3 reasons why price regulation has become critical for Lagos Property Market

Rent control or Price regulation as it is described in this article has been in operation for many decades. The earliest rent control laws in the U.S. date to the 1920s and were often outright rent freezes. The regulation was not so effective but it was re-introduced in the 1970s, this time as “rent stabilization.” In the United Kingdom, Rent control dates back to the early 20th century. During World War I (between 1915-1920), the government introduced rent controls to prevent landlords from profiteering from the housing shortage caused by the war. The Rent and Mortgage Interest Restrictions Act of 1915 allowed local authorities to set maximum rents for properties in their area, while the Increase of Rent and Mortgage Interest (War Restrictions) Act of 1915 limited landlords’ ability to increase rental fees.

 Quite a number of improvements were made through to the early 2000s when the Labour government introduced new measures aimed at improving tenants’ rights and increasing the supply of affordable housing. The Housing Act of 2004 introduced new regulations on houses in multiple occupations (HMOs) and gave tenants greater protection against eviction. Today, the UK rental market is largely deregulated, with landlords free to set their own rents and tenants relying on market forces to negotiate affordable rental fees. Some local authorities still have the power to set maximum rents for certain types of properties, such as HMOs and social housing. Although some of the control measures have shortfalls, it is difficult to deny the role that rent control plays in shaping the housing market across many countries around the world.

 The primary goal of rent control is to make housing more affordable for low- and middle-income households by preventing landlords from charging excessive rents. In Nigeria, especially Lagos, rental fees have increased significantly over the past decade. Rental prices in Lagos went up by an average of 18.09% between 2021 and 2022 and 14% in the previous calendar year[L1] . With increasing pressure on purchasing power, rent inflation of this magnitude cannot be sustainably backed with effective demand. This has brought up some agitation for rent control as a solution – the setting of some guardrail in real estate pricing, especially in a fast-paced city like Lagos. In this note, we will be discussing three reasons why there is a need for price regulation.

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Affordability concerns

The property market in Lagos, especially within the residential submarket, has seen phenomenal growth over the past decade. With new residential hubs opening along the Lekki-Epe artery. There has been an increase in housing stock in this axis resulting in some decongestion of what used to be the core residential regions (Ikoyi and Lekki Phase 1). With this spread in development activity, some price stability was expected, as there was more supply to match demand. But we saw the opposite, as the rental prices have remained on the rise resulting in affordability concerns among residents.

Between October 2021 and September 2022, Lagos recorded an average of 18.09% increase in the price of apartments available for rent and sale respectively. Based on our research, this has been one of the highest increases recorded around the world within the period. The closest to this was described as a rental crisis, the London rental market saw rents rise by 17% throughout 2022. In a statement by Zoopla’s Executive Director, Richard Donnel explained that the root cause of the rental surge is demand and supply. According to his CNBC interview, “Supply and demand are really out of kilter at the moment. On the supply side, the average London estate agent would typically have had 17 to 20 properties for rent on their books. That’s down to 10 or less than 10 at the moment.

 Considering the Nigerian economic suppression, this rental surge in Lagos is not sustainable, especially for moderate-income families and fixed-income earners. It can lead to a rental catastrophe and worsen rental affordability problems. This is already impacting low to moderate-income families and retirees who have little or no increases in their annual revenue.

Worsening living pressure

 We tracked rental rates across 10 moderate to low-end neighborhoods in Lagos and found that the average cost of a one-year lease of a 1-bedroom apartment is now at N1.5million. This is about 42.4% of the average salary of a financial analyst working in any of the top 5 commercial banks in Nigeria. Based on this analysis, the rental cost for an average renter in Lagos is 12.4% more than the generally accepted rule of thumb that stipulates that a person’s annual rental cost should not be more than 30% of their total gross annual revenue. With the inflation rate at 21.91%, and minimum wage still around thirty-three thousand naira, the financial pressure associated with living in Lagos is worsening, especially for low-income earners. This further reinforces the need to control rental prices in the state. Apartment rates are rising higher than the average income of Lagosians.

Rental Inclusion

 Lagos is a metropolitan city that houses people with varying levels of income and financial capacity. Low-income earners and retirees typically have fixed incomes, or in some cases, relatively low-income growth rates. Rent control will have a huge impact on this population segment. One of the direct impacts may enable moderate-income families and people on fixed incomes to live decently and without fear of a catastrophic rent hike. Rent control will provide protection for tenants by preventing landlords from increasing rents arbitrarily or evicting tenants without cause.

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Security of investment

Neighborhoods are safer and more stable with a base of long-term residents in rent-controlled apartments. Rental control is another way to curb the high vacancy rate, especially among high-brow locations in Lagos. Additionally, rent control can help to stabilize the rental market by preventing sudden and large increases in rents. This can make it easier for tenants to plan their budgets and avoid unexpected rent hikes that could result in financial hardship or displacement. By making housing more affordable, rent control can promote economic growth by freeing up resources that families can use for other purposes, such as investing in education, starting businesses, or saving for retirement. This is particularly true for a city like Lagos where some residents are spending as much as 70% of their income on rent.

We love your feedback. Let us know if you agree that the Lagos real estate market needs regulations and why. You can also let us know what topic you will like to read about by sending an email to research@buyletlive.com.

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