BEYOND BRICKS AND MORTAR: ALGERIA'S HOUSING CRISIS

UNCLAS SECTION 01 OF 04 ALGIERS 000385 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN SOCI PGOV AG SUBJECT: BEYOND BRICKS AND MORTAR: ALGERIA'S HOUSING CRISIS ¶1. (SBU) SUMMARY: A housing shortage across Algeria is one of the worst economic problems facing the country. To help ease the shortage, in 2004 President Bouteflika launched an ambitious plan to build more than one million new housing units by the end of 2009. The program has fallen far short of expectations. The USD 9 billion effort aimed to increase the housing stock to seven million units and reduce the average household occupancy rate from seven persons per unit to five. At the end of 2007, the Minister of Housing declared that 43 percent of the target number of homes had been completed. Our contacts believe this figure is far too optimistic, however, and that in reality fewer than 20 percent of the planned housing units have been built. The government's housing plan is plagued by inefficiencies related to poorly managed housing subsidies and inadequate regulations covering land development and property titles. The spiraling costs of building materials is also crippling construction projects as contractors find they cannot operate within the low fixed-price per square meter demanded by the government. The government now finds itself forced to subsidize the markets for some building materials. Complicating matters further, existing housing stock is not fully utilized because of issues of affordability and a lack of mortgage financing. USG proposals to assist the Algerians to address their housing problem have so far gained little traction. END SUMMARY. THE ORIGINS OF ALGERIA'S HOUSING CRISIS -------------- ¶2. (U) Algeria has faced a housing shortage since the 1980s. Years of terrorism in the 1990s caused a spike in rural-to-urban migration and a subsequent demand for urban housing for which the federal and local governments were not prepared. With no clear economic vision, lackluster regional development policies and inadequate urban planning models, the largely state-run construction sector could not keep up with the flow of people to the cities, and limited mortgage capacity made private financing of new home construction nearly impossible. As a result, generations of families, or multiple families, found themselves trapped in the same apartment, waiting for their chance to get on a list for a new home. THE REAL PROBLEM: LACK OF AFFORDABLE HOUSING -------------- ¶3. (SBU) Analysts estimate that housing prices have more than doubled during the past three years. Property prices are inflated because the national government continues to own most of the land in Algeria, and the process by which developers or individuals can obtain clear title to property is cumbersome and sometimes less than trustworthy. The highly publicized effort to remedy the perceived housing shortage belies the fact that between 700,000 and one million housing units (ironically, the same number of units targeted in the president's housing initiative) are unoccupied at any given time, according to press reports quoting the current and former ministers of housing and the chief loan officer for the state-run CNEP Banque, which issues most mortgages in Algeria. The home vacancy rate is due largely to leasing constraints and the shaky title system. Banks will not accept a mortgage application unless clear title is proved at the outset. During a period in the late 1980s and early 1990s, opposition party leaders in many local governments handed out large numbers of "temporary deeds" to properties that were never expropriated, and these temporary deeds were never reconciled against the original land titles. As a result, today multiple claims often exist on the same lots, and banks will not finance their sale. ¶4. (SBU) Supply is also constrained and prices are squeezed upward because the transfer of government-built housing is both severely restricted and poorly monitored. Stories abound of middle-class families who manage to acquire and sell multiple government-subsidized apartments in spite of transfer restrictions. Eviction laws favorable to tenants also prompt some landlords to leave units vacant rather than rent to families who cannot guarantee their incomes over ALGIERS 00000385 002 OF 004 time. It is common, for example, for landlords to demand a full year's rent in advance of occupancy, something most Algerians cannot afford. Some landlords choose to keep properites vacant in hopes of finding an expatriate or a foreign company that will offer top price and a long-term commitment. These constraints affect commercial space as well as residential. We were told by a major international oil company last year that the average price for a square meter of office space in the Hydra district of Algiers was equivalent to office space on the Champs Elysees in Paris. For this reason, and to some extent because of security concerns, many leading corporations are housed in villas around Algiers rather than traditional office buildings, which further restricts housing supply. ¶5. (SBU) Additionally, in widely published comments made at a conference on organized crime in early March, Ahmed Remili, Assistant Director of Criminology at the National Criminology and Criminality Institute (INCC),noted that land speculation as a means to launder money from contraband sales and other illegal activities has restricted in-fill property supply and has consequently added significantly to the cost of housing. The "Mafia du Foncier," or Real Estate Mafia, is also legendary in Algeria: criminal or quasi-criminal elements are believed to control large swaths of the limited number of privately held parcels across the country, and collude to keep land values high. ¶6. (SBU) Large-scale private development projects announced recently by Gulf investors will do little to ease the housing shortage, since the proposed developments cater to the wealthy rather than the majority of the population that is searching for affordable urban housing. Since 2003, Algerians have had greater access to mortgages, but the cost of housing puts most Algerians out of the market. We calculate the home price-to-income ratio (total home price over annual household income) for Algeria to be about 13. By comparison, according to the Overseas Private Investment Corporation (OPIC),the ratio for neighboring Morocco is 9.2, and 5 for Tunisia. (The U.S. Department of Housing and Urban Development reported in 2006 that the home price-to-income ratio for the United States was 3. In 2005 San Francisco topped the U.S. market at 12.6, below our estimate of Algeria's average.) High unemployment and underemployment, along with the ever-rising cost of living, have also been steadily eroding most Algerians' ability to secure an affordable mortgage. Mortgage lending represents about 10 percent of the credit portfolios of Algeria's banks and, according to a 2005 World Bank study, housing finance makes up less than one-half of one percent of Algeria's GDP, whereas housing credits represent over four percent of Morocco's GDP and six percent of Tunisia's. BRICKS AND MORTAR: THE GOVERNMENT'S PLAN FALLS SHORT -------------- -------------- ¶7. (SBU) Housing Ministry Director of Housing Programs and Real Estate Development Mohammed Tahar Boukhari told us on February 20 that the ministry delivered 650,000 completed housing units between 1999 and 2004. He said that the government then determined that there was an immediate need for an additional 1.2 to 1.3 million new units across Algeria to reduce overcrowding and reach a national target of five occupants per home, down from an average of seven. The housing program ultimately developed consists of six categories of housing, each with a different level of government subsidy. For example, 25 percent of the units will be deemed "social" housing, where the government will remain the owner of the property and occupancy will be completely subsidized, while ten percent will be on a purchase-to-lease plan (AADL) where tenants will be given financial assistance to assume title to the property over time. ¶8. (SBU) In terms of construction market share, Mr. Boukhari told us that private Algerian developers have access to 95 percent of the new-housing market. He said that contracts for some 80,000 units of the government's five-year project have been awarded to foreign firms, most notably Chinese, ALGIERS 00000385 003 OF 004 Egyptian, Lebanese and Turkish companies. He added that out of 25,000 private Algerian construction firms, only 1,000 have the required qualifications for these projects. ¶9. (SBU) Recently the housing ministry claimed publicly that it completed 43 percent of the planned units between 2005 and 2007, and that this accounted for 65 percent of the five-year program's budget. But an executive with Egypt-based Orascom Construction Industries told us in early March that based on his study of government construction tenders and his conversations with industry players, the completion rate was actually only 12 to 17 percent. An Algiers-based international housing consultant told us on March 12 that the completion rate was no more than 20 percent. They said that the fixed price per square meter that the government demands is too low for profitability. Projects are often turned over to successive developers after the contract is awarded because no company can make the project profitable given the price ceilings. Thus, few of the large-scale projects have actually been completed, although many have been started. According to the two men, a lack of capacity and experience among Algerian firms has further slowed the pace of construction. ¶10. (SBU) Our contacts explained that attracting developers, particularly foreign companies, has been a challenge because the fixed price per square meter required in the government's tenders is far too low to absorb the skyrocketing costs of raw materials and labor. This has been front page news in the last ten days, as several leading Algerian newspapers have reported at length about the spikes in prices for building materials, especially wood, cement and iron. On March 26, the Arabic-language daily paper Echourouk el-Youmi reported that the price of construction iron had more than doubled in the last few months, causing the government to begin subsidizing the iron market. Echourouk also reported that the cost of building new apartments had jumped by 30,000 dinars, or about USD 4,500, due to the escalating costs of building materials. The paper said that both private and publicly-owned construction companies have asked the government to raise the price per square meter from the current range of 22,000-26,000 dinars (USD 335 to USD 396) to at least 34,000 dinars (USD 518) in order to reflect the current cost of materials. REFORM EFFORT: NEW LAND TITLES, NEW TOWNS -------------- ¶11. (U) The government is now looking at developing the housing market and industry by improving the legal frameworks for land transfer and mortgage lending. Finance Minister Karim Djoudi recently created a committee composed of officials in charge of budget, land and tax administration, as well as officials from the Ministry of Housing, the National Housing Fund (CNL) and commercial banks. The committee is charged with assessing current government housing policies in order to recommend and implement new measures that will remove housing barriers. In addition, the government recently trained more than 3,000 land administration agents who will be tasked with regularizing property deeds and titles. The Director of Architecture and Urban Planning at the Ministry of Housing recently told us that the government is also piloting a regional development project aimed at creating 12 new cities, five in the environs of Algiers, to ease crowding caused by urban migration. COMMENT: MIXED MESSAGES ON PRIORITIES IN HOUSING -------------- --- ¶12. (SBU) Algeria's housing crisis is not simply a matter of construction or mortgage capacity. Issues of land use planning, development policies, title regulations, and subsidy programs all drive up the cost of housing, making affordability a more important issue than either housing supply or mortgage availability. New housing stock should help ease prices, but without a proper regulatory framework and consumer-driven mortgage practices, the number of vacant units will rise along with new apartment towers. We have tried to help by offering Department of Treasury programming ALGIERS 00000385 004 OF 004 in the area of mortgage lending and credit risk assessment and management, but the U.S. subprime crisis and concerns over security have kept a HUD team from coming to Algiers. We have also received mixed messages from the Algerians over the priority it places on housing issues. During a recent visit, Treasury DAS Larry McDonald was told by the Minister of Finance that one of U.S. Treasury's resident advisors in Algeria should help his agency expand mortgage lending in Algeria. As soon as the minister left the room, an official with the national Treasurer's office told McDonald to ignore the housing issue and focus on debt management. Such mixed signals highlight the the general lack of vision within the Algerian government regarding the course of economic reform here, and make our efforts to provide effective programming all the more challenging. DAUGHTON