BusinessDay

Nigeria’s real estate bubble: Burst it now!

My dad should never have been a billionaire.

Let me rephrase that.

My dad was never in actual fact, a billionaire in any real sense of the word. He certainly never had in his possession a 10-figure bank balance or a billion in any currency except maybe the pre-2007 Ghanaian cedi. What qualified him as a (naira) “billionaire” was the abstract value of his real estate holdings, which as any real estate professional in Lagos will tell you, is the Schrodinger’s Cat of value.

Your property might get immediately snapped up at the list price if you decide to sell, or it might sit untouched for 2 years. It all depends on who is paying and why.

Regardless of the non-liquid, abstract state of these hypothetical naira holdings, I certainly got to enjoy a far better life than I perhaps deserved. The main beneficiary of stratospheric property valuations after all are landlords who rent out their property portfolio, and my old man was that guy. I had everything I needed and a lot of what I wanted too. I got to do all the things that Nigeria’s Johnny Everymen dream of doing, and then some. On paper, I should be the very last person to complain about speculative property valuations and their effect on the economy, after all that is exactly what paid my tuition and helped me to get here. Hypocrite much? Well here’s the thing…

Real estate bubbles are for rich economies

It sometimes feels as if I write a column stating some variant of “Nigeria is a poor country, please believe me!” every calendar month or so, so I am sorry to inform the reader that this is in fact, yet another one of those columns. The reason I cannot seem to stop hammering on this point is that the penny really, REALLY has not dropped with the vast majority of our compatriots. In this particular instance, the refusal to accept the reality of what Nigeria is, is feeding the mother of all dangerous asset bubbles.

Read also: Experts develop digital solutions to boost Nigeria’s real estate business

To put it in simple terms, inflation of an asset class until it turns into a speculative bubble, is supposed to be the exclusive preserve of economies like the US and China – economies which have so much capital flying around that they literally cannot find a home. It is no coincidence whatsoever that following a sustained period of low interest rates and quantitative easing by western governments, asset classes such as stocks, crypto and real estate are all at or nearing all time highs in that part of the world. The purpose of capital is to make more capital, ergo when there is a surplus of capital in circulation, it inflates the value of the asset classes it chooses to sink into.

In the case of extreme real estate valuation bubbles, the cities that most readily come to mind are Toronto, London, Vancouver and New York. What all these cities have in common is that they are global investment destinations – people from elsewhere are bringing their money to invest in real estate in those cities. The most famous example of this is probably Vancouver, where a simple 3-bedroom house now retails for well over a million Canadian dollars. This happens because Chinese capital fleeing from Emperor Xi Jinping The Vengeful favours Vancouver as an investment and settlement destination. It might be bad for Vancouver’s existing residents, but it certainly does not hurt Canada’s economy to have vast amounts of foreign money coming in and paying for Canadian assets at vastly inflated prices.

In Nigeria however – and Lagos specifically – there is no global money coming in to justify these weird, head scratching prices. The people to whom Femi Osibona was hoping to sell apartments in his 21-storey collapsible tent for $1.2m a pop, were not Xuwei from Nanjing or Hans from Luxembourg. They were the same people he played golf with, drank with, attended parties with and discussed business with already. Unlike in Canada or the UK, the size of the pie is not expanding in Nigeria, so the upward spiralling prices are not supported by economic fundamentals. They are entirely driven by internal speculative pressure, which WILL eventually fail, because there is only so much money circulating in Nigeria. Without new money coming in to keep the bubble inflated, there is no bubble in the long term.

Speculation is NOT how to create value in a poor economy

So we have established that the bubble will eat itself eventually without foreign money coming in to support it – so what is the problem then? If the bubble will disappear on its own due to market efficiency, then this is a self-solving problem, no? Well not exactly. For one thing, markets are not always efficient, which means that they can remain irrational for much longer than it makes any sense for them to. Markets have been known to remain completely divorced from their fundamentals for years at a time. A famous example of this is Japan in the 1990s.

The bigger problem however, is that as I mentioned at the outset, this real estate bubble in Nigeria is a terrible place for a “developing” (i.e poor) economy to allocate investment rewards. Don’t get me wrong, I am not suggesting that my dad did not work hard or deserve his success. He was one of the most hardworking human beings I ever met, and if I had a third of his work ethic, I would be a lot more successful than I am now, that’s for sure. What is also true however, is that he never in his entire career, created a billion naira worth of value for anyone. There was no reason for Nigeria’s economy to allocate a billion naira to him via asset valuation driven entirely by a mix of speculation and money laundering.

The Nigerian economy that should be worked toward is one driven by some sort of large scale manufacturing base, or anything other than primary production (farming and mining). That could be tech, global outsourcing, entertainment, tourism, whatever – as long as it involves value adding and it employs people in significant numbers. This real estate bubble kidnaps vast amounts of capital from the Nigerian economy and parks it away in the most inefficient, unproductive way you have ever seen. Instead of actual investment and risk-taking, the rational use of capital in Nigeria right now is to put up a structure, slap a 6-figure dollar price tag on it and wait for a so-called Greater Fool to pay for it. You then take the revenue and profit, and recycle that into the same real estate ponzi scheme that fewer than 10,000 Nigerians can afford to take part in at all.

Thus, not only is the economy not growing, but the size of this unproductive slice of it keeps getting bigger, and displacing other ways capital could be allocated. Worse still, Nigeria has the highest cement prices on earth, as well as the highest cement maker profits on the planet – by a very long distance. In other words, the game is rigged against ordinary Nigerians who cannot get a foot into this cosmic real estate ponzi scheme due to the gigantic barriers to entry. What I have just described is a surefire way to increase inequality, become poorer, and hasten the eventual breakdown of societal order that comes with economic collapse.

For the love of God, someone please put a pin in it now.

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