High Demand and Empty Houses: A Look at Abuja and its Market Failures

Photo by peeterv from from istockphoto

By

Chimere Iheonu

Date Published

July 10, 2022

Category

Insight

Nigeria has a housing problem. The demand for houses far outweighs its supply, and the country is said to have a housing deficit of about 17 million units. This number is poised to reach 22 million by 2030. Despite efforts to address the housing crisis by various stakeholders, there hasn't been much done to reduce the deficit to appreciable levels.

Nigeria's capital city, Abuja, in the Federal Capital Territory, has seen a sharp rise in intra- and interregional migration, as individuals look for better economic prospects. The population of Abuja has increased on average at an 8% annual pace. The need for housing has increased significantly as a result of the expanding population. In actuality, Abuja, with its 1.7 million housing units, is responsible for 10% of Nigeria's overall housing shortage. One thing, nevertheless, stands up clearly. The center of the city is plagued with a large number of unoccupied houses and estates. It has been reported that there are at least 600 unoccupied houses in the city center. This number rises significantly when considering other areas in the city. While these housing units can reduce the housing deficit in the capital city, the rents of these houses remain an issue. These homes are beyond the reach of a large number of people living in the capital city, especially low- and middle-income earners, due to the exorbitant rents associated with them.

Conventional economic theory postulates that, under such conditions (where there is available supply and demand), prices move to match supply and demand at an equilibrium due to the interaction of market forces. However, the market for houses in Abuja has not followed this conventional economic doctrine. House owners have refused to bring down prices, and house seekers have also refused to push up the amount they are willing to pay for houses, creating inefficiency in the housing market. This economic distortion is what is termed a "market failure."

Understanding Market Failure

Market failure is the inability of a market to deliver an optimal result, creating inefficient market outcomes. It can sometimes be said to be a disequilibrium where quantity supplied does not equal quantity demanded. Most of the common types of market failures are negative externalities, incomplete information, inequality, public goods, monopoly, and inefficiency in production and allocation. The Abuja housing market can be best explained within the context of the inefficiency in production and allocation. Due to the low housing supply and high rent prices, individuals in need of accommodation cannot afford the available homes. The result of this is a persistently high demand and a large number of vacant homes. The high cost of construction materials, which is transferred to higher rent charges, has been blamed for this inefficiency. Additionally, purchasing land in the city center is expensive, which results in increased rent costs. It makes more sense for property owners to set high rates given the overall high construction costs. Furthermore, it also makes sense for people to fix their housing budgets within their means given their available income. This discrepancy represents a market failure.

Rent control: Will a Price Ceiling solve the problem?

Some stakeholders have called for the introduction of government regulations to cut down on the cost of rent in Abuja. According to the argument, the government can place price ceilings on house rent which house owners are not allowed to exceed. However, a price ceiling can lead to further inefficiency in the market for housing. This is because price ceilings discourage new investment by profit-seeking investors, which has a long-term consequence of shortages. Price ceilings are generally a disincentive for investors. It creates distortions as a result of the artificial drop in supply with continuous growth in demand, thus exacerbating disequilibrium in the housing market and causing the shortage to be worse.

How can Market Failures in the Housing Market be corrected?

Government Interventions

A means through which market failures can be corrected is through the intervention of the government via price mechanisms such as taxes and subsidies. In our case, government subsidies can dampen the market failure in the Abuja housing industry by reducing the associated cost for house owners, which in turn reduces the cost of rents. Subsidies on housing are different compared to fuel subsidies because they are production-based compared to fuel subsidies, which are consumption-based. The government can enter into public-private partnerships whereby it will subsidize building supplies for its business partners in an effort to lower the price of both buying and renting a home. The government can also intervene through housing delivery using the mortgage system. In this way, low- and middle-income earners can use the mortgage system to own an apartment after many years of paying rent to the mortgage institute. This requires the government to reposition the Nigerian mortgage institution.

Reducing Associated Costs in the Housing Market

Cement prices increased by 44 percent between December 2020 and November 2021. This is also reflected in the increasing prices of other building materials that use cement. Due to the continuous fall of the Naira in the parallel market, there has also been an increase in the prices of imported building materials. The surge in port charges and haulage costs has also fed into the cost of housing construction, which precipitates high house rents. This calls for the government to adequately tackle inflationary pressures, which have consistently fed into the prices of building materials. More efforts should also be made to ease the pressure on the Naira through export diversification policies.

Conclusion

Economic theory points out that not all market failures can be resolved, even with government intervention. Governmental actions, however, can lessen the severity of a market failure. One of the three basic needs of existence, housing is crucial to living a good life. This makes it crucial for the government to implement intentional policies targeted at accelerating the delivery of housing and enhancing the efficiency of the housing market. The favorable externalities related to housing can boost Abuja's socioeconomic development as well as the city's overall economic output.

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Disclaimer: This information in this article is NOT investment advice. It is intended for information and entertainment purposes only.

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