Impact Of Inflation Of Property Value In Nigeria
This research work examines Inflation on property value which is one of the most researched concepts, yet there is always a noisy room when it is discussed. Most empirical literature suggests that excessive inflation is harmful to economic growth. The emphasis on ‘excessive’ implies that some level of inflation would have a positive association with growth. Considerable study has gone into determining the points of inflexion where inflation becomes harm.
We found that inflation do affect property values in Illorin and that higher construction material costs and higher land prices inflates property prices
1.1 Background of the Study
Hitherto, real estate property was generally seen as a legacy a parent bequeaths to the offspring. However, with the realization that real estate is a major source of capital appreciation and a good hedge against inflation, the real estate market is coming close in popularity and importance to the money and capital markets. In particular, as Nigeria stands on the threshold of establishing a secondary mortgage market to mobilize capital market finance for the primary market, the need to assist real estate professionals with information on the influence of property features/characteristics on residential property values cannot be over stressed. Although several studies have focused on investment in the money and capital markets in Nigeria, so much cannot be said of the real estate sector (Eriki & Udegbunam, 2008). In the advanced economies however, the use of artificial neural networks (ANNs) in real estate valuation and other fields such as tax assessment, medical diagnosis, bank risk analysis, stock analysis & control, traffic control is now predominant (Moral- Esperanza, 2004). Indeed, artificial intelligent systems, particularly artificial neural networks have been shown to produce more accurate estimates of property values than the multiple regression analysis and other hedonic methods in many countries of the world Australia (Kershaw & Rossini, 1999); U. K. (Wilson, et al, 2001); U.S.A. (Lokshina, et al, 2003); Spain (Mora-Esperanza, 2004); Finland (Taffese, 2007); Greece (Pagourtizi, et al. 2007); and Nigeria (Eriki & Udegbunam, (2008). However, in the extant literature, only a few of the works have gone beyond mere demonstration of the use and capability of the ANNs to actual valuation of residential houses; and many of such works employed single city data. It is against this background, that this study examines the determinants of real property values using residential housing data from two major cities in Nigeria by means of artificial neural networks. Parts of macroeconomic objectives of any Inflation are to achieve price stability and economic growth. Inflation is seen as persistent and appreciable rise in general level of price in an economy (Jhingan 2009). Aminu and Anono (2012), opined inflation as a persistence rise in the general price level of broad spectrum of goods and services in a country over a long period of time, they attributed inflation to a popular say that inflation is too much money chasing too few goods. The structuralist argued that inflation is crucial for economic growth while the monetarist posit that it is harmful to economic growth (Doguwa, 2012). Nell (2000) opined that single – digit inflation may be beneficial, on the other hand, double digit inflation imposes slower growth.
Inflation is seen as a continuous and rapid rise in the price level. It is referred to as the tenacious and the significant rise in the overall level of prices (Jhingan, 2002). Ekpenyong, et. al., (2014) was of the opinion that, not all increase in price of goods and services in an economy can be referred to as inflation but only increase in price level that is enduring, continuous and affect all commodities in the economy. The Central Bank of Nigeria has used diverse approaches in operationalizing the monetary policy. The Central Bank of Nigeria (CBN) from the beginning employs two monetary policy framework viz: exchange rate targeting and monetary targeting. The first was adopted during the period of 1959 and 1974, while the later has been in use from 1974 to date. The attraction on the usage of monetary targeting as monetary policy framework was based on its capacity in enabling the CBN handle domestic issues, and ability to immediately signal monetary policy stance. But in recent time, this strategic approach has been criticized on the basis of poor performance and it not favouring the adoption of monetary and economic integration policy. Therefore, this gives credence to inflation targeting as an alternative option to be used by the monetary authority for macroeconomic management (Awogbemi and Taiwo, 2012). In addition, recent study by IMF stand on non-industrialized countries shows that, inflation targeting was widely accepted by more than half of the participating countries IMF (2008). Hence, we cannot without any caution exclude Nigeria from this group as one of the priorities of the CBN is using monetary policy tools in maintaining single digitization and inflation targeting is a monetary policy framework directed at achieving the primary goal of price stability (CBN, 2011). Hence, studying the direction of a inflation is crucial for the reason that it permits us to better understand the role of monetary authority in its control. Every developing economy engages in ensuring sustainable economic growth which is driven by stable macroeconomic variables most especially low levels of a inflation. Several studies in the past have established the relationship between inflation and economic growth. Studies like Fischer (1993), Bruno and Easterly (1998), Kremer, et. al( 2009) are of the opinion that increased continuing levels of inflation affects economic growth negatively.
Others, such as De Gregorio (1993), Hedgimichael, et. al., (1995), Khan and Senhadju (2000) maintained that low rates of inflation moves in the same direction with high level of economic growth. Hence, it can be concluded with the above assertion that, every developing economy must ensure keeping her inflation at a low rate to sustain economic growth. Anochiwa and Maduka (2015) said ability to manage the growth of inflation to single digit may be an important factor to accelerate economic growth. Too much money in circulation, increase production cost, declines in exchange rates, decrease in the availability of limited resources such as food or oil etc. are the causes of inflation. Inflation is a sign that the economy is growing, but excess economic growth may be detrimental as it can lead to hyperinflation, at the other extreme, an economy with no inflation has essentially stagnated. The right level of economic growth, and thus the right level of inflation, some were in the middle. Creeping or mild inflation can be viewed as having favourable impacts on the economic growth. On the other hand, zero inflation is harmful to other sectors in the economy with falling price, profit, and employment. In general, galloping inflation has unprecedented effects on an economy because it distorts and disrupts the price mechanism, and discourages investment and savings leading to the break down on morals (Hossain et al., 2012). Nigeria is currently experiencing high inflation.
Nigerian inflation rate grew to 13.7 percent in April 2016, 0.9 percent higher than the previous month level of 12.8 percent. The cost-push inflation is driven primarily by the severe scarcity of petroleum products which had forced increases in transportation cost and consequently, arbitrary increases in cost of all other commodities and services consistently for several months. Inflation has further increased to 17.6 percent in august, a fresh 11-year. 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. 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.
1.2 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 (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.
1.3 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;
- To identify the different types of properties in the study area
- To identify the types and causes of inflation
- To examine the effects of the inflation on property values.
- To recommend probable solutions to the problem.
1.4 Research Hypothesis
- Hi: Inflation affects property values in Illorin
- Ho: Inflation does not affect property values in Illorin
- Hi: Higher construction material costs and higher land prices inflates property prices.
- Ho: Higher construction material costs and higher land prices does not inflate property prices.
1.5 Significance 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 inflation hedge. 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.
1.6 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.
1.7 Definition of Terms
Operational terms were defined in this study thus:
This energy that is produced by mechanical, electrical, or other means and used to operate a device.
A power outage (also called a power cut, a power out, a power blackout, power failure or a blackout) is a short-term or a long-term loss of the electric power to a particular area. There are many causes of power failures in an electricity network.
1.8 Organization of the Study
This research work is organized in five chapters, for easy understanding, as follows
- Chapter one is concerned with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
- Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
- Chapter three deals on the research design and methodology adopted in the study.
- Chapter four concentrate on the data collection and analysis and presentation of finding.
- Chapter five gives summary, conclusion, and recommendations made of the study.
Summary, Conclusion and Recommendation
It is important to reiterate that the objective of this study was the effect of inflation on property value in Nigeria.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in evaluating examine the effect It is important to reiterate that the objective of this study was the factors affecting inflation on property value in Nigeria.
This study was undertaken to examine the inflation on property value in Nigeria. It is important to reiterate that the objective of this study was the factors affecting power outages in Nigeria. The study opened with chapter one where the statement of the problem was clearly defined. The study objectives and research hypotheses were defined and formulated respectively. The study reviewed related and relevant literatures. The chapter two gave the conceptual framework, empirical and theoretical studies. The third chapter described the methodology employed by the researcher in collecting both the primary and the secondary data. The research method employed here is the descriptive survey method. The study analyzed and presented the data collected in tables and the hypotheses were tested using the chi square to test hypothesis. While the fifth chapter gives the study summary and conclusion.
5.3 Conclusion and Recommendations
This research work examines the inflation on property value in Nigeria.
This research work examines Inflation on property value which is one of the most researched concepts, yet there is always a noisy room when it is discussed. Most empirical literature suggests that excessive inflation is harmful to economic growth. The emphasis on ‘excessive’ implies that some level of inflation would have a positive association with growth. Considerable study has gone into determining the points of inflexion where inflation becomes harm We found that inflation do affect property values in Illorin and that higher construction material costs and higher land prices inflates property prices.
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