Drivers of Nigeria’s real house prices: long-run analysis and short-run dynamics

• Date: 15 September 2023
• Pages: 196-226
• DOI: https://doi.org/10.1108/IJHMA-07-2023-0093
• Published date: 15 September 2023
• Subject Matter: Property management & built environment,Real estate & property,Housing markets
• Author: Paul Chinedu Okey

Drivers of Nigeria’s real house

prices: long-run analysis and

short-run dynamics

Paul Chinedu Okey

Department of Estate Management, University of Nigeria, Enugu, Nigeria

Abstract

Purpose –The purpose of this paper is to assessthe long-run and short-run drivers of real house prices in

Nigeria from 1991Q1to 2020Q4.

Design/methodology/approach –Vector autoregressionand cointegration tests were usedto assess the

key drivers of Nigeria’sreal house prices in the long run and short run.

Findings –The empirical f‌indings revealed that household disposable income is the most important

determinant of house prices in Nigeria. House prices increased by 1.6% and 60.8% in response to a 1%

increase in disposableincome in the long run and short run, respectively, whilereal mortgage credits pushed

up house prices by 5% and have no long-run effects,suggesting that most Nigerians depend on their money

income rather than creditsin securing a home. In addition, prices of oil sector productsand real interest rates

had negative and signif‌icant relationshipwith house prices, while positive correlations were found for real

effective exchange rate and real housing investments regardless of the time horizon. The impact of

constructioncosts and cement prices was also documented.

Originality/value –This is likely a pioneeringstudy of its kind to focus on the determinants of real house

prices in Nigeria. It is probablythe f‌irst study, the best of the author’s knowledge, to empirically examine the

impact of the oil sectoron houseprices in the country.

Keywords Cointegration, Nigeria, Granger causality, Vector autoregression, Demand-supply,

Real house prices

Paper type Research paper

1. Introduction

Uncontrollable and unsustainable house price inf‌lation has been observed across the world,

including but not limited to countries in the Organization for Economic Co-operation and

Development and in the Central and Eastern European region, albeit some stagnancies in

Germany and Portugal over the past few decades, raising fears about the possibility that

house price dynamics might have disconnected from the development in the underlying

fundamentals of housing demand and supply (Egert and Mihaljek, 2007;Engerstam, 2021;

Asal, 2020). The International Monetary Fund (2021) also reported that house prices have

skyrocketed by 5% in 23 countries out of the 60 countries in the IMF’s Global House Price

Index for 2020.In Nigeria and other African cities,house prices are surgingto unprecedented

levels, and housing market participants remain optimistic about future house price

appreciation (Messah and Kigige, 2011;Olowofeso et al.,2012;Oloke et al.,2017). While

persistent house price surge alongside speculators’expectation of continuous house price

increasemay imply an existence of a bubblein the house prices (Sunde and Muzindutsi,2016;

Engerstam, 2021), one may also argue that they are being fueled by interactions between

demand and supply fundamentals (Asal, 2020). Considering Nigeria’s macroeconomic and

built environment, this study hypothesizes that house price appreciation in Nigeria is

arguablycharacterized by effects from:

IJHMA

18,1

196

Received14 July 2023

Revised9 August 2023

Accepted15 August 2023

InternationalJournal of Housing

Marketsand Analysis

Vol.18 No. 1, 2025

pp. 196-226

© Emerald Publishing Limited

1753-8270

DOI 10.1108/IJHMA-07-2023-0093

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1753-8270.htm

f‌luctuations in oil price –Nigeria’s economy is largely driven by the oil sector;

exchange rate f‌luctuation;

interest rates f‌luctuation –serving as benchmark for all other rates, including

mortgage rates;

cement price f‌luctuation –a key factor that drives the overall construction industry

(Oluwatuyi and Olayemi, 2012;Thompson Reuters Trust Principles, 2021;Ayemba,

2022);

household disposable income after income tax deductions –which when compared

to the soaring house prices makes housing unaffordable to many segments of the

population despite periodic upward wage reviews;

mortgage credits to the private sector by banks;

equity price f‌luctuations denoted by trends in stock index;

contribution of housing investment to the gross domestic product (GDP);

population growth resulting to large demands chasing few available supplies, with

housing def‌icit estimated at around 28 million units as at January 2023, according to

The Federal Mortgage Bank of Nigeria;

other demographic factors such as labor force and unemployment size; and

continuous upward rent reviews or house price f‌ixing which are arbitrary and

possibly overpriced (Oloke et al., 2017).

In line with these characteristics, Table 1 shows the descriptive statistics of the necessary

variables collected to verify the hypotheses raised. All these characteristics and

uncertainties suggest the importance of assessing the house price dynamics with a view to

identifying the key drivers of house price appreciation. Furthermore, understanding the

determinants of house prices helpsin monitoring the housing market for the maintenance of

price and f‌inancial stability as well as the formulation of favorable macroeconomicpolicies

which will be of signif‌icant benef‌it to the economy as a whole. Maintenance of f‌inancial

stability, being a key function of the Central Bank, is closely connected to the housing

market, thus identifying house price drivers would help to formulate policies that will

control persistenthouse price increases in the long run (Engerstam, 2021).

This paper focuses on assessing the determinants of real house prices (RHPs) in Nigeria from

1991Q1 to 2020Q4. Jogunola et al. (2018) were probably the f‌irst to conduct an econometric study

that examined the inf‌luence of some micro- and macroeconomic factors on house prices in Nigeria.

They used autoregressive distributive lag (ARDL) model and cointegration tests to examine the

impact of monetary policy on house prices in Nigeria. This paper seeks to extend their work by

using vector autoregressive (VAR) models and by accommodating a wider spectrum of micro-

and macroeconomic variables in house price analysis. This study is likely a pioneering one of its

kind to empirically examine the impact of the oil sector on house prices in the country.

VAR was applied in this study for it has been considered useful for the modeling of

multivariate time series in a single model and thus are superior to the unidirectional

univariate autoregressive model. VAR typically leads to the Granger casualty tests which

reveal the long-run causation between RHPs and the other variables; cointegration tests

which identifythe existence of long-runrelationships in the system;impulse responses which

show the adjustmentof house prices as a result of one-unit shock fromother variables in the

long-run equationand variance decompositionwhich reveals the contribution of eachtype of

shock to the forecastof error variance.

Nigeria’s real

house prices

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