NON-STABILITY OF THE EXCHANGE RATE AND ITS IMPACT ON REAL ESTATE IN NIGERIA

ESV ( MRS) PATIENCE AGUEBOR ANIVS.

ABSTRACT

The exchange rate plays a crucial role in shaping the economic landscape of a

country. Nigeria, like many other developing nations, has experienced significant

fluctuations in its exchange rate over the years. This paper investigates the nonstability

of the exchange rate and its impact on the real estate sector in Nigeria.

The paper examines the relationship between exchange rate volatility and real

estate market dynamics, including property prices, investment patterns, and

market liquidity. It also explores the implications of exchange rate instability on

foreign direct investment (FDI) in the real estate sector. The findings highlight the

need for effective exchange rate management policies to mitigate the adverse

effects of currency volatility on the Nigerian real estate market.

INTRODUCTION

Exchange rates are an important aspect of any economy as they determine the

value of a currency in relation to other currencies. A stable exchange rate is

crucial for the growth and development of an economy, as it helps to promote

international trade and investment. However, when the exchange rate is unstable,

it can have a negative impact on various sectors of the economy, including the

real estate sector. This paper will explore the non-stability of the exchange rate

and its impact on real estate in Nigeria.

EXCHANGE RATE AND ITS INSTABILITY

Exchange rate refers to the value of one currency in relation to another. The

exchange rate can be determined by various factors such as market demand and

supply, political instability, inflation, interest rates, and fiscal policies. When the

exchange rate is stable, it helps to promote international trade and investment as

it provides certainty and predictability for investors. However, when the

exchange rate is unstable, it can lead to uncertainty, volatility, and risk, which

can impact various sectors of the economy, including the real estate sector.

The Nigerian economy has been characterized by a non-stable exchange rate due

to various factors such as low oil prices, political instability, and weak economic

policies. This has led to a significant depreciation of the Naira against major

currencies such as the US dollar, British pound, and euro. For instance, in 2016,

the Naira depreciated by 36% against the US dollar due to the fall in oil prices,

leading to inflation and a decline in economic growth. This non-stability of the

exchange rate has had a negative impact on various sectors of the economy,

including the real estate sector.

IMPACT OF NON-STABLE EXCHANGE RATE ON REAL ESTATE IN

NIGERIA

The real estate sector is one of the major contributors to the Nigerian economy,

accounting for about 7% of the country’s GDP. However, the non-stability of the

exchange rate has had a negative impact on this sector, leading to a decline in

investment and growth. The following are some of the impacts of non-stable

exchange rates on real estate in Nigeria:

1. High cost of building materials: Non-stable exchange rates have led to an

increase in the cost of building materials, as most of these materials are imported.

This has made it difficult for developers to build affordable housing, leading to a

decline in demand for real estate.

2. Reduced foreign investment: Non-stable exchange rates have made it difficult

for foreign investors to invest in the Nigerian real estate sector. The uncertainty

and volatility associated with non-stable exchange rates have made it difficult for

foreign investors to make long-term investment decisions.

3. Reduced property value: Non-stable exchange rates have led to a decline in

property value, as investors are unsure of the future value of their investments.

This has led to a decline in demand for real estate, leading to a decline in

property value.

4. Reduced access to finance: Non-stable exchange rates have made it difficult for

developers to access finance, as lenders are unsure of the value of their collateral.

This has made it difficult for developers to finance real estate projects, leading to

a decline in investment and growth.

IMPACT ON PROPERTY PRICES:

Exchange rate instability in Nigeria can significantly impact property prices.

When a country’s currency fluctuates, it can lead to inflationary pressures,

affecting the affordability and demand for real estate. Here’s a breakdown:

1. Currency Fluctuations and Inflationary Pressures:

A depreciating currency often results in higher import costs for construction

materials and equipment, driving up the overall cost of real estate development.

This cost push inflation can extend to the broader economy, affecting consumer

purchasing power and potentially leading to higher interest rates, which further

impact property affordability.

2. Affordability and Demand:

Currency fluctuations can erode individuals’ purchasing power, making real

estate less affordable for potential buyers. Reduced affordability can lead to a

decline in demand for real estate, affecting both residential and commercial

property markets.

3. Speculative Activities and Investor Behavior:

Exchange rate instability may attract speculative activities in the property market

as investors seek assets that can provide a hedge against currency depreciation.

Speculative bubbles can form, driving property prices to unsustainable levels,

which poses risks when the bubble bursts.

4. Role of Investor Behavior:

Investors might engage in short-term buying or selling based on anticipated

currency movements rather than fundamental property value, amplifying

market volatility. The psychological impact of exchange rate uncertainty can lead

to cautious investor behavior, influencing market dynamics.

CASE STUDIES

Oil Price Fluctuations (2014-2016): The decline in oil prices during this period

led to currency devaluation in Nigeria, impacting the real estate market as

construction costs surged, affecting property development and affordability.

Global Economic Crisis (2008): The global financial crisis and subsequent

exchange rate fluctuations influenced investor confidence and contributed to a

slowdown in Nigeria’s property market.

Exchange rate volatility in Nigeria can significantly shape investment patterns in

the real estate market, particularly concerning foreign currency exposure,

investor sentiment, and decision-making processes. Here’s a detailed analysis:

1. Foreign Currency Exposure and Investment Patterns:

Construction Costs: Exchange rate volatility impacts the cost of imported

construction materials, affecting the overall expense of real estate development.

Financing: Foreign investors, especially those financing projects in foreign

currencies, face increased costs when the local currency depreciates. This can

influence investment decisions and project feasibility.

2. Investor Sentiment and Decision-Making:

Risk Aversion: Exchange rate volatility can lead to heightened risk aversion

among investors. Uncertainty about currency movements may make investors

more cautious and conservative in their real estate investment decisions.

Speculative Behavior: Some investors may engage in speculative activities, trying

to capitalize on expected currency movements. This behavior can introduce

additional volatility to the real estate market.

3. Exchange Rate Risk and Decision-Making:

Hedging Strategies:Investors, especially those with significant foreign currency

exposure, may adopt hedging strategies to mitigate exchange rate risk. This

involves using financial instruments to offset potential losses due to currency

fluctuations.

Impact on Financing Terms: Exchange rate risk can influence the terms of

financing. Lenders may adjust interest rates or demand additional risk premiums,

affecting the overall cost of capital for real estate projects.

4. Implications for Capital Flows:

Foreign Direct Investment (FDI): Exchange rate volatility can impact the flow of

FDI into Nigeria’s real estate sector. Foreign investors may be deterred by the

uncertainty surrounding currency values, affecting the overall attractiveness of

the market.

Portfolio Investment: Exchange rate fluctuations influence the returns and risks

associated with real estate as a portfolio investment. Investors may reallocate

their portfolios based on perceptions of exchange rate stability.

5. Domestic Investor Decision-Making:

Purchasing Power: Local investors are also affected as exchange rate volatility

can erode their purchasing power. This influences their ability to afford real

estate, impacting demand in the domestic market.

Asset Allocation: Domestic investors may reconsider their asset allocation,

potentially shifting towards investments perceived as less vulnerable to exchange

rate fluctuations.

6. Government Policies and Interventions:

Policy Responses: The Nigerian government’s interventions to stabilize the

exchange rate play a crucial role in shaping investor confidence. Clear and

effective policies can mitigate the negative impact of volatility.

Regulatory Environment: The regulatory environment, including measures to

manage exchange rate risk, can influence investor perceptions and decisions in

the real estate sector.

CONCLUSION:

Exchange rate volatility in Nigeria has far-reaching effects on the real estate

market, impacting construction costs, financing, investor sentiment, and capital

flows. The ability of investors, both domestic and foreign, to manage and navigate

these challenges is crucial for the sustained development and stability of the real

estate sector in the country.

This paper has explored the non-stability of the exchange rate and its impact on

the real estate sector in Nigeria. The analysis reveals several key findings:

First, the high cost of building materials due to non-stable exchange rates has

made it challenging for developers to build affordable housing, resulting in a

decline in demand for real estate.

Second, reduced foreign investment has been observed due to the uncertainty

and volatility associated with non-stable exchange rates, limiting the potential for

growth and development in the real estate sector.

Third, the fluctuating exchange rates have led to a decline in property values,

causing financial losses for investors and hindering the overall health of the real

estate market.

Lastly, limited access to finance has been a significant challenge in the real estate

sector, as non-stable exchange rates make it difficult for developers to secure

funding for their projects.

In light of these findings, it is crucial for policymakers and stakeholders in the

Nigerian real estate market to recognize the importance of effective exchange

rate management policies. The following recommendations are proposed:

1. Implement policies that promote exchange rate stability: Policymakers should

strive to maintain exchange rate stability through sound monetary and fiscal

policies. This will provide certainty and predictability for investors, encouraging

both domestic and foreign investment in the real estate sector.

2. Diversify the economy: Overreliance on oil has contributed to the vulnerability

of the Nigerian economy to exchange rate fluctuations. Policymakers should

prioritize economic diversification to reduce exposure to external shocks and

enhance the stability of the exchange rate.

3. Enhance access to finance: Efforts should be made to improve access to finance

for real estate developers. This can be achieved through the establishment of

dedicated funds, incentivizing lenders, and implementing supportive policies that

reduce financing barriers for real estate projects.

4. Encourage foreign investment: Policymakers should create an enabling

environment that attracts foreign investors to the Nigerian real estate market.

This can be achieved through investor-friendly regulations, tax incentives, and

measures to reduce the risks associated with non-stable exchange rates.

In conclusion, effective exchange rate management policies are essential to foster

stability and mitigate the adverse effects of currency volatility on the real estate

sector in Nigeria. By implementing the recommended measures, policymakers

and stakeholders can create a favorable environment for real estate investment,

promote growth in the sector, and contribute to the overall economic

development of the country