added to the capital, 278.1 square meters of residential building permits were granted. If we were to refer to the average area in the EU, this results 9 times more than the need. This indicator is a bubble warning.

However, it has two strong limitations. The first, due to the lack of statistics, does not take into account the existing stock of living space per person. How many built-up square meters does Tirana currently have per inhabitant? This data is not available.

If the existing housing stock is small, for example 15 square meters per inhabitant, then the increase in construction supply would simply accommodate the needs of existing residents without necessarily leading to a bubble.

The second limitation is the use of housing as an investment. If Tirana faces a high influx of tourists using AirBnb, a part of the apartments would be used as an investment by the owners, generating income without leading to an oversupply of the market.

The second indicator that is used to signal a possible bubble in construction is that of the growth of the construction sector in relation to GDP. This is an indicator widely used by the IMF to warn of bubbles.

From the empirical studies of the IMF, it has been found that if the difference between the growth of construction and that of the economy as a whole remains above 5 percentage points for more than 5 years, then the risk for the flow increases exponentially. So if the economy grows by 2 percent, while construction grows by 7 or 8 percent for 5 consecutive years, the risk of a bubble is high. What is happening in Albania?

In 2020, the construction sector grew by 1.21 percent. For the same year, the economy fell by 3.3 percent. The difference in growth is 4.5 percent. But in 2021, the difference between construction growth and that of the economy jumped to 9.1 percent, while last year it reached a record 10.9 percent.

So in the last three years, construction is growing much faster than the economy as a whole. Graphically, this would appear as a sphere that enlarges within the narrow circle of the economy. If this situation continues for a few more years, the risk that the blister will burst increases exponentially.

The third indicator is even simpler. It was devised by Joseph Stieglitz, one of the world's most famous economists. Stieglitz says that if the price of an asset is higher than the fundamentals of the economy suggest and people continue to buy it simply and solely driven by the idea that its price will rise even more, then a bubble is near.

There are many discussions that housing prices in Albania are much more expensive than the strength of the Albanian economy suggests. This is also supported by hard data. Practically, Tirana is one of the cities with the highest housing prices in Europe in relation to purchasing power. And the price continues to rise because many citizens continue to buy with the idea that the price will rise even more.

So, all spy indicators suggest that the risks of a construction bubble are increasing exponentially. Will it happen? No one can say this. Science ends here. Further are the works of God./ Oligarchia.al