GLOBAL ECONOMIC MELTDOWN AND CHALLENGES OF

PROPERTY INVESTMENT: THE NIGERIAN PERSPECTIVE

By
Emma O. Omuojine,
B.sc (Nigeria), MBA, LL.B (Lasu), LL.M (Lagos) BL, FNIVS

INTRODUCTION
Every economy has its high and low, enunciated in the typical business
economic cycle of expansion, recession, contraction and revival
(Omuojine 1988).

However the global economic meltdown arrived with a bang without

warning, defiling discerning minds, with only a few seers conjecturing
the impending doom. Since the infamous frauds at Enron and
WorldCom, the world financial market has not been the same.

Globalization is a world phenomenon of general application, it knows

no boundaries and it is seemless. Suffice to say however that the
global economic or financial meltdown as we have it today reared its
ugly head in the United States of America, around July 2007 and
gradually engulfed Europe, Asia and the world in general (The Hindu,
October 19, 2008).

The global financial crisis started when a loss of confidence by

investors in the value of securitized mortgages in the US resulted in a
liquidity crisis that prompted a substantial injection of capital into
financial markets by the United States, Federal Reserve, Bank of
England and European Central Bank.
By September 2008, the financial crisis had deepened as stocks
markets worldwide crashed with high volatility and a number of banks,
mortgage institutions and insurance companies went under (Wikipedia,
2009)

CAUSES OF THE FINANCIAL CRISIS

Though various reasons have been adduced for the financial meltdown,
we will adopt Ben Bernanke’s summary of the situation;

For almost a year and half the global financial system has been under
extra ordinary stress–stress that has now decisively spilled over to the
global economy more broadly. The proximate cause of the crisis was
the turn of the housing cycle in the United States and the associated
rise in the delinquencies on subprime mortgages which imposed
substantial losses on many financial institutions and shook investor
confidence in credit markets.

However, although the subprime debacle triggered the crisis, the

developments in the U.S mortgage market were only one aspect of a
much larger and more encompassing credit boom whose impact
transcended the mortgage market to affect many other forms of credit.
Aspect of this broader of credit boom include widespread declines in
the underwriting standards, breakdowns in the lending oversight by
investors and rating agencies, increased reliance on complex and
opaque credit instruments that provide fragile under stress and usually
low compensation for risk taking.

The abrupt end of the credit boom has had widespread financial and
economic ramifications. Financial institutions have seen their capital
depleted by losses and write-downs and their balance sheets clogged
by complex credit products and other liquid assets of uncertain value.
Rising credit risks and intense risk aversion have pushed credit
spreads to unprecedented levels, and markets for securitized assets,
except for mortgage securities with government guarantees, have shut
down (Bernanke, 2009).

Heightened systematic risks, falling assets values, and tightening

credit have in turn taken a heavy toll on business and consumer
confidence and precipitated a sharp slowing in global economic
activity. The damage in terms of lost output, lost jobs and lost wealth is
already substantial (Wikipedia for Research, 2009).

EFFECTS ON GLOBAL REAL ESTATE

The global financial meltdown has tremendous effects on the
residential and real estate sector of the economy generally. Lending to
the real estate sector has become subdued with banks getting over
cautious and interest rates on the rise.

The slow down in the real estate sector is self evident with a seeming
glut in the housing and real estate transactions by individuals,
corporate bodies and between banks and real estate developers.

In the face of rising demands for housing loans, housing loan

disbursement by banks and financial institutions have reduced to near
zero level while banks have become choosy in funding commercial
buildings and residential apartments. Prospective investors have
started to rethink real estate as an investment option. The enthusiasm
of the pre-meltdown regime, 2005-June 2008, has vanished.

During the bull run on stock markets from August 2006-June 2008, the
real estate business and the banking sector had complemented one
another. But now they do not seem to be in harmony since banks
started modifying and readjusting their portfolios. (The Hindu, October
19, 2008)

GLOBAL MELTDOWN AND THE NIGERIAN ECONOMY

Global or globalization in simple language can only mean one thing-
what touches one touches another. But in the wake of the global
meltdown in 2008, we were told by the administration of our erstwhile
economy that the Nigerian economy was hedged against the global
economic meltdown. This was buttressed by the fact that we had just
emerged from the euphoria of bank consolidation which raised the
capital base of operating banks to a minimum high of N25 Billion and
our huge investment in foreign reserve. ”‘Nigeria won’t experience
economic recession” declared Professor Chukwuma Soludo, the then
CBN Governor, earlier in the year. This was in the face of the global
crisis which created fear over the future of our fragile local economy.
But we now know better.

The first major jolt of the global financial meltdown was the bubble
burst of the stock market. To date most stocks had depreciated in
value by over 90 percent on the stock exchange since August 2008;
stocks are still gravitating towards their par levels. The meltdown has
also affected the nation’s economy resulting in liquidity and credit
crunch, confidence crisis and weak consumer demand.

The capital market continues to record a downturn as a result of

decline in FDI’s and divestment by foreign investors.

Also commodity prices have collapsed with crude oil being worst hit,
declining from $140 per barrel in August 2008 to below $34 per barrel
in February 2009 the first quarter of 2009. With OPEC quota decreasing
from 2.2 million barrels per day to about 1.6 million barrel per day,
national revenue contracted. The pressure on and de-accumulation of
foreign reserves has created pressure on exchange rate with the
attendant increase in inflation. Exchange rate to dollar declined from
N116 in August 2008 to N150 in September 2009.

The global economic meltdown has occasioned massive reduction in

consumer purchasing power as a result of drastic cut in public sector
spending which has affected the consumption pattern of the citizenry
and demand for goods and services.

Global Economic Meltdown And Nigerian Real Estate Market

The global economic meltdown has hit the Nigerian real estate market
in a special way. While foreclosures may be strange to the Nigerian
housing and real estate because of our dwarfed and relatively non-
existent mortgage institution, the Nigerian property market especially
in the major cities of Portharcourt, Abuja and Lagos achieved an all
time high between 2007 and second quarter of 2008. In Lagos,
property values were known to have been increased by as much as
100% in the first half of 2008 from their 2007 values. Strange as it was
to discerning investors and professionals, the phenomenon was easily
explained away by the “militant activities” in the Niger Delta that
forced oil Corporations to relocate from Portharcourt and Warri to
Lagos exerting demand pressure on the limited housing stock. The
erstwhile virile stock market trading fuelled the housing bubble and it
was only a matter of time for the bubble to burst.

As the stock market in the United States of America, U.K and

elsewhere in the world nose-dived and housing values fell rapidly,
leading to foreclosures, foreign investors started recalling their
investments in Nigeria resulting in unprecedented run on the stock
market, the banks and other financial institutions. Consequently
consumer demand for real property decreased substantially while the
property stock for sale increased concomitantly.

In the face of this global economic meltdown, Nigeria still exhibited

some special economic market peculiarities. Inspite of the seeming
glut in the real estate market, values have generally stagnated at their
pre-2008 level and in most cases have increased tremendously in the
low and medium income neighborhoods in all our major cities of Lagos,
Abuja, P/H, Ibadan, Benin, Warri, Asaba, Enugu, Jos, Kaduna, and Kano.
What is responsible for strange phenomenon? you may ask. The simple
answer is that our housing and real estate market is not mortgage
driven. Our real estate industry is predominantly equity-based and
where credit is advanced it is thoroughly low geared. So in the face of
a depression such as this, landlords and property owners can afford to
hold stubbornly to their high profile values unrepentantly, hoping for a
better and improved economy. Time value of money is of no
consequence to them as they hibernate their capital, awaiting a
favourable economic clime.

Suffice to say however that a few property investors in the high brow
areas of Ikoyi, Victoria Island and Abuja got their fingers burnt by
speculating on land and property development when values were well
over their peak only to be caught in the global meltdown imbroglio.

THE CHALLENGES
Humanity always fails to learn from history. It is a trite saying that one
gets “wiser after the event” but such lesson hardly enures as we
easily fall back to our old ways.

It is rather surprising how the fortune of one country can rock the
financial foundation of the world. It is more surprising that the historic
failure of Wall Street security giant, Lehman Brothers Holdings, on
September 15, 2008 held the US economy captive and triggered off a
financial earthquake now known as Global Economic Financial
Meltdown.

“The bank founded by three German immigrants existed for 158 years.
It survived the American Civil War, two World Wars, the Great
Depression and the terrorist attack of September 11, 2001. The bank
quickly grew from small to big and furiously mushroomed from big to
too big; Finally, on Monday September 15, 2008 the deeply traditional
bank collapsed. In the end there were more risks than assets on
Lehman books, its bankers good sense had been trumped by greed.
The blend of brilliance and arrogance, ambition and megalomania
typical of the industry had proven to be fatal” (Spiegel Staff, 2009).

It became clear that the powerful of the financial world were now
powerless to cope with the risks that had accumulated over the years.
(Spiegel Staff 2009)

In his September 7, 2009 Labour Day Speech, U.S Presidents, Barrack

Obama summerised the whole episode succinctly when he said that,
‘the crisis exposed that human greed surpassed responsibility’.

In contending with the challenges posed by the financial meltdown the

worst since the Great Depression of 1929-1939, it is pertinent to
consider the gyration in the financial economy that let to the crisis.

John Bellamy Foster writing on “The Financialization of Capital and the

Crisis” attributed the housing bubble that eventually led to the
financial crisis to what he calls “Speculative Mania” which is
characterised by a ‘rapid increase in the quantity of debt and an
equally rapid decrease in its quality’. Heavy borrowing is used to buy
up financial assets not based on the income streams they will generate
but merely on the assumption of increasing prices for these assets.
Collaterised Debt Obligations (CDO’s) with their exposure to subprime
mortgages or financial toxic waste increasingly took this classic form ‘
Mortgage lenders and subprime borrowers were not the only ones
caught in the trade, a crowd of real estate speculators got into the
business of buying houses to sell off at higher prices at a later date’.

Many home owners began to view the rapid increase in the value of
their homes as natural and permanent and took advantage of low
interest rates to refinance and withdraw cash value on their homes.
This was a means to maintain or increase consumption level despite
stagnant wages for most workers. At the height of the bubble in U.S
new mortgage borrowing increased by $1.11 trillion between October
and December, 2005 alone, bringing outstanding mortgage debt as a
whole to $8.66 trillion equal to 69.4 percent of U.S GDP (J B
Foster,2008).

In tandem with Kindelberger’s model in Manias, Panics and Crashes,

panic set in, marked by a rapid selling off of assets and a run on the
banks in a flight to liquidity and eventual burst and crash.

The initial crash that shook the US market occurred in July 2007 when
two Bear Stearns hedge funds that held nearly $10 billion in mortgage
backed securities (MBS) imploded. One lost 90% of its value while the
other melted down completely.
A severe credit crunch followed as fear spread among financial
institutions, each of which was not sure as to the level of financial toxic
waste the other was holding. The seepage of credit crunch into the
commercial paper market cut off the main source of funding for the
bank- sponsored SIVs (Structured Investment Vehicles). This brought to
the fore the heavy risk exposure of same of the big banks arising from
CDS (credit default swaps). A key event was the failure and
subsequent bailing out and nationalisation of British mortgage lender
Northern Rock, which in September 2007 was the first British bank in
100 years to experience a bank run.

Much of the fear that swept through global financial markets was due
to a system so complex and so opaque that no one knew where the
financial toxic waste was buried. This led to a stampede into national
treasury bills and a drastic decrease in lending.

“In the old days finance was treated as helper of production” (Sweezy
1994) But now the traditional role of finance as a helpful servant to
production has been stood on its head with finance now dominating
over production (John Bellamy Foster, 2008)

Consequently global growth projections fell, stock markets plummeted

and currencies lost their value against the dollar, making coordinated
monetary interventions, bank bailouts and fiscal stimulus packages
inevitable (Will Straw 2008). The US government and the US Federal
Reserve moved in to save the economy by injecting about 11 trillion
dollars into the economy (Spiegel staff 2009)

In November 24, 2008 the British Government announced a $30 Billion

(20 billion pounds) stimulus package, to jump start the economy. This
was in addition to planned increased borrowing targeted at massive
public spending on hospitals, schools, transportation and
environmental projects. In defending the economic stimulus package,
Prime Minister Gordon Brown said “To fail to act now would be not only
a failure of economic policy but a failure of leadership ( The
Washington Post Tuesday No. 25, 2008).

“About 90 percent of the money in Canada’s ($40 billion 5yrs)

economic stimulus package was committed to fund more than 7500
infrastructure and housing projects across the Country. Prime Minister
Stephen Harper stated that 220,000 jobs will be created or maintained
in Canada by the end of 2010. (Andrew Mayeda, Sept. 28, 2009,
Canada.com)

However, it would seem that these policy interventions are only

available to the handful of countries which have ability to defend
themselves from capital flight or can fund their fiscal deficits. Most
middle-income countries with notable exception of China have
struggled to make the necessary interventions while developing
countries look on with concern as necessary investments and
expansion in development assistance are threatened.(Will Straw 2008)

While the developed countries and some other nations have well spelt
out recovery plans, Nigeria has been virtually inactive in taking visible
revival steps to bring the economy out of the woods (Sunny Nwosu,
2009)

The Executive Secretary of Nigerian Automobile Manufacturers

Association, Mr. Arthur Madueke lamented that the productive sector
which could have given stimulus to financial market’s growth has been
on a long recess in Nigeria (2009)

The causes of the Nigerian depression following the global economic

meltdown are multifaceted.
First, there was the fatal crash of the capital market following the run
on it by foreign as well as local investors where most stocks
depreciated by over 80 percent between August 2008 and August
2009.

The over reliance of the national economy on petroleum as a source of

income. Over 95% of national revenue is from oil and gas which makes
Nigeria a mono-economy in spite of its vast natural and human
resources.
Activities in the world oil market and the Niger-Delta militant agitation
has drastically affected the crude oil production with resultant drop in
revenue.

The high reliance on importation to meet our basic physical, social and
economic needs thereby boosting other foreign economies at the
expense of our national economy. This has led to increasing depletion
of our foreign reserve and indebtedness to the World Bank and the
International Monetary Fund (IMF)

Outright corporate greed exhibited by various companies and service

providers has contributed in no small measure in depleting our national
economy.

One of the major challenges of our time following the recent evaluation
by the Central Bank of Nigeria (CBN) in the near fall of the Big Five in
the words of Obama is that ‘legal norms and ethics should be
enhanced in the financial sector’ (2009). Subprime lending should be
discouraged while credit underwriting should involve proper evaluation
of securities by professional valuers. In banking parlance it is a usual
saying that credit is not a security issue . Very true indeed but most
investments on which credit are based have predominantly real estate
elements and factors that need proper scrutiny and evaluation by
trained and seasoned professional estate surveyors and valuers. This
will greatly discourage over crediting and abort wrong credit
underwriting.

What the global financial crisis brought to the fore is the inadequacy or
near non existence of the mortgage institution in this country. The
mortgage industry should be encouraged to grow by government
putting in place a sound mortgage policy with attendant low interest
rate regime. This will galvanise development, economic activities and
economic growth by virtue of employment, improved consumer and
business spending, value added and growth in GDP.

Though an irony that it is the same mortgage institution that led to the
housing bubble and eventual global economic meltdown. The reason
for this as espoused in this paper is because of its wrong management
and radical deviation by practitioners from traditional best practices of
the mortgage business, through over financialisation, creation of funny
credit instruments that are out of tune with traditional mortgage
banking.

History has shown that the main engine of national economic growth
after a depression such as this is housing and real estate development.
This is a big lesson and challenge for Nigeria. It is trite that the
precursor to a sound mortgage policy and system is an enduring land
tenure. It has been pleaded severally by professionals and authors in
the real estate sector that a proper land certification system is the
answer to our current skewed land tenure and economic
development(Holden Stein T,Deininger Klaus,Ghebru Hoseana,2007);
necessitating a revisitation of the Land Use Act which has made land
transactions unnecessarily laborious and less productive.

CONCLUSION
Globally, the decline in equity and real estate wiped out $28.8 trillion
of global wealth in 2008 and the first half of 2009 (fipod 1, 2009)
Economic meltdown has had tremendous and far reaching effect on
the Nigerian economy including crash in the NSE/NSI, decline in oil and
distributive revenue, fall in the value and purchasing power of the
naira, stagflation and decline in consumer disposable and spendable
income.

If Nigeria is to recover and rise above the current economic quagmire,

like most developed countries are already doing, we have to look
beyond the regime of monopoly finance capital, which benefit
oligopolists who dominate both production and finance, and evolve a
system that will grow the economy while advancing the needs of the
entire citizenry. The answer we dare say lies in housing, real estate,
agriculture and a diversified economy. The challenge is ours.

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