Because of the Arab-Israeli War of 1973 and the imposition of the crude oil embargo, international crude oil price spiked. Hence, Nigeria introduced fuel subsidy to cushion the shock coming from this. And government after government have tried to remove or at the very least reform these costly subsidies to no avail. Even after the passage and assent by the President of the PIA (Petroleum Industry Act) in 2021, removal of fuel subsidy has still remained a challenge.
There are upsides and downsides to fuel subsidy removal. The former includes less burden on the national treasury for an unsustainable spending while the latter brings with it deep fall in real income hence deeper impoverishing of an already pauperized population.
In the real estate industry, the inflationary pressure that comes with fuel subsidy removal would price out many Nigerians out of the real estate market as the costs of all inputs into the industry skyrocket. Some unscrupulous and desperate elements may resort to using sub-standard inputs or reduce their amount with the concomitant catastrophe of building collapses likely to be on the increase because of this.
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The impact of fuel subsidy does not only affect the energy sector but also pervades the entire economy and the real estate sector is not spared. So, prices of property would keep climbing as the general price remains relentlessly elevated.
The removal makes construction costs to climb as not only transport costs go up but also those of machinery and power. Because of higher costs, it reduces profit margin and/or translates to exorbitant costs to the buyers; diminishes real estate investor confidence hence depressing the investment into the sector. This would have repercussions down the line for the masses.
EFFECTS ON LOW AND MIDDLE-INCOME EARNERS
High price level means many plans would either be shelved or be overhauled to be effective. If one had it on the cards to start building or even if you have started, you might be compelled to reevaluate these decisions as prevailing circumstances would make them largely untenable. While palliatives are being rolled out, the real estate would remain depressed with or without these as purchasing power has been chipped at to the extent that everyone has to reconsider the decision of building at a time that hunger has become widely prevalent.
One thing about the high oil price is that commuting would be reduced. People would prefer to live close to their working places if you cannot work remotely. This would increase demand for real estate around city centres where the jobs are concentrated hence less demand for those far away from the heart of the city. The cost of rental as well as buying of real estate would surge as landlords pass on high prices of transportation as well as others to their tenants and buyers.
I. EFFECT OF SUBSIDY REMOVAL ON THE LOW-INCOME EARNER
More rent defaulters would increase with the high cost of living and demand for sub-standard housing would spike. Those building would put that on hold or even abandon it. Some low-income earners would become homeless because rent or buying may be too prohibitive for them. Many would resort to urban slums like Makoko in Lagos; Daki-Biyu or Garki village in Abuja where mud houses still exist in the heart of cities. This would lead to a surge in crime in the city centres as these desperately poor try to make ends meet.
II. EFFECTS ON THE MIDDLE-INCOME EARNER
For middle-income earners, they may be priced out of prime real estate market whether to buy or to rent as cost of living surges and more resources are dedicated to more pressing basics outside home-owning. Many may opt for less expensive or smaller apartments all in a bid to prop up their livelihoods. This could lead to crowded spaces which is quite unhealthy as going farther afield is not an option as you stay far away from the action and more exorbitant transportation would only compound matters.
III. EFFECTS ON CIVIL SERVANTS COLLECTING MINIMUM
For civil servants making minimum wage of #30, 000 which at paltry under $30 makes you miserably poor. This means accommodation would be a huge challenge. While staying far away from city centres would provide relatively affordable real estate. However, transportation cost would be more as you opt for affordable accommodation. So, it is a Hobbesian choice.
Removal of subsidy touches off crazy transportation costs as well as general increase in price level. When prices climb, real estate affordability is threatened.
Subsidy means government giving financial support to the citizens in the form of reduced prices. So, removing such would lead to increased costs including rents and cost of buying property. Reduced purchasing power would lead to lower demand, investors becoming more diminished in their confidence with spending on real estate leading to reduced supply.
High interest rates and low wages have colluded to financially incapacitate the Nigerian ability to access mortgage loan to pay for a house.
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WHAT MUST BE A PERSON’S MINIMUM SALARY TO OWN A HOUSE OF #5M
Subsidy removal would lead to increased labour, material and overhead costs; and distort the real estate sector. A house of #5 million means it is a measly under $5,000. This means it would be difficult to buy a decent apartment in a town or city. If you must get it, then it would be a rundown or dilapidated structure. Making a minimum of 150,000 naira monthly would make you to afford a house of #5 million. As it is advisable you use only a third of your income to pay both principal as well as interest.
II. WHAT MUST BE A PERSON’S MINIMUM SALARY TO OWN A HOUSE OF #10M
For you to afford a house of #10 million would require you to be able to use the maximum of a third of your salary monthly to be able to pay back the principal as well as the mortgage rate on yearly basis. Meaning the exorbitant interest rate of 22-25% yearly plus principal being paid regularly. This means you need twice the amount the person that is paying for a #5million house to buy the one of #10 million. Hence, making a salary of #300,000 a month minimum would do the magic.
CONCLUSION AND RECOMMENDATIONS
While palliatives are needed particularly for the must vulnerable in society, sustainability is key. Cosmetics approaches to solving problems would neither help the government nor the offered the help. Hence, such should not be pursued.
What is needed is living wages for everyone and rock bottom interest rates for real estates to become more affordable.
The bodies helping Nigerians acquire properties should have easy entry so encourage competition.
In conclusion, fuel is an important production input, hence an increase in its price would permeate all aspects of life. And the real estate sector would not be excluded from this. People must just be determined to save more or opt for lesser apartments to rent or buy.
Isong, D. (June 25, 2023) How fuel subsidy removal will impact real estate sector. Ripples. https://www.ripplesnigeria.com/how-fuel-subsidy-removal-will-impact-real-estate-sector/
Saliu, S. (June 2023). Impact of the Removal of Fuel Subsidies on the Real Estate and Construction Industry. https://www.linkedin.com/pulse/impact-removal-fuel-subsidies-real-estate-industry-saliu-fmva-/
Tayo Adeyinka (7 July, 2023). Influence of the Removal of Oil and Gas Subsidy on Real Estate Affairs in Nigeria.