THE IMPACT OF INFLATION ON PROPERTY VALUE IN NIGERIA

THE IMPACT OF INFLATION ON PROPERTY VALUE IN NIGERIA

CHAPTER ONE

 INTRODUCTION

1.1       Background of the Study

Inflation is commonly taken to be an appreciation on real value whereas it is an increase in the volume of money and credit leading to a rise in the general level of prices and consequent erosion of purchasing power. Inflation is characterized by a fall in the value of the country’s currency and a rise in her exchange rate with other nation’s currencies. This is quite obvious in the case of the value of the Naira (N), which was N1 to $1 (one US Dollar) in 1981, N100 to $1 in year 2000 and over N128 to $1 in 2003. In 2014 it was N161 to $1, in 2016 it was N 298 and presently it is over N450 to $1. During inflation prices rises and prices of some goods and services rise faster than others while some may remain unchanged at the same time wages and salaries are more or less fixed but the prices of commodities continue to rise. This is evident in the prices of goods and services which has made it almost difficult to an average Nigerian to meet up the basic requirement of a decent livelihood.

The impact of inflation on the value of assets is considered one of the primary financial concerns of long term investors. While actual and expected inflation have slowed considerably since the early 1980’s, concern over future increases is still a consideration for long term investors. Ibbotson and Siegael (1995) conclude that real estate compensates the investor for inflation risk. When real estate is added to a mixed-asset portfolio, the inflation risk of the expanded portfolio is substantially below that the original portfolio (expanded real estate). In recent years, during which we have inflation seen the incidence of inflation falling to low levels and fairly static property markets, the conventional wisdom has means low, or no growth in property values. There are many benefits from investing in property in a low inflation environment and particular risks in investing in a high inflation environment.

The key to understand the impact inflation on property values is found in two factors in particular. Firstly, the benefit from real estate is maintaining a hedge against inflation and over and above that, increasing the purchasing power of capital by having it increase in value ahead of the rate of inflation, any change in value for a given period above or below the rate of inflation is called the “real” growth rate. Parkin, J. Micjeal (1975) Historically Kwara houses prices have increased over the long term at around 10% per annum compound. Inflation during the same period has averaged around 7% per annum growth, that is, the growth above the inflation rate which is increasing the purchasing power of our capital and therefore our “real “ wealth, has averaged around 3% per annum. If in every year inflation was 12% and prices increased by 15% giving us a 3% real increase, this will be telling us that the property market is booming. Chris and Ola (2001) Why then, when inflation is saying 2% and values increases 5%, again giving us a 3% real increases do they adopt a negative view? The result is virtually the same.

The second key to understand the impact of inflation on property values is on the aspect of home owners’ wealth in housing is currently the largest part of Nigeria households’ investment portfolios. After stock prices collapsed in 2009 and mortgage rates hit historically low levels, investment in residential housing picked up. This increase, coupled with higher home prices, boosted household wealth in real estate from $6.6 trillion in 2000 to $10.5 trillion in the second quarter of 2005 and an increase of more than 58 percent. Over the same period, household wealth in corporate equities lost a fourth of its value, falling from $8 trillion to $6 trillion.

Housing price bubbles occur when home prices grow at a rate exceeding the inflation rate in an area, especially the inflation rate for construction materials and labor. In such situations, higher home prices generally reflect increased demand (Chris and Ola, 2001). For world economic markets, Inflation is a fairly new experience as for much of the pre-twentieth century there had been little upward pressure on prices. These limit governments’ abilities. Inflation reflects a situation where the demand for goods and services exceeds their supply in the economy (Hall, 1982). It causes could be triggered by the private sector and the government spending more than their revenues, or by shortfalls in output. Price increases could also be triggered by increases in costs of production. For instance increases in prices of imported raw materials will cause inflation if not managed. Whatever the initial cause, inflation will not persist unless accomplished by sustained increase in money supply. In this case, inflation is monetary phenomenon. But what effect does inflation have on property values. Inflation causes many distortions in the real estate market. It hurts people who are retired and living on a fixed income. When prices rise these consumers cannot buy as much as they could previously. It is on this note that this study seek to examine the impact of inflation on property value in Nigeria.

1.2       Statement Of Problem

Inflation is one of the challenges facing property values any urban areas in the World. The first is through increased costs: higher wages for construction labor, higher construction material costs and higher land prices. When the prices of new houses and old houses are compared, new houses are more expensive on average than old houses, and the price difference to a great extent reflects higher construction labor and material costs. Inflation as affected property values in terms of rent. Irving Fisher (2010), a noted American economist, put forth a theory about the relationship between interest rates and inflation rates that can be applied to housing market rents.

According to Fisher (2010), when lenders loan money, they consider the expected inflation over the term of the loan and add that expected inflation rate to the interest rate they charge. If lenders want to charge 2 percent interest and expect a 3 percent rate of inflation, they charge 5 percent interest on the loan. A similar process takes place in housing markets. When landlords rent housing units, they consider recent inflation rates as well as expected inflation rates over the terms of rental contracts. They increase rents to meet their inflation expectations. Higher rents translate into higher home prices because the price of a home is equal to the present value of future streams of actual or imputed rents (gross rents minus maintenance costs, taxes, depreciation and so forth).

1.3       Aim And Objectives of the Study

The aim of this study is to examine the impact of inflation on property values in Nigeria. To this end, the study shall focus on the following specific objectives;

1. To identify the different types of properties in the study area
2. To identify the types and causes of inflation
3. To examine the impact of the inflation on property values.

1.3       Research Questions

In other to have a deep insight about the impact of inflation on the property values in the study area. The following issues must be properly addressed;

1. What type of properties are in the study area?
2. What are the types and causes of inflation?
3. How does inflation affect property values?

1.4       Significance Of The Study

This research work is significance to the government for decision making, student, practicing estate surveyors and valuers, investors, researcher etc as the findings of the study will enable them make informed decision of the impact of inflation on property value in Nigeria.

            In addition, the study will enable property developer know how to go about their investment in real estate despite the challenges of inflation and rising cost of building materials and construction in general

Lastly, this research work will help to determine the effect of inflation and other factor influencing property value in Nigeria which is an essential pre-requisite to successful property investment as well as stimulating interest in the students to carry out further research on the topic.

1.5       Scope Of The Study

The study addresses the impact of inflation on property value in Nigeria. The scope of this research is restricted to Nasarawa town in Nasarawa State, this is to enable the research have an indepth evaluation.

Some obstacles encountered in the course of carrying out this research were as follow:

• Time factor was the major constrain couple with multiplicity of other classroom work and lecture requirement were a set back to the research.
• Un-cooperating attitude of some respondents as they were busy to attend to the researcher.
• In accessibility of adequate information from research respondent due to illiteracy among them, some find it difficult to understand some question they were asked.
• Finance was also a limiting factor in the course of the research.

1.6       Definition of Terms

Inflation: Inflation is the decline of purchasing power of a given currency over time.  The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.

Property: According toCollins dictionary a property is a building and the land belonging to it.

Property Development: (The Collins English Dictionary, 2014) This can be define as an improvements in land.

Value: This a monetary worth of an asset, business entity, goods sold, service rendered, or liability.

Rental Value: Oxford Advance Learner’s Dictionary (6th edition) define is the fair market value of a property.

Property Value: Property value refers to the worth of a piece of real estate based on the price that a buyer and seller agree upon. According to economic theory, the value of a property converges at the point where the forces of supply meet the forces of demand.

1.7       Historical Background Of The Study

Nasarawa local government area of Nasarawa state was established in 1976 during the military regime under the leadership of General Muhammed administration.

The local government are covers an estimated area of 154 square kilometers.

It has thirteen (13) wards and consists of six departments which is responsible for carrying out the activities of personnel, social, primary health care, agriculture and natural resource. The state derives it name from the local government of Nasarawa. The local government head quarter is between latitude 8.8 degrees east of Karu. They also share boundary with Toto local government area, Federal Capital Territory and Benue.

The local government has a population of 60,210 by the 2006 census through other contest in the law court. It has multiethnic like Afo, Agatu, Gwan-dara etc.

TOPOGRAPHY

From an elevation of about 1,500 to 1,000 meters, the Nasarawa descends in a series of step to the wide Benue through the northern part of the low lands forms a continuous plain about 50 kilometers wide which gradually slopes from the foot of the Nasarawa towards river Benue.

The western part of the northern low land is an area of transaction, only part of it can be regarded as belonging to the Benue plains.

CLIMATE

Nasarawa has two seasons, which includes:

1. A dry season without or with little rain from November to March.
   1. Wet season from April to October

The main annual rainfall is 1-300km

THE PEOPLE AND THEIR OCCUPATION

The major ethnics groups are Hausa, Afo, Gwari, and Gwandara. The earliest inhabitants were predominantly farmers and some of them are fishermen they use river for their routine fishing.

Besides, they were also engaged in rearing of cattle, black dying and weaving. Meanwhile, trading is one of their major occupation as a result of the establishment of the Federal Polytechnic.