housing bubble
A housing bubble is when property prices rise far beyond what rents or incomes can justify, purely because everybody expects them to keep rising.
In plain English
A bubble is a price supported by belief rather than by arithmetic, and property bubbles are the most dangerous kind because they are funded with debt.
The pattern repeats everywhere and it is always the same. Prices rise. People buy because prices are rising. That buying pushes prices higher, which attracts more buyers, who borrow more to keep up. At some point the price of a property has no connection at all to what it earns in rent or what a local salary could ever service.
The tell is exactly that disconnection. When a flat costs sixty times its annual rent, or a hundred times an average annual income, the price is no longer resting on anything. It is resting on the next buyer.
In parts of Lagos, prices have moved a very long way from what rents or local incomes support, and a great deal of it is held by people who expect somebody else to pay more later.
None of which tells you when it will end, and that is the honest and unsatisfying part. Bubbles run far longer than they should.
It tells you to ask one question before buying. Does this price make sense if prices never rise again? If not, you are not investing. You are hoping.
A flat costs ₦120 million and rents for ₦4 million. That is thirty years of rent to recover the price, before any costs. The purchase only makes sense if somebody pays even more later, which is the definition of hoping.
Questions people ask
How do I spot a housing bubble?
Look at price relative to rent and to local income. When a property costs many decades of its own rent, the price is resting on expectation rather than arithmetic.
Is Lagos property in a bubble?
Prices in parts of Lagos are far above what rents and local incomes support, which is a warning sign. Nobody can tell you when or whether that corrects.
What happens when a bubble bursts?
Prices fall, and those who borrowed heavily can owe more than the property is worth. Those who bought within their means and hold income producing property survive it.
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