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IMPACT OF
INFLATION OF PROPERTY VALUE IN NIGERIA
CHAPTER ONE
1.0
INTRODUCTION
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 homeowners’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. This discourages saving due to the fact
that the money is worth more presently than in the future. This expectation
reduces economy needs a certain level of savings to finance investments which
boosts economic growth.
1.1
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 (1998), 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, 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 rentsminus maintenance costs, taxes, depreciation and so forth).
Thus, inflation impacts house prices through increased rents.
1.2 RESEARCH
QUESTION
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?
2. How does
inflation affect property values?
1.3 AIM AND
OBJECTIVES
The aim of
this study is to examine the impact of inflation on property values in Ilorin,
Kwara State. 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 effects of the inflation on property values.
4. To
recommend probable solutions to the problem.
1.4
JUSTIFICATION OF THE STUDY
Glenn R.
Mueller (1993) examines real estate performance during and low inflation
periods in U.S. The results show that real estate does provide an
inflationhedge. Second, real estate returns are broken down by major property
type categories (office and industrial) to determine if any property type
differences exist. A major difference is found between the inflation hedging
effectiveness
of office and industrial properties. Third, the industrial are further analyzed
in relation to vacancy rates in the two property types. A structural imbalance
in the office market is evidenced by high vacancy rates. Therefore, the
relative impact of vacancy rates upon office and industrial property
performance is examined and found to be a significant factor in explaining
returns,
thus affecting inflation hedging characteristics.
Anari and
Kolari (2002), they examined the long-run impact of inflation on homeowner
equity in South Africa by analyzing the relationship between house prices and
the prices of non-housing goods and services. There are two reasons for this
methodological departure:
(i) The
total return on housing is fully reflected in house prices even when it
cannot be
measured accurately, and (ii) Valuable long-run information can be captured by
using prices rather than using returns, since differencing house prices and
non-housing CPI lead to a loss of long-run information contained in the series,
Moreover, unlike previous studies, to avoid potential bias in estimating how
inflation affects housing prices, we exclude housing costs from our measure of
the consumer price index of goods and services.
Irving
Fisher (1998), 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. The inflation hedging characteristics of property prices
have been examined in both developed and developing countries: Australia (Brown,
1990), Canada (Newell, 1995), New Zealand
(Newell&
Boyd, 1995) and Switzerland (Hoesli, 1994). The purpose of this study is to
examine the impact of inflation on property values. Unlike previous studies,
such an analysis has never been attempted in Kwara State and this is where the
uniqueness of this study lies.
1.5 SCOPE OF
THE STUDY
A study of
an impact of inflation on rental values which will covers all issues relating
to the effect, solution and methods adopted in reducing it impact on the
populace in the study area. It
will cover a
wide range of residential, industrial and commercial properties.
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