According to Walgenbach.P, inflation is a general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money. Economists believe that high levels of inflation and hyperinflation—which have severely disruptive effects on the real economy—are caused by persistent excessive growth in the money supply.
The impact of inflation may seem small in the short term, as the prices of individual goods and services do not tend to skyrocket immediately, but over the course of years and decades, inflation can drastically erode the purchasing power of one’s savings. You shouldn’t think of inflation in terms of higher prices for just one item or service, however. Inflation refers to the broad increase in prices across a sector or an industry, like the automotive or energy business—and ultimately a country’s entire economy. This piece we will be exploring the effect high interest rates have on real estate in Lagos.
To calculate inflation in Nigeria, the Consumer Price Index (CPI) is used, the CPI measures the change over time in prices of 740 goods and services consumed by people for day-to-day living. The index weights are based on expenditures of both urban and rural households in the 36 states.According to Trade Economics, Nigeria’s annual inflation rate accelerated for the third straight month to 16.82% in April of 2022, from 15.92% in the prior month. It was the steepest inflation rate since last August, driven by prices of food and non-food products.
Inflation is one of the challenges facing property values in urban areas around the World. The first is through increased costs: the cost of wages for construction labor rises, the cost of construction material costs rises and the cost of land also rises.
Inflation has 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.
Inflation also has impacts on how much is charged for rent. When landlords rent housing units, they consider recent inflation rates as well as expected inflation rates over the terms of rental contracts. They increase the amount they charge as rent 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. Thus, inflation impacts house prices through increased rents.
As mentioned above, one of the key ways inflation affects the real estate market is through the rising costs of building materials. Building materials and labour costs have once again taken a leap in the real estate sector following rising inflation and exchange rate in the economy, raising fears among prospective builders of even harsher times ahead. Manufacturers are passing the rising cost of raw materials to their customers, adding to concerns that inflation, which has continued to rise, may put further pressure on housing. According to the Guardian, construction materials such as cement, steel and finishes and labour have experienced a significant increase in their prices, leading to a rise in development costs of commercial high rises, offices and other buildings.These rising prices could force developers to either raise prices just as drastically or source for inferior building materials which can have severe consequences.
To recap, inflation affects all sectors of the economy and real estate is not immune to this. As prices of pretty much everything in a country increases, from raw materials, to even food commodities, the cost of living increases meaning workers also need to be paid more, this makes it a lot more expensive to build. In order for developers to make their profit these costs need to be passed on to the consumer.
