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Daily Nation : January 30th 2014
2 DN coverstory DAILY NATION Thursday January 30, 2014 Why Kenya’s property market will not tumble any time soon Up along a nondescript stream on the slopes of Mt Kenya, high-value bungalows have been cropping up. Many rich Kenyans and foreigners are rushing there to own a piece of the mountain. And you would be surprised to know who own some of those highly guarded villas along the coast and upmarket Nairobi BY PATRICK MBATARU email@example.com of an approaching bubble burst. But a deeper analysis of the fundamentals influencing property prices suggests that the market is not about to experience a burst any time soon, and there are several reasons why this might be the true position. To get there, however, we need to M first understand what a real estate bubble is. Experts define it as a rise in housing prices fuelled by demand, speculation and the belief that recent history is a perfect forecast of future behaviour of the market. Housing bubbles, therefore, usually start with an increase in demand... in the face of limited supply. A combination of very low interest rates and easy credit can bring ost commentaries on the ever-rising prices of real estate in Kenya easily fall into an emotional warning borrowers into the market, fuelling demand. Speculators then jump into the fray, believing that profits can be made through short-term buying and selling, and thus further driving up demand. A rise in interest rates and tightening of credit standards can lessen demand, and if the demand continues to drop while supply continues to rise, a sharp drop in prices may result, leading to market collapse. That is natural. Other general economic and demographic trends can also create a housing bubble. However, due to the large transaction costs associated with owning a house, real estate markets are not traditionally as prone to bubbles as other financial markets. For example, it took almost 70 years for the US to experience another housing bubble burst after the Great Depression. Yet the current fear of a real estate market bubble in Kenya is fuelled by the recent collapse of property prices in the US and Europe. These, however, Bubbles are easier to understand and analyse after they burst. Like the overinflated balloon, one only knows that it has burst after the ‘pop’! are radically different markets. An analysis of the US bubble burst, for instance, shows factors that do not exist in Kenya. First, what would surprise many Kenyans is that the US housing market controls have been very relaxed so that almost everyone with some disposable income can get a mortgage. But the Kenyan mortgage system is very rigid, small and controlled by the numerous legal and financial regulations. While the US government policy encourages low-income households to own homes, the Kenyan market is highly in favour of up-market and middle class ownership. Secondly, the interest rates in the US before the burst were enticingly low. At one per cent, many rushed to take loans and invest in the real estate sector, which offered more returns. A lot of people took several mortgages, a trend which ended up releasing more houses into the market. This is different from the Kenyan scenario, GROUP EDITORIAL DIRECTOR: Joseph Odindo GROUP MANAGING EDITOR: Mutuma Mathiu FEATURES EDITOR: Bernard Mwinzi REVISE EDITOR: Mary Wasike SUB-EDITOR: Naliaka Wafula PHOTO EDITOR: Joan Pereruan CHIEF GRAPHIC DESIGNER: Roger Mogusu GRAPHIC DESIGNERS: Nzisa Mulli, Andrew Anini, Dennis Makori, Alice Othieno, Michael Mosota, Ken Kusimba, Hassan Ibrahim, Benjamin Situma, Joy Abisagi, Virginia Borura, Teddy Murimi, Linus Ombette REPORTER: Joy Wanja COVER GRAPHIC: Hassan Ibrahim where interest rates have never been very friendly to the ordinary Kenyan wishing to own a home, and where the average Joe is apathetic to bank loans. Many lost homes to foreclosures So when the US interest rates climbed up sharply in 2007, many Americans were unable to service their mortgages because most of them were variable interest packages, which means servicing the mortgages became difficult. Many people lost their houses through foreclosures, further releasing more houses into the market, and of course, leading to a sharp fall in prices. Thirdly, the relaxed mortgage system in America and the low interest rates simply fuelled speculative madness to a level not seen in Kenya. The belief that house prices could only go up brought all players into an irrational enthusiasm: no one questioned the sustainability of the prices, not the is published every week by Nation Media Group Limited. It is distributed free with every Daily Nation. Unsolicited manu- scripts, artwork, transparencies are submitted at the sender’s risk. While every care will be taken on receipt of such material, the Nation Media Group Limited cannot accept responsibility for accidental loss or damage. ©Nation Media Group Limited, 2009. All rights reserved.
January 29th 2014
January 31st 2014