Windhoek
Experts at the International Monetary Fund (IMF) have produced a study that on paper predicts the high likelihood of a housing bust and possibly a financial crisis in Namibia, if the housing market continues to climb at the current pace.
Although the study clearly cautions that it based its premise on anecdotal evidence and limited historical data, it does present various scenarios that in the end could result either in a bubble bust in the housing market, and collapse of the construction and real estate sectors, resulting in a significant increase in non-performing loans as the two sectors retrench employees, and of banks sitting with mortgage loan books that have very little value.
Ominously, the paper also noted that: “Most countries that recorded a five-year price increase similar to Namibia experienced a severe housing bust during the recent financial crisis.”
The paper was published in October 2015, with information obtained in September of that same year.
Interestingly, the IMF has since 2012 warned repeatedly of a housing price bubble in Namibia and the possible effects of such a price bubble bust and has been asking the central bank to keep an eye on commercial banks’ mortgage lending to consumers.
The recent paper uses modelling and computing to ‘stress-test’ the effects of a possible housing bubble bust on the country, using scenarios experienced in the United Kingdom, Spain, Ireland, USA and Denmark, among others.
The IMF warns of possible effects of housing price overvaluation, which is expected to be especially acute in the lower and middle segments of the residential property market and in urban areas, because the housing backlog is mainly concentrated in this segment, where consequently prices and rent continue to trend upward.
“This in turn has attracted speculative investments, driven by the possibility of high returns and large capital gains,” said the IMF.
A decline in housing prices would affect people’s ability to repay, especially those who have bought second homes as investments or to rent out.
Further, a housing price decline would also impact on the construction sector, with many contractors who have taken out bank loans to construct houses unable to service their loans, or retain their workforce.
Banks would not only be sitting with bad housing loans to households, but also to construction businesses.
The paper notes that “a decline in house prices would reduce economic activity in the construction and real estate sectors, which are among the major contributors to Namibia’s value added and employment.”
There is also a possibility of an indirect impact through banks and household de-leveraging. When facing losses banks are expected to reduce lending to the economy, because of rising difficulties to attract funds and a need to improve capital ratios.
“A plunge in home prices affects household balance sheets in two distinct ways – it causes both an increase in leverage and a decline in overall wealth. In an environment of reduced economic activity and credit tightening, this is expected to create a need for de-leveraging that, in turn, would depress consumer spending,” the report indicates.
Other factors that could contribute to woes on the housing market include the decline in cash purchase of properties by non-Namibians, who have used the oil and commodity boom in their country to invest in properties in Namibia.
A decline in mining activities would also impact on the housing market, as this would mean major retrenchments for much of the country’s employed population with bank mortgages.
The IMF paper, however, cautiously says that while banks are heavily exposed to the risk of a potential house price crash, it is necessary to note that not all housing busts end in a financial crisis.