Title

Economic Meltdown and Housing Development in Nigeria

Presented by:

Oladeji Oparinde

College of Environmental Science Estate Management Department

And

Yusuf Y. Bamalli

College of Environmental Science Estate Management Department

Being A Paper Presented At Conference Hall, College Of

Environmental Studies Kaduna Polytechnic, Barnawa.

On

3rd November, 2009

Theme: Economic Meltdown and Environmental Issues

1.0 INTRODUCTION

Economic growth in many sectors of the Nigerian economy met a deadlock due to the recent

global economic crisis called Economic Meltdown. This meltdown, besiege the global

economy.

The major factors of production are land and capital which will then need entrepreneurship to

oversee them with the required labour. The relationship of finance and property has made

them part of the major determinants of economic growth. The melt down of the economy

caused by a number of factors ranging from excess circulation of money, toxic debts, and

financial crisis will have direct effects on housing developments which is basically the

provision of shelter at the right locations. In other words the stability of the economy means

better and more housing development and affordability.

Despite the early warnings of economist and professionals the property and economic crunch

(harder mortgage conditions, falling house price, foreclosures, job loss e.t.c) and the financial

crisis (Lehman Brothers, Failed banks Bank in Nigeria, Halifax in United Kingdom) in the

United States America and the United Kingdom, affected a number of countries whose

economy is in one way or the other related to the Americans and the Britons.

One of the giant sectors of any nation’s economy is the real estate sector which normally

represents more than 80% of the nation’s total investment (Sule, 2007). Housing investments

is in the nature of housing development. Housing development is a technical process which

enables various components among which is land, finance and infrastructure to create living

area for humans. Finance being the fuel of housing development has however suffered from

the economic meltdown.

In Nigeria, thus all issues associated with housing development need to be looked at to

understand the status quo ante.

This paper intends to pursue the following:

i. Review of previous situations before the meltdown.

ii. Effects of economic meltdowns on affordability (first time housing developers).

iii. Effects of Economic meltdown for medium and long term housing development

requirements.

iv. Indentify the suitable policies as bail out to efficient housing developments.

v. Possibilities of the emergence the housing development sector in Nigerian from the

meltdown.

2.0 PREVIOUS SITUATION OF HOUSING DEVELOPMENT: HOW WE GOT TO

WHERE WE ARE NOW.

For about 16 years of sustained growth in the housing development market in the Nigerian

economy along with much of the world has encouraged developers and investors to be

interested in the housing development investment portfolio, but housing development is

facing the blow of both economic meltdown and financial crisis. The impact of this crisis on

house prices has been dramatic with a fall in the investment yield of about 16% within a few

months (August 2007 to April 2009).

 This crisis (economic meltdown and financial crisis) has been caused by a number of factors

I. Turmoil in the financial markets “toxic debts”: the issuance of huge unrecovered housing

loans to both individuals and corporate organizations.

II. Tighter lending criteria being adopted by mortgage lenders.

3.0 AFFORDABILITY AND BENEFICIARIES OF HOUSING DEVELOPMENT

Everyone needs a place to live, and housing expenses is dominant portion of most families’

budgets. The major problems facing developers is the rent or buy option decision and this in

effect affect or determines the demand for housing developments as well as supply. But to make

such decisions there is a need to accurately predict the future price rise and falls; what will

happen to home prices in the future? Will they rise making the investment more valuable? How

much will they rise or will home prices fall, making the investment an unwise one? What will

happen to income tax laws that affect the deductions you can take for mortgage interest and

property taxes? Will it be profitable for developers to concentrate on owner occupied housing

units or develop to invest?

To some extent these factors will cancel each other out. The net result is likely to be a small

additional increase in our housing supply range advice over the period to 2026 (Corporate

Nigeria, 2009). Tighter mortgage lending criteria, particularly larger deposit requirements, have

made it harder for first time buyers to get into the housing market.

In current circumstances the accessibility of housing – whether someone can get on the housing

ladder – depends not just on how much the home they want to buy costs compared with their
income, but also on how much of that purchase price they can raise in a mortgage, and hence

how big a deposit they need to find.

Superficially, falling house prices should be good for first-time buyers and housing developers:

the affordability ratio – the ratio of lower quartile house prices to lower quartile earnings –

has, after all improved. However, the affordability ratio only tells part of the story. Tighter

mortgage lending criteria, particularly larger deposit requirements, have made it harder for

first time buyers to get into the housing market

4.0 EFFECTS OF ECONOMIC MELTDOWN ON MEDIUM AND LONG TERM

HOUSING DEVELOPMENT REQUIREMENTS

Finance has been the next most important factor of production after land and thus their

interrelationship. Housing development investments are capital intensive and this majorly

determines the term for housing development requirements. In other words loans and financial

instruments are the fuels that run the housing development sector.

To invest in long, medium or short term housing development scheme, the investor or developer

will obviously need to have good understanding of the financial instruments, the effects of the

financial crisis and economic meltdown (tougher lending criteria, high Nigerian interbank

lending rates 11.45% in September 2009 and high interests on mortgage) on finance instruments.

Basically there are four tradition methods of housing development finance. These are

(a) Forward funding with an institution: this is a term given to the method of housing

development finance which involves a pension fund or insurance company agreeing to

provide short-term housing development finance and to purchase the completed property
 as an investment. This method of finance has shown that the developer has no or little

exposure to risk as all the risk will be borne by the investor. This method is usually

difficult to acquire for first time buyers or housing developers.

(b) Bank loans: clearing houses, merchant banks, commercial banks all provide short-term

development finance, either on a “rolling “ or project –by-project basis, by means of

overdraft facilities are short-term corporate loans secured against a particular

development. They include loans such as corporate loans, project loans, investment loans,

syndicate project loans, mezzanine finance and interest rate options (David, 1999).

(c) Mortgages; mortgages usually provide the most usual form of long-term development

finance. Mortgage is loan secured on a property whereby the borrower has to repay the

capital loan plus interest by certain date. From the lenders point of view a mortgage is a

fixed income investment and very illiquid. However, the availability of mortgages is

limited due to problems of the “reverse yield gap”. .

(d) Equity finance; these are money and resources provided by the developer, partner,

investors and funds who participate in the risk and profit of the scheme. This method of

finance is usually adopted when there is no other source of finance available.

Considering all these methods of finance the economic meltdown has made it difficult to housing

developer be it individuals and the government to secure finance for the development of housing

units.

On the course of the paper, a research was made consulting the financial institution currently

providing the highest number of housing development loans at this period of economic

meltdown (Unity Bank Plc) the new and lending criteria adopted is the 4Cs method:
Cash Stake: relates to how much equity (the borrower’s own money) is going into the

transaction and the bank will want to know where the equity is from

i. Is it lent from someone else?

ii. Is it from another profitable activities or investments?

iii. Is it simply a surplus which has arisen on the revaluation of property?

iv. Is it already pledge as security?

v. Is it legally acquired money- not laundered money?

Character: this relates to the trading history of the individual, corporation or developers

experience. The lender will want to know whether the borrower has the experience to

complete the housing development, manage and run it effectively before finance can be

granted.

Capability: does the borrower have the capability to service the loan, that is to pay the

interest when it arises and the capital as and when repayment is required? Does the borrower

have accounts or business plans to show his / her present financial position and any estimate

of future cash flow?

Collateral: the lender will want to know what security will be offered for the loan, its value

and its salability, the value of the security and on what basis.

The broad conclusion of this analysis is that there are three factors likely to have significant

impact on medium to long-term housing requirements:

• New official household projections – which show an increase to the number of homes needed,

• The impact of the recession in reducing growth rates for a number of years – which will tend to

dampen demand in terms of house price growth,

• The impact of lending criteria on first time developers, or developers with few years of

experience.

5.0 Housing Policy Decision for Housing Developments

A brief review of past housing policy initiative and programs of both public and private sectors

in Nigeria, shows that during the colonial period housing activities focused on the development

of quarters or housing units for expatriates and selected staff. Therefore apart from native homes,

the government made no efforts to build houses either for sale or rent to the general public.

After independence in 1960 two development plans were adopted and they both regulated issues

on housing development and delivery. In 1967 more states were created and that also influenced

development of houses through the creation of corporations’ e. g Railway Housing Cooperation.

Between 1975 and 1980 the third National Development Plan period was initiated. The plan

recognized that housing is a national problem and it is therefore aimed to increase the supply of

housing for all Nigerians substantially by the year 2000. To achieve this, the government needed

to provide 700, 000 houses per annum and thus they adopted the following objectives (National

Housing Policy February, 2009)

(i) Encourage and promote active participation in housing delivery by all government tiers
 (ii) Strengthen institutions within the system to render their operations more responsive to

demand

(iii) Emphasize housing investments which satisfy basic needs

(iv) Encourage quarter participation by the private sector in housing delivery

All these objectives lead to the creation of Federal Housing Authority in 1976, the Federal

Mortgage Bank in 1977, the Land Use Decree(now Act) of 1978 and Employees Housing

Scheme Decree in 1979.

The Federal Government introduced the monetization policy on housing which in part intended

to sell all federal government houses occupied by public and civil servants (excluding houses

occupied by the armed forces, police e.t.c) on the replacement cost basis (a decision by the

government as against the open market value basis). This has helped in the provision of houses

and reduced colossal waste of public funds on housing, but a deliberate attempt to provide homes

to public civil servant at affordable price to help minimize the effects of the economic meltdown.

6.0 Salvaging the housing development sector from the meltdown.

Emerging from the recession: the consequences for housing development requirements.

The question we need to ask preparing for the emergence from the meltdown is, “How many

homes would need to be built over the plan period – in most cases until 2031 – in order for

housing affordability to be stabilized at the levels experienced between 1999 and 2006? In

answering that question, the key new issues are:

• What level of household growth will occur?

 • How quickly will the economy emerge from recession?

• How quickly will home building recover?

• How long will the current tight mortgage market continue?

How quickly will the number of households grow?

Research shows that the number of households has experienced booms and dooms over the past

35 years, during which time there have been three recessions which have had little impact on the

increase in the total number of households.

The last official household projections (issued by the Federal Housing Authority in March 2009)

suggest that, over the period of 2006-2026, the increase in the number of households will be

around 16% higher

One aspect of the recession that may have significant impact on the household numbers is

through reduced levels of lending criteria which may otherwise if not properly managed cause

banks and finance providers loose much money to the public, and increase in the interest rates.

Another is the rate of nominal earnings which had a 2.5% growth over a period of two (2) years

and maybe 3% by 2011. With good nominal earnings they would be little dependence on finance

houses as developers; investors in housing development could save from their earnings to

produce housing development units. Mortgage supply has not increased over the economic

meltdown period and the demand for housing units with the increase of population day by day

could be as high as 2/4 of the present demand.

The faster the economy recovers the stronger demand will be and more houses will need to be

built to hold affordability to any particular level.

The precedent of the early 1990s recession suggests that it could take some time for housing

development to recover from the current recession.

Conclusion

In view of the uncertainty about how quickly house building will recover, the presenter has

looked at a number of different scenarios ranging from the scenario used for the 2008 housing

development plan in United Kingdom for supply range advice, which did not include any dip of

supply but reduced immigration which obviously is not a factor in the Nigerian context, to the

scenario that assume house build rate halve and then grow at different rates to the already state

levels needed to stabilize affordability which will influence the housing development as well as

regulating the economy through the housing development investment portfolio.

The basic conclusion is that, the longer it takes housing developments to recover the higher the

build rate will need to settle at if affordability is to be stabilized at 2007 levels by 2026, but

there is relatively little difference in the total number of homes that need to be built by 2026
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