Since Covid-19 reared its ugly head, there have been additional consequences that have emerged that have directly affected the Nigerian Real Estate scene. Our recent article on the Nigerian Real Estate Sector – post Covid, examined the outlook and performance of the sector and what we could expect in the near future; while this piece will examine how the increasing rate of inflation will impact the market and what can be done to brace ourselves from this impending circumstance.
According to our friends at Naira Metrics, Nigeria’s rate of inflation hit a 27 month high in July when it soared to 12.82% from its previous high in March 2018 when it was recorded at a whopping 13.34%. Inflation has been rising for 11 straight months in the country and this has compounded the existing struggles related to Covid-19, like unemployment, lower/slashed wages, and decreased public services.
How Does Inflation Effect Real Estate?
When we normally think of inflation, we usually notice price increases for the everyday commodities and supplies that we purchase, ie food, clothing, fuel and, supplies for home and school. Inflation also impacts other parts of the economy.
In basic terms, “core” inflation covers everything outside of food and agricultural products, such as car parts, pharmaceutical goods, construction and transportation products, and more. Food inflation as the name implies regards all food products – and we tend to “feel” inflation here first.
For real estate, we can see the effects in several ways. Since materials and construction supplies will be higher, we can then be assured that the cost of building houses will go up, and those increases will be directly passed on to the end consumers – me and you.
Rents will also soar. No one is spared from inflation, but those on fixed and limited incomes the impact is greater. Not only do we have to pay higher prices for our tomatoes and yams, but our landlords will be licking their lips, waiting to increase their rents at their earliest opportunity.
The cost of borrowing goes up. Not that mortgages are easy and readily available in Nigeria (but they need to be), in the event that you are able to obtain a mortgage, the rates will be higher and you will end up paying more in the long run.
Are There Any Pros To Inflation For Real Estate?
The main “pro” if you will, for inflation would be that overall property values will increase, thus benefiting land and property owners. As the cost to construct and supply housing to the market increases, so does the value of those houses and the real estate surrounding.
Landlords will also see positive results (usually) – they will be getting higher rents, and their property will appreciate in value – in theory.
Protecting Yourself From Inflation
Unfortunately, there is not a foolproof method to stave off the side effects of inflation. The best thing the common man can do is try to keep your employment, save as much money as possible and look for other streams of income to sustain your family.
For others with more substantial means – investing is a good bulwark against inflation if done right. By investing in “real assets” i.e. real estate, one can expect to offset inflation by appreciation. When your real estate holding increases in value – this lessens the impact of the current inflation rate.
Be on the lookout for our real estate investing series, which will dive deeper into the benefits and risks of jumping into the real estate investing scene in Nigeria – it will be informative and practical.