Returning to Albania after many years abroad gives you a somewhat more personal perspective on phenomena that you might vaguely hear about when living abroad, but which become more material when you encounter them on a daily basis. A simple example: for the first time in a long while, we started looking for apartments for rent in Tirana, and the quoted prices were unexpectedly high. Naturally, I already knew this before arriving, but by looking at offers, the reality became even more tangible.

For some time now, the data have shown a sharp increase in rental prices. For example, this report from the Bank of Albania from last year indicates that, on average, the rental price in Tirana in December 2023 was around 700 Lek (ALL – equivalent to USD 7.5) per m², meaning that for an 80 m² apartment, the average rent in Tirana is around 550 Euros. This is last year’s report; I am sure that rents are even higher this year.[1]

When we talk about prices, everything is relative; a price must be compared to something that serves as a benchmark. The first response when looking for a benchmark is salaries; that is, the complaint is that prices in Tirana are high compared to salaries. Is this true? Below is a comparison of house prices as a fraction of incomes in various cities in Southern Europe, sourced from Numbeo.[2]

In terms of affordability, Tirana is less affordable than Athens, Rome, and Sarajevo. In the Balkans, only Belgrade and Novi Sad surpass it in unaffordability (the higher the number, the less affordable the housing). At first glance, Tirana appears unaffordable compared to its neighbors. Considering the fact that interest rates in Albania are relatively higher than in other Balkan countries, prices should generally be lower if purchases are mortgaged. The fact that relative prices in Tirana are higher than in Skopje gives the impression that more purchases are made with cash.

The growth rate of house prices over the last 5-6 years has been impressive. According to surveys by the Bank of Albania, between 2018 and 2024, house prices have increased by 110%, meaning they have more than doubled. Compared to the first half of 2023, prices have risen by about 23%.

Private sources, which provide average prices and are not indexed, show more or less the same increase, a doubling of prices since 2018.

Market prices are one of those statistical data points that are always bewildering and often serve as a source for conspiracy theories. The price of a specific house reflects both the quality of the dwelling and the characteristics of the buyer and seller that carry out that transaction. A house owned by a seller in urgent need of cash sells at a lower price than one owned by someone who has the luxury to wait for a long time. Prices are somewhat duplicative as well; if your neighbor sells his house for a high price, it creates a comparative base for you, meaning that the price of your house cannot be much lower than your neighbor’s. However, in aggregate, prices usually respond to some basic laws of supply and demand. Thus, in the case of Tirana, it would be good to take a closer look at both.

According to INSTAT, approximately 8 million square meters have been approved for construction in Tirana over the past six years. This constitutes around a 40% increase in the housing stock in Tirana. Some reasons that might explain the price increase are:

• Economic Growth: One of the reasons cited for price increases is usually economic growth. When there is growth in economic activity, real estate prices generally follow the growth trend. Since 2018, Albania has experienced growth of around 25% in GDP, which does not justify the phenomenal increase in housing prices. To date, I have not seen studies that provide a specific figure linking economic growth to housing prices. Nevertheless, a situation where price growth is four times the economic growth is unusual. Considering also the fact that the center of Tirana has prices close to the center of Athens, something seems off.
• Population Growth: Tirana’s population grew by about 11% in the past six years, which does not sufficiently explain the price increases. Naturally, there is a significant influx of foreigners and “digital nomads,” and the latter have much greater purchasing power than the average Albanian worker. However, their number does not seem large enough to justify the housing price increases. According to INSTAT, the number of registered foreigners in Albania is about 18,000 people, an increase of about 29% since 2018. Although their purchasing power is high, and assuming all of them live in Tirana, they only constitute 3% of its population.
• Construction Costs: Usually, when construction costs rise significantly, prices also increase. According to INSTAT, construction costs have risen by only 16% during this period.
• Empty Apartments: According to INSTAT, around 25% of the apartments in Tirana are empty, meaning they have not consumed any electricity. According to these statistics, for every five apartments built, one is empty. The reasons may vary, including speculation and money laundering, which is difficult to measure, but it seems to me that one significant reason is the high cost of renting an apartment out. By costs, I mean difficulties like contract non-compliance, non-payment of services or rent, damages to property, etc. Someone who has an empty apartment and does not rent it is losing money, especially with such high prices. The risks of renting, whether imagined or not, raise the minimum price someone might accept for renting an apartment. In this context, standardizing rental contracts, investigating and penalizing those who breach contracts, and facilitating the renting process would be a public policy that would have a significant impact on the real estate market.
• Airbnb/Booking: According to Airbnb and Booking, Tirana has about 4,000 active listings, which constitute a very small part of Tirana’s capacity.

From the above discussion, one may be tempted to just add the effects of economic growth, population dynamics, and construction costs to explain price increases. However, simply adding percentage increases would be a conceptual error, as these factors are interdependent and would overestimate their collective impact. In order to properly parse out the impact of each effect, a structural model would be necessary.

There must be other reasons that may have escaped me, but it seems that one of the main reasons for the rising cost of apartments in Tirana is a combination of economic growth and the reduced availability of apartments caused by the predominance of vacant homes. As a benchmark, in 2016, the local government of British Columbia, Canada, initiated a study on empty homes in Vancouver. This was in response to rising prices and rents, which created political pressure to address the issue. In this context, it was found that about 6-7% of homes in the city were permanently vacant. Compared to Tirana, this was a much smaller number (6-7% in Vancouver versus 25% in Tirana). This figure prompted the British Columbia government to create the Empty Homes Tax to encourage the renting or sale of unused homes. According to the aforementioned report, this type of program was considerably successful, significantly reducing the number of unused homes. Perhaps it would be productive for a similar study to be conducted for Tirana, to provide a more complete understanding of the nature of vacant apartments and the potential effects of a similar tax.

While economic theory would typically cite factors like economic growth, population dynamics, and construction costs to explain price increases, Tirana’s real estate market reveals additional complexities. The informal market and potential money laundering may play significant roles in price distortions. A tax on empty homes, among other measures, even if capturing only half of the vacant properties, could translate to a 12.5% increase in housing supply.

The bottom line remains stark: Tirana’s housing prices are disproportionately high compared to neighboring cities, consuming a large portion of household income in a sector critical to Albania’s economic development and overall welfare. Housing prices constitute a significant inflationary driver with substantial economic implications. Resolving housing market inefficiencies could significantly ease inflationary pressures, potentially translating into lower living and production costs across the economy. A rigorous structural economic model is necessary to accurately measure these effects, and public policy in Albania should actively pursue such research.

Editor’s note: the Albanian version can be read here. 

© 2024 Elton Dusha. Të gjitha të drejtat janë të autorit.

 

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[1] Here I am focusing only on Tirana because it is dominant nationwide and the most active market.

[2] A note about the source of statistics: Numbeo does not have very accurate data specifically for each city. There are much better sources that can be used, such as the Bank for International Settlements. The problem with most of these data sources is that they do not include Albania, and the basis for comparison is somewhat challenging.