Last week, the CBN’s Monetary Policy Committee decided to raise the benchmark interest rate by 50 basis points, to 18%. The minor rise, according to CBN Governor Godwin Emefiele, is intended to manage other economic challenges and lessen the impact of inflation.
According to the most recent inflation statistics, Nigeria’s inflation rate increased in February for the second consecutive month, rising to 21.91% from 21.82% in January.
From April 2022, when it was 11.50%, the MPR has been increasing. The rate has an effect on lending and inflation rates, which in turn has an impact on the rise in the cost of goods and services.
It was learned that the action had the immediate effect of automatically increasing the bank lending rate, which was previously thought to be extremely high. Several experts predict that in the upcoming months, commercial bank interest rates may approach 30%.
The real estate industry is underfunded, and financial system bottlenecks have long made it difficult to get bank financing. Many players think it would be foolish or pointless to hope for great success in a field where borrowing is done at such high rates.
In the past, developers have turned to methods such strict off-plan sales, which never guarantee having enough cash on hand for business, rather than taking the risk of heavy borrowing with high interest rates. High prices for real estate-related goods have been the result.
Although experts claim interest rate increases could, to some extent, limit inflation, they can also exacerbate supply chain problems, raise the cost of building supplies, and thus increase the cost of construction projects.
Hakeem Ogunniran, the chief executive officer of the property development firm Eximia Realty Company Ltd, told The Guardian that the change will make things even worse for both developers and potential home buyers.
He emphasized that there is no long-term building finance available and that one of the major issues is the high cost of capital. When they are accessible, he pointed out, their terms are brief.
According to Ogunniran, the banks will mark up rates from their current 28% with an increase in interest rates. He believes that this will have an impact on construction financing as well as the full real estate value chain.
“Even the providers of inputs in the value chain will increase their prices. We are talking about an industry labouring under the yoke of severe challenges including source of funding,” he said.
According to the former CEO of UPDC Plc, financing for real estate developments requires a comprehensive strategy from the government.
He encouraged the government to establish a special window for the use of pension money as well as long-term bonds and other financial instruments.
Concerned about the limited absorption capacity in the mortgage industry, Ogunniran argued that mortgages needed special attention because key mortgage institutions also serve as commercial banks, making it challenging to obtain mortgages given the existing high rates and lengths of mortgages.
Dr. Aliyu Wamakko, president of the Real Estate Developers Association of Nigeria (REDAN), predicted that the new lending rate set by the CBN will raise interest rates at commercial banks to roughly 32%.
He said that the association’s members, who specialize in creating affordable homes across the nation, would be impacted by the hike.
He stated that: “Without affordable fund, there is no affordable housing. The low-income earners have no room to get a house with high cost of funds. It will reduce the production of housing and increase costs. Only a low interest rate can create affordable housing and massive employment opportunities for Nigerians.”
According to Wamakko, the new federal administration must recognize the need for inexpensive financing for affordable housing and open the door for it. In order to promote mortgage culture, he added that real estate agencies should work together.
“There should be a special intervention fund for housing and an enabling environment for the private sector to thrive. The outgoing government was not able to produce the one million housing they promised. The government was not even able to complete the 3, 700 houses and that is why we felt the government had no business in the development of houses.”
Fundamentally, the private sector is what drives the housing market around the world. A supportive atmosphere will encourage the private sector to work hard and develop chances for the government to provide homes.
“There should be a reduction in the cost of interest rate, review of Land Use Act to reflect the present realities. Land acquisition is a herculean task and when governments across all levels budget for housing, it should be channeled through the private sector with single digit interest to produce affordable housing.”
Kazeem Owolabi, managing partner of REFin Houses Ltd, claimed that the new policy would increase building costs in a market where workers have been clamoring for lower construction costs.
Following the announcement, he noticed that commercial banks had begun notifying borrowers by letter of a rate review.
Owolabi declared: “The 18 per cent rate is the internal to the CBN, the external rate will hover around 28 to about 32 per cent to borrow money from the commercial by the time you pay a four per cent fee. Before it was 17.5 per cent and borrowing was at around 28 per cent at commercial banks.”
“Developers may no longer have access to finance even if you have access, it will be too high for builders. There is going to be a multiplier effect; building materials will increase, developers will be affected, negotiation fees will increase and the cost per unit of housing will increase.”
“When you borrow at 18 per cent, deposit interest will increase. Our housing deficit will increase because there will be fewer operatives and off-takers sales will reduce due to low earning power of the people. What the sector needs now is special funding, specifically designed for developers.”
