The liberalization of the Ethiopian birr has been a significant topic recently, with many anticipating substantial effects on the economy. One key area of interest is the real estate market in Ethiopia, where we foresee a mix of impacts.
In the short term, there is likely to be confusion and uncertainty. Currently, many real estate companies price their homes in USD to hedge against sudden birr depreciations. With the birr dropping by over 30% on the first day of liberalization, home prices in birr have surged accordingly. This sudden price hike may upset buyers and could result in disputes and legal challenges.
However, in the long term, if the currency stabilizes and the gap with the parallel market diminishes, the effects should be positive. Diaspora buyers will be able to send money through official channels, and real estate companies can price homes in birr without fearing sudden inflation. This would be advantageous for both buyers and sellers.
In the immediate future, inflation is expected to spike due to increased costs of imported goods, food items, construction materials, real estate, fuel, and services. To protect themselves from rising inflation, individuals and businesses might invest in real estate and other tangible assets, potentially boosting the real estate market and encouraging new construction projects.
Additional monetary policy changes accompanying the currency floating could also benefit the real estate sector. For instance, removing interest rate caps on deposits and loans would enable banks to lend at more profitable rates, increasing the availability of funds for borrowers.
Overall, the government's decision to float the birr represents a necessary but challenging step. If executed correctly, we expect a net positive impact on the real estate market in the long term.
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