The economic crisis may not be far away

Real estate prices have grown faster than incomes in Albania, as in many other countries.

They are continuing to grow even in 2024, but not at the high rates of recent years.

Fred Harrison argues that rising prices are the key indicator of any crisis. They continue to grow until the point where it starts to feel like growth is not happening anymore. Then they start to drop sharply.

Harrison believes it is wrong to use land and real estate as the main drivers of economic growth. His basic idea is that economists mistakenly assume that the state of the real estate market depends on the state of the rest of the economy. In fact, ownership is the key factor that shapes the business cycle, while vice versa is wrong and impossible.

Due to the fact that real estate sales have a lag between still high interest rates and housing prices, in the first 6 months of 2024 a legal initiative has appeared to tax their sales at a reduced rate (5%) with 2 times lower than it is now (15%).

This government initiative seems to stimulate resale more than new sales in the market, after the signals of the market that has started to exert pressure with the decrease in the pace of housing price growth.

Experts say the housing market will only see a revival once interest rates fall enough to ease affordability and encourage foreclosed/vacant homeowners to move, following the passage of the Low Interest Rate Act. their sales tax.

In a well-functioning market, increased demand is met by increased supply that moderates price increases. In the years when the demand for real estate was high, despite the increase in prices, their purchase was somewhat affordable,
But the new suppliers of real estate, which appeared to supply additional construction, did not affect the reduction of prices.

This phenomenon is a clear indication of the distortion of demand and supply, due to the factor of informality. In the long run, prices settled into a new, higher equilibrium, but one that no longer reflects the rules of the free market.

In many cases, the increase in supply is not met by the increase in demand. This means that rents and house prices rise much faster than incomes.

Many of us would understand that house prices are so high because there are too many people and not enough houses. However, the 2023 Census contradicts this logic.

The reality is that housing prices rose massively due to informality.

But why does this trend in real estate prices affect economic development?

First of all, construction and trading of real estate have a direct weight over 1/6 of the economy, but connected with other sectors their weight reaches up to 1/3 of our economy.

Second, we ask the question:

– Is a house to live in, something that everyone needs? Or is it really an asset that everyone should aim to own?

You could say it could be both.

One consequence of everyone scrambling to own a home has been that house prices have risen much faster than wages/incomes, meaning homes are becoming less and less affordable. Anyone who didn’t own a home before prices started to rise is giving up more and more of their salary savings just to pay for a place to live.

And it’s not just average homebuyers who are being affected, as rents are also rising quickly.
This increase in prices led to a massive increase in the amount of money that first-time buyers spent on loan repayments.

High housing prices also act as a mechanism for transferring wealth from the young and poor to the rich, that is, those who own more than one or two real estate properties.

Even home owners don’t benefit massively from higher house prices, because after all, everyone needs a place to live, and anyone selling their house will find that on average other house prices will have increased by the same amount, leaving them in no better condition.
In reality, only banks and those with multiple properties benefit from high house prices.

Higher rates mean people will have to take out larger loans for longer periods of time, which means more money in interest payments to the banks.

Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet.

As the loan is repaid, the money exits the everyday economy, while the banks keep the interest as profit.

And since a home loan is secured by the home itself and a significant profit can be made from the interest on the loan, this is a win-win situation for the bank.

But is it a win-win situation for anyone else?

People who decided to become multi-home owners are the beneficiaries.

But in reality all this funding going into a pool of non-productive assets is a major contributor to the financial crisis.

If this money was used for something more useful, house prices would have stayed lower.

The result of this approach: fewer people would own multiple homes, and fewer people would own homes.

We would all have more disposable income because rent and mortgage payments would be lower, there would be less household debt and we would all be better off.

The government has launched a tax relief scheme for the sale of houses serving this policy as financial support to help people buy houses.

But do the short-term benefits of more homeowners outweigh the problems caused by avoiding a long-term strategy to create a sustainable economy?

We don’t think so.

For the reasons described above, we think it is not a good idea to apply fiscal amnesty models, for some more short-term tax revenues, as well as to stimulate the deflation of the real estate stock in conditions of high informality and low fiscal transparency.
The government in this tried and tested model is making people think they can buy another property with a loan that they simply cannot afford in the long term.

These prices will drop at some point.

The reason is simple: the prices are artificial and cannot be sustained for long with the same economic operating model as until today. People’s incomes are falling in real terms and have endured this situation for more than five years.

We need higher wages/incomes for wages to catch up with rents and loan payments, and the only way to achieve this is to have room in the economy to create high value jobs rather than inflated house prices.

Therefore, we must change the rules of the economic game.

If we have people who want to work and jobs to do, why can’t we create a system that achieves these things?

In quite a few cases we have suggested with arguments, that the Bank of Albania and the Government create opportunities for new money that can enter the economy through the government.

This can be done in three ways: (a) increasing government spending on the productive economy and citizens most affected by inflation and shocks from the economy, (b) professional and non-political management and policy of taxes and taxation; (c) making direct payments to citizens by printing an amount of money that can remain in circulation temporarily.

Although each of the options needs its own analysis, we think that because youth unemployment needs to be reduced and youth attrition is to be curbed, the greatest benefit to society would be to increase government spending on job creation. new jobs in the sectors that young people aspire to and the economy of tomorrow.

In a country with a small workforce there are very few good jobs to be had.

Opportunities to create jobs and build a more sustainable economy lie in green energy infrastructure, building affordable housing policy, strengthening the health system based on service quality and a market-oriented education and, as and developing better public transport.

It’s not that we can’t handle these things.

In fact, we do not have an economy that works the way the citizenry and the country’s economic perspective require.