Are the Uganda Real estate Prices sustainable?

Are the Uganda Real estate Prices sustainable?

I recently went looking for purchase a plot of land with my peanut savings, so the broker on knowing the amount I had in mind- he called his network of brokers to look for me a cheap plot intimating “Ono sente tayina za CHOGM”  literally meaning he does not have CHOGM funds. This arguably among other factors could explain the exponential rise in real estate’s prices in Uganda. It is against this backdrop that I try to explore the sustainability of Uganda’s real estate bubble that characterized by rapid increases in valuations of real property

Unlike the stock market, where most people understand and accept the risk that stock prices might fall, most people who buy a house don't ever think that the value of their home might decrease. The laws of physics state that when any object (which has a density greater than air) is propelled upward, it will return to earth because of the forces of gravity act upon it. The laws of finance say that markets that go through periods of rapid price appreciation or depreciation will, in time, revert to a price point that puts them in line with where their long-term average rates of appreciation indicate they should be. This is known as mean reversion. Prices in the housing market follow this law of mean reversion too - after periods of rapid price appreciation (or depreciation), they revert to where their long-term average rates of appreciation indicate they should be. Home price mean reversion can be rapid or gradual. So yes, at some point property prices will come down. The when question is one that has not empirically be answered, therefore the scope is this piece is limited to the key factors that cause the bubble as well pointers to why it might burst.

Economically prices are driven by demand and supply. When demand Outstrips supply, the prices go high and reverse is true. To best understand the dynamics of real estate market, one ought to know the factors that affect both demand and supply of real estate. Assuming the supply is constant (same geographical stock of land), my analysis is limited to the key drivers of the demand side.

Land, real estate prices don’t follow the normal demand law, where the higher demand is driven by lower prices and vice versa. To the contrary, people buy more real estate when prices are high expecting them to rise further. This is primarily driven by speculation as well lack of alternative investments in other sectors like agriculture. The speculation will further stimulated by the huge expectations from the oil sector where the estimates place the value of Uganda's oil assets at a minimum of $75 billion. A substantial amount of this money is to be spent on public expenditure, with a good amount trickling into the property industry. Also worth noting is that a commercial exploitation of the reserves requires about US $10bn of investment which will also inevitably trickle down to  However; Oil trend significant oil revenues (worth 5% GDP) won’t happen until 2030. During the peak period – which is estimated at 15 to 40 years at maximum – revenues will be around US$ 1.1 billion. Often resource extraction often entails little job creation, unemployment rises.

The risk of rising debt levels is that they will likely strain the future oil proceeds. Debt levels increasing simply mean more taxes in future. Currently, Uganda’s post HIPC and MDRI debt is growing at an average rate of 17% per annum in nominal terms, whilst projected to rise to 20% per annum in the medium term and long term frameworks. If we can take a leaf from the Greece or any debt ridden country, austerity coupled with increased taxation only strains the demand levels with a trickledown effect on housing prices

It is reasonable to expect that the number of houses built will increase as approximately the same rate as population grows. However as  much as there is growing demand for real estate and an apparent Huge housing deficits, the structure of the population demonstrates high levels of dependency with over 60% of population below 18years. This coupled with the growing levels of youth unemployment will prospectively lead dwindling demand for non-consumables including land

Real estate bubbles are seen as an example of credit bubbles (pejoratively, speculative bubbles), because property owners generally use borrowed money to purchase property, in the form of mortgages. This is probably the case in Uganda, as in FY 2011/ 12 when the central bank initiated an inflation targeting tool- by increasing interest rates to curb the runaway inflation (30% in November 2011), construction sector grew in real terms at 1.7% in FY 2011/12 compared to 7.8% in FY 2010/11. Real sector activities continue to grow at 5.6% over the last 4 years.  Also notably banks have consequently revised their mortgage valuations way below the market valuations. This move was prompted by dip in housing prices in the center of town. This only points to fact that land and other real estates are wrongly priced primarily due to speculation. E.g. when will land of 1bn shillings in kololo ever pay back?

Speaking of inflation, arguably it could be here to stay primarily. There is an increasing shortage or scarcity of food inputs like land, energy, water etc. yet the demand globally is increasing due to increased population growth rate. Thus the structural changes around oil and food production may be here to stay. With persistent inflation, the consumption share of income of the already small formal sector(less than 10% of the economy) as well as others will increase reducing the available disposable income to clear mortgages or least buy off the overly priced properties.

 

Lastly corruption has a significant premium or call tax on the real estate pricing. Corruption which is estimated annually 10% of the national budget/ about 2.2% of GDP has played a significant impact on the boom in real estate activities. Since the introduction of declaring the source of income for all properties above 50Million, the land and real estate activities have dwindled. Corruption if not curbed in the long run impedes investment especially since it worsens the doing to business indicators as well global competitiveness index thus reducing investor appetite. The expansive Corruption trends will trigger increased citizen demand for accountability which consequently will reduce corruption as well lower demand for real estate products.

 

The Oil potential impact with standing, economic theory seems to suggest that the key drivers of real estate bubble that is corruption, private sector credit, remittances, among others like growth of an economy and expectations tend to be volatile in the long run. So given that real estate the real estate prices are growing faster than any macroeconomic variable, worryingly higher than real GDP growth which is a proxy for effective demand/ affordability, the bubble will inevitably burst unless government takes strong stands to regulate the real estate prices as well as put measures in place to control corruption. Construction and housing bubble will burst faster in medium term (5-10 years) than other real estate activities which will in the long run(10years plus) unless regulation happens. This recommendation is in sync with Joseph E. Stiglitz recommendation on the market failures_ REGULATE REGULATE ofcourse in moderation (checks and balances)