On the Interaction between the Nigerian Residential Property Market and the Macroeconomy

Abstract

Changes in real Gross Domestic Product, changing relativities of exchange rates, as well as inflation rates and short-term interest rates fluctuations exert profound impacts on the bulk of any country’s tangible capital and vice-versa. This paper employs a vector autoregressive (VAR) model to examine the interaction between the Nigerian residential property market - using returns from direct residential property as proxy - and the macroeconomy. First, in estimating a parsimonious VAR model, we applied Augmented Dickney Fuller (ADF) test to detect the presence of unit roots (non-stationary) within the variables that enter the model. Secondly, a multivariate information criteria technique is used in selecting the appropriate lag lengths for the variables to be included in each equation so as not to introduce multicollinearity problem and specification errors. The results of the forecast error variance within the VAR model suggest that macroeconomic shocks explain 28% of the variation in residential property rents and that unexplained variation in the behaviour of residential rents may reflect the explanatory power of property market indicators (as varied as yield, vacancy rates and new construction) rather than macroeconomic variables. Furthermore, responses of residential property rents to shocks in real GDP, exchange rates and short-term interest rates reflect the fact that rents from direct residential property and by extension, the market for residential property adjust slowly to changes in macroeconomic events in Nigeria. On this basis, we hypothesise that this relatively slow adjustment will creates arbitrage profits for parties operating within the Nigerian residential property market to exploit.

Keywords: impulse response function, macroeconomic variables, residential property market, residential property rents, shocks, vector auto regressive model, variance decomposition