Real estate market?
Understanding whether a rise in housing prices is driven by sustainable growth or speculative forces is crucial for any real estate investor.
In markets like Nigeria, where the dynamics of economic growth, infrastructure development, and speculation intersect, the ability to differentiate between these two forces can mean the difference between making a profitable investment or getting caught in a bubble.
Property prices in any given market can increase for two main reasons: economic growth and speculation.
While both factors can drive prices upward, they behave differently.
Economic growth reflects fundamental demand for real estate, while speculation is driven by the hope of future profits and is often disconnected from real market fundamentals.
Let’s explore how to identify these trends in the Nigerian real estate market using practical tools and data-driven strategies to help you make informed decisions about investment opportunities.
Keep an Eye on Interest Rates(in the real estate market)
Interest rates are one of the most influential factors in property markets.
They directly affect borrowing costs, which in turn impact demand for housing.
When interest rates are low, people and businesses can access credit more easily, meaning they are more likely to purchase property.
The Influence of Low Interest Rates
When interest rates are low, individuals and companies can secure loans with lower monthly payments.
This increased access to credit pushes more people into the market, leading to higher demand for homes, which drives property prices up.
Low rates can also encourage speculative buying, where investors purchase properties intending to sell them later at a higher price.
However, this is a double-edged sword.
While a drop in interest rates can lead to short-term price increases, it also carries risks.
If the market’s growth is driven by cheap borrowing rather than real economic development, a sudden increase in rates could have a damaging effect.
This was seen in the 2008 global financial crisis, where housing prices inflated due to speculation and easy loans, only to crash when interest rates increased and mortgage repayments became unaffordable.
What You Should Do
As an investor, it’s crucial to differentiate between price increases caused by low interest rates and those driven by actual demand.
When interest rates drop, monitor the sustainability of the price increases.
Avoid markets where prices are primarily driven by low borrowing costs.
Instead, focus on regions with solid economic foundations, such as Lagos and Abuja, where long-term growth in infrastructure and job creation provides a more reliable basis for price increases.
Study Housing Supply(Inventory)
The availability of housing inventory(i.e., the number of homes or properties for sale) is one of the most straightforward indicators of demand.
Inventory levels can tell you a lot about whether the market is balanced, overheating, or headed for a downturn.
Low Inventory and High Demand
When inventory is low, it usually signifies a strong market with high demand.
A lack of available properties suggests that buyers are competing for limited housing, which can lead to price increases.
In major cities like Lagos and Abuja, areas such as Lekki, Ikoyi, and Victoria Island tend to experience low inventory levels because demand outstrips the supply of available homes.
As more people move to these cities in search of jobs or better living conditions, the available housing stock becomes even more scarce, pushing prices higher.
High Inventory and Oversupply
Conversely, high inventory indicates that there may be an oversupply in the market, which can drive prices down.
If developers are unable to sell properties, this can signal that demand is weak.
Oversupply can result from speculative development or from local economic conditions that discourage buyers.
What You Should Do
To assess market health, track the number of unsold properties in areas of interest.
If you see a shortage of unsold homes, it could be a sign of strong demand, and it might be a good time to invest.
Conversely, if developers are struggling to sell properties in a particular area, you may want to wait before making a purchase.
In markets like Lekki or Ikoyi, a lack of unsold inventory can be a sign of a hot market, while areas with a high number of unsold units might indicate a potential downturn.
Check Absorption Rates
Absorption rates measure how quickly properties are being sold in a specific market.
A high absorption rate indicates strong demand, whereas a low absorption rate can be a sign of sluggishness in the market.
High Absorption Rates: Indicator of Strong Demand
A high absorption rate suggests that properties are being sold quickly, which often means there is significant demand.
This could be due to factors such as population growth, infrastructure projects, or rising job opportunities.
When properties sell quickly, it often leads to higher prices, as developers and investors can be confident that there is enough demand to absorb new stock.
Low Absorption Rates: Sluggish Market
On the flip side, if homes are taking longer to sell, it may indicate weak demand.
Buyers may be hesitant, or the market may be oversupplied.
This could happen in areas where the economic prospects are uncertain or where speculative developers have overestimated the market’s capacity.
What You Should Do
You have to monitor how quickly properties are being sold in the areas you are considering for investment.
If properties in a city like Abuja or Port Harcourt are selling rapidly, it could be a sign of a booming market.
Areas with lower absorption rates might suggest a less favorable environment, especially for those looking to make quick profits.
Compare Wages to Property Prices
One of the simplest yet most telling metrics in determining market health is the comparison between average wages and property prices.
When home prices are disproportionate to what the average person can afford, the market may be driven by speculative forces rather than organic demand.
Affordable Markets
In healthy markets, property prices are in line with what the local population can afford.
For instance, if the average person in a particular area can afford a home after working for 5 to 10 years, the market is considered affordable.
In these cases, property prices typically reflect real demand driven by population growth, job opportunities, and overall economic health.
Speculative Markets
If, on the other hand, it would take a typical person more than 20 years of their salary to afford a home, it may indicate that the market is speculative.
This is common in areas where investors are pricing properties far above what the average local can afford.
Banana Island and Victoria Island in Lagos are prime examples of such speculative markets, where properties are priced so high that they are unaffordable to most people.
What You Should Do
Evaluate the affordability of the real estate market by comparing local wages with average property prices.
If a location’s property prices are far out of reach for the local population, it’s likely a speculative market.
In contrast, areas where homes are more affordable for residents tend to be more stable and present lower investment risk.
Evaluate Rental Yields
Rental yields refer to the income generated by a property as a percentage of its market price.
This metric is important for investors who want to assess the profitability of a property based on its rental income.
In a healthy market, both rental values and property prices should increase together, reflecting genuine demand.
Healthy Rental Yields
In a stable market, rental yields typically range between 5% and 10%.
This means that property values and rental incomes are growing at similar rates.
If a property in Lekki rents for ₦5 million a year and is priced at ₦100 million, this gives a rental yield of 5%.
Such a yield suggests that the property is being purchased for its income-generating potential, not just as a speculative asset.
Speculative Markets
However, in speculative markets, property prices might increase rapidly while rental yields remain stagnant.
For example, if a property in Lekki is priced at ₦100 million but only generates ₦1 million per year in rent, this would result in a rental yield of just 1%. Such a low yield suggests that prices are driven by speculation rather than sustainable demand for rental properties.
What You Should Do
When evaluating potential investment properties, compare rental yields with property prices.
High rental yields indicate a healthy balance between price appreciation and rental income, while low yields could signal a speculative market.
Seek out properties where rental incomes are consistent with price levels.
Understand the Role of Government and Infrastructure Development
In Nigeria, government policies and infrastructure projects play a significant role in shaping the real estate market.
Infrastructure development—such as new roads, bridges, rail lines, and airports—can greatly increase the attractiveness of a region, driving demand for housing.
What You Should Do
Stay informed about local government projects and infrastructure plans.
For example, the Lagos-Calabar Expressway or the new Lekki International Airport in Lagos can directly affect property values.
If the government is investing heavily in infrastructure, it’s likely to stimulate demand for real estate, which can lead to price growth.
Conclusion
The key to long-term success in real estate is identifying areas with solid, sustainable growth driven by economic fundamentals.
By staying informed about local market conditions, focusing on areas with growing demand, and avoiding speculative bubbles.
You can position yourself for profitable and low-risk investments in Nigeria’s ever-evolving real estate market.