The Impact Of Interest Rate On Housing Finance In Nigeria
The Impact Of Interest Rate On Housing Finance In Nigeria
Abstract
Housing remains to be a critical and essential sector for nearly all economies around the world as it has connections with several other sectors. Growth in the housing sector can directly lead to employment creation, growth of GDP and a change in the consumption patterns of the economy. Despite the real estate sector being one of the major sectors in Nigeria’s economy, it has largely been affected by erratic Interest Rate. The researcher sought to show case this outcome by demonstrating how Interest Rate affected the financing of housing properties in the period of study. This study employed a descriptive survey to ascertain and describe the features of the variables of interest in a situation. The study population comprised of all the housing real estates in Nigeria. This study employed secondary data, where data on Financing of Housing Properties was extracted from the Hass Property Index, while data on Interest Rate, money supply and GDP growth was extracted from the CBN. The study employed quarterly data for a period of 5 years from 2013-2018 2013 to 2018. A simple regression model was used to analyze the data. The findings established that the relationship between Interest Rate and the housing property index is negative and insignificant while the relationship between economic growth and the housing property index is negative and significant. The findings indicate that the correlation between the housing property index and money supply is positive and significant while the relationship between inflation and the housing property index is positive and insignificant. The study concluded that the levels of Interest Rate have no significant effect on financing of housing properties. The study also concluded that financing of housing properties are significantly affected by inflation, economic growth and money supply. The study recommended that the government through the central bank of Nigeria should institute policies to mitigate the effects of inflation, economic growth and money supply on financing of housing properties in Nigeria.
Table of Contents
Chapter One:
Introduction
- Background of the Study
- Financing of Housing Properties
- Interest Rate and Financing of Housing Properties
- Financing of Housing Properties in Nigeria
- Research Problem
- Research Objective
- Research Question
- Significant of the Study
- Scope of the study
Chapter Two:
Literature Review
- Introduction
- Theoretical Review
- Portfolio Theory
- Loanable Funds Theory of Interest Rate
- Efficient Market Theory
- Empirical Review
- International Studies
- Local Studies
- Determinants of House Prices
- Economic Growth
- Money Supply
- Inflation
- Population Growth
- Conceptual Framework
- Summary of Literature Review
Chapter Three:
Research Methodology
- Introduction
- Research Design
- Target Population
- Data Collection
- Diagnostic Tests
- Data Analysis
- Tests of Significance
- Analytical Model
Chapter Four:
Data Analysis, Results and Interpretation
- Introduction
- Descriptive Statistics
- Correlation Analysis
- Regression Analysis
- Model Summary
- Analysis of Variance
- Regression Coefficients
- Interpretation of the Findings
Chapter Five:
Summary, Conclusion and Recommendations
- Introduction
- Summary
- Conclusions
- Recommendations
- Limitations of the Study
- References
Chapter One
Introduction
Background of the Study
Housing remains to be a critical and essential sector for nearly all economies as it has connections with several other sectors. Growth in the housing sector can directly lead to employment creation, growth of GDP and a change in the consumption patterns of the economy. The demand for houses has increased substantially amongst individuals and households due to the increased levels of income and wealth. Houses are mostly supplied by builders, property developers and the various construction companies countrywide, these is in both the public and private sectors when analyzed in the context of supply and demand for housing units, particularly due to the scarcity of land in the urban areas (Singh et al., 2012).
Due to the rapid economic development in the last few years, the demand for housing housing has increased significantly in most urban areas in Nigeria, leading to dramatic increase in the prices of houses both in small towns and major cities, but depending on specific locations. Land and house prices are escalating and hence making it difficult for most Nigerians including the middle-class to own a house. The economic theory states that, house price changes are characterized by the demographics and economics of a given region, such like population, inflation, GDP, housing finance, and the construction cost (Ong, 2013).
The real estate industry, much like any other industry, is constantly evolving. The key drivers for this sector range from the prospect for profitability to the changing face of building space complimented by the uncertainties encircling the sector.
However, the developers are unable to keep up with the rising demand for both housing and commercial property brought about by the increased rural-urban migration in the major towns. To some extent, this inability can be blamed on the absence of proper finance mechanisms, high Interest Rate, unavailability of loan capital, challenges in the supply of building materials, low-income levels, escalating costs of raw materials for building and land acquisition problems. Although the demand for affordable modern housing in Nigeria is insatiable, the developers in this sector continue to experience a depressed sale-to-rental ratio on the houses they construct. The real estate developers face numerous challenges which including but not limited to high Interest Rate, low mortgage uptakes and high risks of default. This makes it difficult for them to sell off properties and raise capital to build new developments (Kimani and Memba, 2017).
Financing of Housing Properties
House prices, are just like the prices of many other assets and can be established by discounting all the expected future cash flows. When lending institutions offer loans at a lower rate, they increase the accessibility to credit hence encouraging current and future economic activities. The rate of interest has a profound influence on the prices of real estate properties, and as a result, most potential investors in this sector concentrate on the volatility of Interest Rate. As they also influence capital accessibility and demand for investment. The inaccessibility of capital influences the demand and supply for property, hence, it affects the overall property prices (Ong, 2013).
Real estate markets are diverse, with a chain of geographical and sectoral sub-markets that lack a central trading market. The pricing process is customarily subject to negotiation while the market is characterized by large transaction costs. The present value of an existing asset (apartment) should supposedly be equivalent to net present value of its future cash inflows (rents), which depend on the anticipated real Interest Rate, expected growth in income, taxes, and other structural factors. In a competitive market, a balance between the demand and supply should determine the price. The ultimate equilibrium price is reached at the point where replacement cost is equal to the stock of existing real estate (Hilbers et al., 2001).
A growth in house prices signifies an increase in demand and hence a market growth. Several factors drive the demand in the real estate market. As the demand for housing real estate goes up, the prices also go up and as a result, most investors would desire to increase their investment in real estate to satisfy the demand and thus it can be concluded that the real estate demand has a direct proportionality to real estate investments, and real estate prices. Many families in Nigeria consider a house as a major investment representing over 30% of their wealth. Thus, house pricing is of paramount importance to them. Other parties who may be interested with the house prices include the real estate developers, banks or lending institutions and policy makers (Karoki, 2013).
Interest Rate and Financing of Housing Properties
The real estate markets can highly be impacted by the volatility in Interest Rate. The ability of a person to purchase a housing property can be greatly affected by the interest rate volatility. This is because, when rates of interest drop, the overall cost of buying a house on mortgage is significantly reduced, consequently increasing the demand for real estate property, thus escalating the prices. On the contrary, a raise in the interest rate automatically increases the cost of acquiring a mortgage, consequently reducing the demand for real estate, and thus lowering their prices. Low Interest Rate would encourage buyers to acquire more homes as part of the money that would otherwise have been used to pay interest to the lender is available to them.
Such a scenario could attract new buyers into the market, leading to numerous offers/bids on houses and an uptake in the overall prices. The rate of interest has an enormous impact on the purchasing power of an individual to the extent that, a lot of people erroneously believe that the only determining factor in the valuation of real estate is the mortgage rate. Nevertheless, the mortgage rate is simply one of the many factors related to Interest Rate that influence property values. Property prices can be driven in different directions by Interest Rate, since they affect the demand and supply of capital, the required rate of return on investments, and capital flows (Karoki, 2013).
Financing of Housing Properties in Nigeria
The housing sector in Nigeria can be characterized by a lack of reasonably priced and descent housing, widespread and inappropriate houses, including squatter settlements and slums, and a low urban house ownership. The NHCN plays a primary role in the execution of policies and programs relating to housing, through the development of service and site schemes, mortgage and rental housing.
Investment in infrastructure is mainly driven by economic development. In Nigeria, infrastructure and real estate receive the biggest budget allocation. Mortgage financing is mainly provided by the Nigerian financial system through its intermediation role. Despite enormous opportunities in the sector, many people still use household savings to finance their real estate investments, this clearly indicates that funding is a major limitation. Mortgage finance is long-term unlike most other types of credit which are short-term in nature. Therefore, a strong mortgage market is required to satisfy these demands for long- term funding in this sector. The Government is committed to growing the real estate sector, as clearly articulated in the 2010 finance Bill, and the Vision 2030 blueprint. The Finance Bill delineates several measures to encourage the development of the real estate market. Particularly, to enable the construction of sufficient housing to Nigeria’s fast-growing population.(Muriuki, 2013).
Research Problem
The real estate sector is a major sector in Nigeria’s economy. Nonetheless, it has largely been affected by erratic rates of interest. The researcher sought to show case this outcome by demonstrating how Interest Rate affected the financing of housing properties. The construction and purchase of real estate is capital intensive, and most ordinary Nigerians can’t afford, hence they borrow from banks to fund this huge expenditure. The Interest Rate charged by all commercial banks are determined by the real interest rate, which mainly adjusts for inflation. Interest Rate are majorly driven by inflation. The CBN has an obligatory role to supervise all the commercial banks and fix the base lending rate which accommodates all the economic factors. Based on the central bank rate (CBR), commercial banks and other lending institutions can then define their own lending rates or mortgage rates some basis points from CBN’s lending rate (Muriuki, 2013).
Muthee (2012) sought to ascertain the correlation between economic growth and real estate prices in Nigeria. He discovered that there exists a significant connection between house prices and the GDP. Basically, this relationship can be described by the fact that, as house prices drop, people may be less likely to purchase new houses for the fear that prices may continue to drop, subsequently leading to a decline in the demand for construction, mortgage lenders and any activities directly or indirectly related to housing. Oremo (2012) analyzed the role of the government in the determination of the cost of borrowing and how it works towards enhancing the real estate industry. He discovered that both the public and private sectors should collaborate to better the investment atmosphere considering that Nigeria’s annual housing demand is higher than the supply. The government can considerably influence the cost of borrowing through its various actions and policies. The trading of government securities in the financial markets has a substantial effect on the Interest Rate, supply of money, and credit availability. A huge purchase of Coffers by the CBN injects new funds into the banking system, which then increase the amount of money to lend out, thus forcing the Interest Rate to go down.
Many scholars in the developed countries have carried out various research works to determine the effect of Interest Rate on housing real estate properties and found contradicting outcomes which cannot be generalized or hold in all environments. It is for this reason therefore, that the researcher desired to answer some specific questions such as:
– what is the effect of Interest Rate on Financing of Housing Properties in Nigeria, and what is the effect of other macroeconomic factors on the financing of housing properties.
Research Objective
The broad objective of the study is to establish the effect of Interest Rate on Financing of Housing Properties in Nigeria.
Specifically the study will examine:
- Assess the nature of the relationship between Interest Rate and Financing of Housing Properties in Nigeria
- Determine whether or not the relationship between Interest Rate and Financing of Housing Properties in Nigeria is significant
- Examine the impact of economic growth on Values of Housing Properties in Nigeria
- Assess the role of inflation in determining the Values of Housing Properties in Nigeria
Research Questions
The research questions for this study are thus:
- What is the nature of the relationship between Interest Rate and Financing of Housing Properties in Nigeria?
- Is the relationship between Interest Rate and Financing of Housing Properties in Nigeria is significant?
- What is the impact of economic growth on Values of Housing Properties in Nigeria?
- What is the role of inflation in determining the Values of Housing Properties in Nigeria?
Significance of the Study
The study findings will add to the existing body of knowledge in the field of real estate valuation/pricing and form a footing for further research by other scholars in the future. The real estate brokers and agents will also obtain relevant information relating to real estate patterns and thus advise their clients accordingly. The results of this research will remain of foremost importance to the mortgage providers as they would use it to fine tune their loan advancement decisions to the real estate investors. Financial analysts would also obtain necessary information which can help them in advising their clients on matters relating to financial decisions.
The government and its agencies may as well use the outcomes of this report as a guideline in formulation and development of policies and procedures that relate to the real estate sector. The government would also be enlightened on the various approaches that real estate firms may adopt in determining the prices of properties and advice accordingly.
Scope of the Study
The study scope is restricted to assessing the the effect of interest rate on financing of housing properties in Nigeria using relevant statistical data from 2013 to 2018.
Chapter Five
Summary, Conclusion and Recommendations
Introduction
This chapter covers the summary of findings, study conclusions, and recommendations. In addition, the chapter also presents the limitations of the study and the suggestions for further research.
Summary
This study specifically sought to explore the effects of Interest Rate on Financing of Housing Properties in Nigeria. The study adopted the portfolio theory, the loanable funds theory of Interest Rate, and the efficient market theory. The dependent variable of the study was the Financing of Housing Properties while the independent variables were the Interest Rate, economic growth, money supply and inflation. This study employed a descriptive survey and employed quarterly secondary data for a period of 5 years from 2013 to 2018. A simple regression model analysis was used to analyze data.
The descriptive results found that the mean value of the housing property index (RPI) was 304.45 and that the average interest rate is 15.7877 correspondingly. The average GDP according to the results was 824,287.60 and the average amount of money supplied is 1,513,156.80 while the average inflation (CPI) is 125.47 respectively. Trend analysis results revealed that housing property prices in Nigeria had been steadily increasing from 2013 to 2018.
The results also found that the levels of Interest Rate in Nigeria had been fluctuating from 2013 all through to 2018 and that real GDP in Nigeria had been fluctuating from 2013 all through to 2018 however falls and rises occurred in some quarters of some years. The trend of money supply in Nigeria had been increasing steadily from 2013 all through to 2018 while inflation levels had been rising from 2013 all through to 2018 in Nigeria.
The results of correlation analysis found that the relationships between the rates of interest, economic growth, money supply, inflation and the housing price index are strong and positive. The model summary results show that inflation, Interest Rate, economic growth, money supply explain 97% of the variation in housing real estate property index. The ANOVA findings established that the regression model was fit and significant. The coefficient findings established that the relationship between Interest Rate and the housing property index is negative and insignificant while the relationship between economic growth and the housing property index is negative and significant. The findings show that the relationship between money supply and housing property index is positive and significant while the relationship between inflation and the housing property index is positive and insignificant.
Conclusions
The findings established that Interest Rate had a negative but insignificant effect on housing property index. The study therefore concludes that the correlation between the financing of housing properties in Nigeria and Interest Rate is negative and insignificant. The study results revealed that economic growth has a negative and significant effect on housing property index. The study therefore concludes that the relationship between the financing of housing properties in Nigeria and economic growth is negative and significant.
The research findings established that the money supply has a positive and significant effect on housing property index. The study therefore concludes that the relationship between the financing of housing properties in Nigeria and money supply is positive and significant. The findings of the research established that inflation has a positive and significant effect on housing property index. The study therefore concludes that the relationship between the financing of housing properties in Nigeria and inflation is positive and significant.
Recommendations
The study based on the study findings concluded that the relationship between the financing of housing properties in Nigeria and Interest Rate is negative and insignificant. The study recommended that the government through the central bank should ensure that the Interest Rate are stable since they may affect other macroeconomic variables, which may have significant effect on financing of housing properties in Nigeria.
The study concluded that the correlation between the financing of housing properties in Nigeria and economic growth is negative and significant. The study therefore recommends that the government and the central bank should make strategic policies that will facilitate economy growth and consequently boost housing in Nigeria.
The research based on the results concluded that the relationship between the financing of housing properties in Nigeria and money supply is positive and significant. The study therefore recommends that the central bank of Nigeria should supply an optimal quantity of money to ensure the growth of housing real estates in Nigeria.
Finally, the study concluded that the correlation between the financing of housing properties in Nigeria and inflation is positive and significant. The research recommends that the Central bank and the government of Nigeria should come up with effective monetary policies to mitigate the effect of inflation on financing of housing properties in Nigeria.
Limitations of the Study
The main aim of this study was to assess the effect of Interest Rate on financing of housing properties in Nigeria. As such, money supply, economic growth and inflation were incorporated as the control variables. However, the effect of other macroeconomic variables like exchange rates, foreign direct investments, unemployment, industrial production were not explored and did not form part of the study and part of the study conclusions and recommendations. Additionally, the study findings, conclusions and recommendations were based on quarterly secondary data from 2013 to 2018.
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