September 15, 2014

Why Ebola Won’t Affect Residential Property Prices

Dolapo Omidire

Exploring the implications that macroeconomic, global and in this case medical factors have in every sector is always an engaging experience. The Ebola virus which recently found its way past Nigeria’s borders will almost certainly have wide-spread implications on the perception of Nigeria as well as her economy. But the question is where will these implications be felt, and to what extent?

There has been some speculation regarding the effect the virus will have on Nigerian property market. Speculation on the entry and exit of expats who reside in high brow regions like Ikoyi and Banana Island. It has been said that a reduction in the entry of these expats will lead to a supposed reduction in real estate prices in those regions. While this is possible for hotels and even to push it, short stay apartments; the effect on the larger property market will be much different. To begin to debunk this myth, I’ll compare the pricing mechanism of assets like equities and gilts to that of property.

The pricing mechanism for assets like equities and gilts are transaction/market based. These assets are transacted, traded and change ownership in large volumes so their prices are more susceptible to volatility. Their divisible nature also allows them to be acquired at very low unit prices (i.e GTB – 1 unit = N30)  which pushes the large amount of volumes sold on a daily basis. Making it easy for them to react to the changes in expectations about the economic environment.

On the other hand, the pricing mechanism for property is appraisal based, which means that property prices are slow to react to the changes in expectations about the economic environment. As transactions in this sector are infrequent, partly because of the asset’s expensive indivisible nature, to obtain their value a property will be appraised by a property valuer. The Investment Property Forum explained that appraisal methods involve valuers using historical appraisals and in other cases comparable properties with values which were arrived at in previous periods that had different economic backdrops. Hence, property prices are slow in adjusting to on-going economic situations or future expectations. This induces ‘sluggishness’ into the volatility of real estate prices and also means that property is not wholly placed within a capital market context. Meaning that before an external economic or other factor can change property prices it will take a reasonable amount of time. Consequently, the virus (obviously) won’t be having an effect on property prices. And if Ebola was to have an effect on Nigeria’s property market, it would much longer than a couple months.

As a side note, it’s important that we don’t mix up the asking price with the value of a property. Anybody can label any asking price on their property, but the value is the price that the property changes hands at. That is indicative of where the market is. Furthermore, Nigerian landlords and property owners are uniquely resilient or ‘stubborn’, and before they agree to reduce their rent or sell their properties at a discount, there must be considerable motivation to do so. That in itself could take much longer than a year as many landlords in Lagos have been known to leave their properties on the market for years because they are unsatisfied with prospective achievable prices.

Much of the academic world has criticised the pricing mechanism for property and others have argued against the accuracy of equities/gilt pricing mechanisms, but that’s another topic for another day.

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