Property is ablaze but everybody loses
The runaway cost of land and housing is defeating all the growth and progress made over the past five years. Two significant events over the past fortnight both contributed to drive this point home.
First, a noted analyst gave us a breakdown of the nominal increases in housing and land over a three year period. The detail is covered in another article elsewhere in this edition so I will only state that housing is now solidly out of reach for most, if not all, first-time buyers. Existing owners of property can only afford to pay the elevated prices for a new home, if they sell the one they have first. And then it is mostly a matter of shifting money from the front pocket to the back pocket. The mortgage more or less stays the same, or increases only incrementally.
Second, the by-now infamous auction of new erven by the City of Windhoek produced a major backlash when the Ministry of Local and Regional Government, Housing and Rural Development instructed the City of Windhoek to stop land auctions, and to nullify the results of the most recent auction. This week Thursday, the City said We’ll see about that!
It is obvious that housing is in a classic and severe asset bubble. But I am sure very few people are interested in the mechanics of why this is so, and are only concerned over the fact that they see their dwelling dreams fly away in an ever-rising spiral of property prices.
Asset bubbles arise when too much capital chase too few assets with the irrational hope, from the investor’s side, that the inflation will continue, and soon help to make the asset affordable. Notice my emphasis on “irrational”.
An asset bubble is when inflation for a particular asset outstrips general inflation or the “normal” inflation associated with related or ancillary assets. Housing and land are in inflationary bubbles that exceed even the most liberal definitions of inflation. Simply put, housing and land have become outrageous.
It must be noted that the first culprit is the Ministry of Finance with its aggressive pouring of liquidity into the broader economy.
The second culprit are the banks who are only too keen to finance property notwithstanding the very dangerous distortion that mortgages are approaching half of the banks’ loan books. Meanwhile, this is fuelled by unprecedented credit growth over which the Bank of Namibia is rightly concerned.
The third culprits are the municipalities, who, for a lack of both foresight and adequate funding, have become complacent over many years, until the backlog of land has grown to such proportions, it will take more than the entire Gross Domestic Product, to remove the imbalances.
Property prices are the result of these three factors combined and will continue to escalate as long as 1.) the government keeps fuelling the economy artificially with funds borrowed in the capital market, 2.) banks continue their over-reliance on mortgages to meet their own targets, and 3.) land remains in short supply.
Until any or all of these factors are removed, there is nothing any ministry can do to remedy the situation.
But once a property market is distorted, it is very difficult to normalise short of creating chaos and an eventual implosion of property prices.
This is not armchair philosophy, it has actually happened in Japan, Ireland, and most recently in Spain. As a matter of fact, it has happened in several other locales but not with the dire consequences as in these three jurisdictions.
There are also other, social aspects to consider. When an economy has entered a severe inflationary spiral, the mere expectation of more future inflation contributes to an increase in the velocity of near-term inflation.
This means property prices are self-enforcing but they are also defeating all reasonable development objectives. The faster they grow, the less comes from all the good intentions to make affordable land available to lower income earners.
This observation does not even consider the position of the very poor and the unemployed.
Finally, if the provision of housing is a key factor in a broader strategy to reduce poverty and income inequality, that strategy is defeated by property inflation.
In other words, the extremely high land and house prices benefit only a fraction (less than 5%) of the population who actually qualifies for financing for a modest dwelling. For the rest, it only leads to greater poverty and greater inequality.