CHAPTER ONE
1.0 INTRODUCTION
The impact of inflation on the value of assets is considered one of the primary financial concerns of long term investors. While actual and expected inflation have slowed considerably since the early 1980’s, concern over future increases is still a consideration for long term investors. Ibbotson and Siegael (1995) conclude that real estate compensates the investor for inflation risk. When real estate is added to a mixed-asset portfolio, the inflation risk of the expanded portfolio is substantially below that the original portfolio (expanded real estate). In recent years, during which we have inflation seen the incidence of inflation falling to low levels and fairly static property markets, the conventional wisdom has means low, or no growth in property values. There are many benefits from investing in property in a low inflation environment and particular risks in investing in a high inflation environment.
The key to understand the impact inflation on property values is found in two factors in particular. Firstly, the benefit from real estate is maintaining a hedge against inflation and over
and above that, increasing the purchasing power of capital by having it increase in value ahead of the rate of inflation, any change in value for a given period above or below the rate of inflation is called the “real” growth rate. Parkin, J. Micjeal (1975) Historically Kwara houses prices have increased over the long term at around 10% per annum compound. Inflation during the same period has averaged around 7% per annum growth, that is, the growth above the inflation rate which is increasing the purchasing power of our capital and therefore our “real “ wealth, has averaged around 3% per annum. If in every year inflation was 12% and prices increased by 15% giving us a 3% real increase, this will be telling us that the property market is booming. Chris and Ola (2001) Why then, when inflation is saying 2% and values increases 5%, again giving us a 3% real increases do they adopt a negative view? The result is virtually the same.
The second key to understand the impact of inflation on property values is on the aspect of homeowners’wealth in housing is currently the largest part of Nigeria households’ investment portfolios. After stock prices collapsed in 2009 and mortgage rates hit historically low levels,
investment in residential housing picked up. This increase, coupled with higher home prices, boosted household wealth in real estate from $6.6 trillion in 2000 to $10.5 trillion in the second quarter of 2005 and an increase of more than 58 percent. Over the same period, household