INFLATION AND REAL ESTATE IN PERSPECTIVE: NIGERIA IN FOCUS

By ESV. PATIENCE AGUEBOR ANIVS 

INTRODUCTION 

The word “inflation” is an economic term that refers to the persistent increase in the general price level of goods and services in an economy over a period of time. The “Real estate” on the other hand, is defined as the land and any permanent structures, like a home, or improvements attached to the land, wether natural or man-made. The real estate market in Nigeria is a vital and dynamic sector that contributes to the country’s Gross Domestic Product. It is a concept that touches the lives of Nigerians daily, impacting their purchasing power, savings, and significantly, the real estate sector. 

This phenomenon is of paramount concern, especially in Nigeria, where the real estate sector plays a pivotal role in the nation’s economic landscape. Nigeria, a country with diverse culture and rapidly growing population, the demand for housing, commercial spaces, and investment properties is insatiable. Consequently, any disruption to the real estate sector reverberate throughout society, affecting millions of lives. 

In this article, we are to dissect the multifaceted relationship between inflation and real estate in Nigeria, highlighting the factors contributing to inflation, its effects on the property market, and offering insights into strategies for investors to navigate these challenging times. 

By the end of this article, we aim to equip you, the reader, with a deeper understanding of this economic phenomenon and its tangible impact on the Nigerian real estate sector. 

INFLATION AND THE NIGERIAN ECONOMY 

To comprehend the profound implications of inflation on real estate, it’s essential to first grasp the current economic climate in Nigeria, particularly the state of inflation. 

As of May 31st 2023, the inflation rate in Nigeria has reached 22.22%, which marked an increase from the 22.04% recorded at the end of the 1st quarter. This surge represents the highest inflation rate witnessed in the country over the past 20 years. It is important to understand the factors that contribute to the rise of inflation in Nigeria and the different types of inflation prevalent in the country. By examining these aspects, we can gain insights into the dynamics of inflation and its impact on the economy. 

Ahamba, et al (2020), did a study to assess the macroeconomic determinants of Inflation in Nigeria for the period 1981 -2017. The study revealed that the following macroeconomic variables, Gross Domestic Product (GDP), money supply, general government expenditure, imports of goods and services, exchange rate, wages, interest rate, pump price of petrol, and unemployment rate are significant determinants of inflation in Nigeria in the long run. While the study employed two inflation modes based on the traditional theories; demand-pull and cost-push, it revealed that both demand-pull and cost-push factors are determinants of inflation in Nigeria. 

A study conducted by Asekunowo (2016) examined the factors influencing the rise in commodity prices, focusing on both traditional and institutional aspects. Nigeria, being a consumer state, has a higher consumption than production, resulting in a heavy reliance on imports for its commodities. Asekunowo’s study revealed that inflation in Nigeria is primarily driven by companies and 

importers passing on the cost of imports to domestic prices, thereby increasing their profit margins. This type of inflation is known as cost-push inflation, this occurs when companies decide to pass on the costs associated with imports, such as tariffs and custom duties and increase in price of goods imported. The aim behind this strategy is to ensure that their profit margins remain stable or even increase. As a consequence, the prices of goods and services rise, reflecting the impact of this cost transfer on the overall inflation rate. 

In a study conducted by Babalola and Salau (2020), the impact of petroleum pump price on the consumer price index was analyzed using data from the period of 2000 to 2019. The objective of the study was to determine empirical justifications for either removing or retaining government subsidy. The findings revealed that in the short run, petroleum pump price has a significant impact on the consumer price index. Furthermore, the study concluded that both petrol price and diesel price have significant positive effects on the manufacturing sector. 

Nigerian manufacturers bear substantial energy costs due to the high usage and expenses associated with diesel and/or petrol. These costs are often transferred to the prices of goods, thereby contributing to inflation. Consequently, there is an increased demand for higher wages to mitigate the effects of inflation, resulting in what is known as built-in inflation. 

These studies clearly demonstrate that Nigeria encounters two primary forms of inflation: Cost-Push and Demand-Pull Inflation. Furthermore, the Nigerian economy is also influenced by Built-in inflation, which involves a continuous cycle of rising prices and wages, where each factor fuels the increase of the other. Although, In numerous instances, the nation is poised with stagnant wages and salaries which often fuels the escalation of poverty within the nation. This perpetual upward trend in prices has become ingrained in the Nigerian context, contributing to internal factors that drive inflation. Consequently, the economy confronts the persistent challenges posed by inflationary pressures. 

INFLATION AND REAL ESTATE IN NIGERIA. 

In the face of inflationary pressures, investors often turn to real estate as a favorable investment asset class, recognizing its potential to serve as a reliable hedge against rising prices in the economy. However, it is crucial to recognize that these positive effects primarily apply to seasoned investors who already own properties and generate revenue from them. Property owners can expect appreciation in property values that keeps pace with inflation. Studies around the world have suggested that this assertion is true while others revealed in the negative. 

However, new investors may face challenges during high inflationary periods. Rising inflation leads to increased construction costs, including labour, materials, and machinery, which in turn drives up property values. This phenomenon is a characteristics of cost-push inflation. More than 60% of housing construction costs are allocated to materials, mostly imported, while the remaining 40% covers labour and other expenses. As a result, there may be fewer real estate development projects, delayed completion of ongoing projects, increased demand for existing properties, and a surge in housing deficits. 

While some developers have found ways to navigate the impact of inflation, it remains a concern for some. I once posed a question to a developer about how they would hedge against rising inflation and the devaluation of the the currency. Their response was straightforward; they stock up on materials, particularly those with high costs, well in advance of construction. This proactive approach enables them to mitigate potential price increases. However, labour costs cannot be paid ahead of time and are faced head-on during construction. Acquiring necessary materials before 

commencing construction is the best strategy developers can employ to protect their projects against inflationary pressures. 

In Nigeria, the pressing issue of a 28-million unit housing deficit, coupled with a soaring inflation rate of 22.22%, has led to skyrocketing property values and rental costs. The reduction in the value of the local currency, the Naira, further compounds the challenges, resulting in significant setbacks in the delivery of affordable housing. This scenario poses a looming threat for low to middle income earners who may struggle to acquire properties or meet future rental obligations. The impact of inflation extends across the real estate market, adversely affecting retired individuals or those on fixed incomes who find their purchasing power diminished as prices continue to rise. 

In Nigeria, the history of price inflation for personal gain is well-known, some Nigerians do inflate prices of commodities and services for personal gains. This is a problem that has been exacerbated by the country’s economic challenges, such as the high cost of living and the devaluation of the Naira. There are a number of reasons why Nigerians might inflate prices. Some do it simply to make a profit, while others do it to make up for the high cost of doing business in Nigeria. Still others do it because they know that they can get away with it. The slightest disruption, whether from internal or external factors, often leads to inflated prices for goods and services. 

Currently, the country is facing an economic shock triggered by a sudden and significant 170% increase thereabout in petroleum pump prices. The announcement of the petroleum subsidy removal by President Bola Ahmed Tinubu during his inauguration has caused varying increase in prices across different regions, with prices soaring from N198 to N540 per liter. One immediate consequence of this economic shock has been felt through soaring transportation costs, which will subsequently drive up commodity prices. 

As highlighted above in a study by Babalola and Salau (2020), petroleum pump prices have a notable influence on the consumer price index, and this indirectly affects the real estate market in terms of sales and rent prices and the construction sector in terms of high construction materials. We are already witnessing this effect, and it’s anticipated that more individuals will struggle to afford decent housing. To illustrate, a friend recently shared his experience of renting a two-bedroom bungalow in Lugbe, Abuja. Initially priced at N800,000, the rent skyrocketed to N1.5 million—an alarming 87% increase. This occurred even before the announcement of the petroleum subsidy removal and subsequent fuel price hike. Such an exorbitant surge in rent is unquestionably unreasonable. As a society striving for progress, we must exercise caution when it comes to adjusting prices for essential commodities to mitigate inflation, particularly those essential for basic human needs like food, shelter, and clothing. 

In a study conducted by Omoniyi, Obaka and Olabode (2022) to assess the effects of Inflation on property ownership in Nigeria by analyzing time series data of Home-Ownership Rate (HOR), Inflation Rate (INF), Per Capita Income (PCI), House Price Index (HPI), and Public Housing Spending dated from 1999 to 2021. The study found that rate of home ownership in Nigeria for the time period was found to be negatively and significantly impacted by the inflation rate, this implies that a rise in the general price level will adversely affect home ownership in Nigeria. 

FACTORS THAT CAUSES INFLATION IN NIGERIA 

The following are some of the factors that causes inflation in the country, Nigeria. 

Currency Devaluation. 

Nigeria’s dependence on imported goods and services, coupled with a fluctuating exchange rate, makes currency devaluation a potent factor contributing to inflation. When the Naira weakens against other 

currencies, it takes more Naira to purchase the same amount of foreign goods. This results in an overall increase in prices across the economy, including real estate. 

Increase In The Cost Of Producing Goods And Services 

A surge in production costs, influenced by factors such as fuel prices, transportation expenses, and raw material costs, can trigger inflationary pressures. Businesses often pass these increased costs on to consumers, affecting the affordability of homes and commercial properties. 

Government Policies 

Government policies and decisions wield tremendous influence over inflation rates. Monetary policies, fiscal measures, and regulatory changes can either alleviate or exacerbate inflation. For example, the removal of subsidies on essential commodities can lead to rapid price increases, impacting the real estate market. 

EFFECTS OF INFLATION ON REAL ESTATE 

Now that we’ve examined the causes of inflation, let’s explore how it directly impacts the real estate sector in Nigeria. 

Decrease In The Value Of Money 

Inflation reduces the purchasing power of money. Put simply, ₦100,000 today won’t buy as much as it would have a year ago. This is a critical concern for prospective homebuyers and investors in real estate, as it means their savings or investments may not stretch as far as they hoped. 

As a result, individuals and investors find it challenging to preserve their wealth through savings, prompting them to seek alternative investments. Real estate, historically seen as a hedge against inflation, becomes an attractive choice. 

Increase In The Price Of Property 

Inflation also leads to an increase in the price of property. When demand for real estate exceeds supply, property values soar, making it harder for average Nigerians to afford homes. 

Increase In The Cost Of Building Materials And Labour 

Additionally, the cost of building materials and labor also rises, increasing construction expenses and ultimately the price of homes and offices. 

STRATEGIES FOR REAL ESTATE INVESTORS 

Amidst these challenges, there are strategies for real estate investors to navigate inflationary periods successfully. 

Diversification And Hedging Strategies 

Diversification of investments across different asset classes can help spread risk, thereby reducing the effect of inflation on real estate investment. Investors can also consider indexed rental agreements that adjust rents according to inflation rates, ensuring a steady income stream. 

The Long Term Outlook 

The long-term outlook for real estate investments in Nigeria remains promising, as the growing population and urbanization continue to drive demand for housing and commercial spaces. 

PREDICTIONS FOR THE REAL ESTATE SECTOR IN NIGERIA CONSIDERING INFLATION 

Predicting the future of Nigeria’s real estate sector in the context of inflation requires a cautious approach. Given the historic volatility of Nigeria’s economy, it’s likely that inflation will continue to be a significant factor. 

In the short term, we can expect fluctuations in property prices and demand to be driven by inflationary pressures. However, in the long term, real estate will serves as a hedge against inflation, so the sector will likely remain attractive for investors. 

POTENTIAL OPPORTUNITIES AND CHALLENGES 

Opportunities 

– Rental income can provide a hedge against inflation for property owners. 

– Affordable housing projects may gain prominence as demand for cost-effective housing rises. 

– Real estate investment trusts (REITs) could offer diversification options for investors. 

Challenges 

– High inflation can erode the purchasing power of potential buyers, reducing property sales. 

– Financing challenges may arise due to interest rate hikes to combat inflation. 

– Political and economic instability could deter foreign investment. 

RECOMMENDATIONS FOR STAKEHOLDERS: 

1. Government: The government should Implement policies to stabilize the economy and control inflation, encourage affordable housing initiatives to cater to a broader segment of the population and facilitate foreign investment by ensuring a stable business environment. 

2. Investors: Investors should Diversify portfolios to include inflation-resistant assets like real estate, monitor inflation rates and adjust investment strategies accordingly and collaborate with local authorities for compliance and risk mitigation. 

3. Real Estate Developers: Property evelopers should Focus on affordable housing projects to meet the evolving market demand, consider alternative construction methods to reduce costs and explore partnerships with financial institutions to offer favorable financing options. 

CONCLUSION 

Inflation remains a critical factor influencing Nigeria’s real estate sector. While short-term challenges are posed by fluctuations in property prices and demand, the long-term prospects for real estate as an inflation hedge are positive. 

The impact of inflation on Nigeria’s real estate sector is complex, with both challenges and opportunities. It’s crucial for stakeholders to remain adaptable, stay informed about economic trends, and collaborate to ensure the sector’s resilience 

Additionally, by addressing the causes and effects of inflation, Nigeria can aim for a stable and inclusive economy where affordable housing remains accessible. It is through strategic efforts that we can navigate the complexities of inflation and promote sustainable economic growth and prosperity for the nation