No real estate bubble about to burst in Kenya
By George Wachiuri
A real estate bubble is an economic cycle characterised by a rapid escalation of property prices followed by a contraction. A bubble is created by a surge in property prices unwarranted by the fundamentals of the property and driven by exuberant market behaviour. When no more investors are willing to buy at the elevated price, a massive sell-off occurs, and puff! - Causing the bubble to deflate.
Bubbles can often be hard to identify, due to difficulty in accurately estimating intrinsic values. The basics are estimated from rental yields or based on a regression of actual prices on a set of demand or supply variables.
A bubble simply happens with the change of market psychology moving from ‘These property prices seem irrationally high but they are increasing incredibly fast, so let’s buy a property soon’ to simply ‘Real estate prices seem irrationally high and they are not rising fast anymore, so let’s just wait and see’. Then puff! The burst occurs.
According to Investopedia, a housing bubble starts with a rise in demand but limited supply, which takes a relatively long period of time to replenish and increase. Speculators enter the market, further driving demand. At some point, demand decreases or stagnates; at the same time supply surges, resulting in a sharp drop in prices – and then the bubble bursts.
Usually, the housing market is not as prone to bubbles as other financial markets due to the large transaction and carrying costs involved in owning a home. However, a combination of low-interest rates and opening of credit doors can bring many borrowers into the market and fuel demand.
After that, a rise in interest rates and a tightening of credit standards can lessen demand, causing the housing bubble to burst. Over-borrowing from banks to fund property purchasing is a key ingredient to real estate bubble. This has been witnessed in first world economies such as the US, Australia, China and Poland.
Kenya not a credit economy
However, Kenya is not a credit economy; we are a consumer economy. We do not depend so much on bank loans to finance our projects such us building homes. Indeed, Kenya has insignificant mortgages. There were 26,187 mortgage loans in the market by December 2017 (according to the Central Bank of Kenya’s Bank Supervision Annual Report 2017) slightly up from 24,059 recorded in December 2016, for 51 million Kenyans.
These low figures are supported by a study titled The Home Ownership Survey conducted by the Centre for Research on Financial Markets and Policy carried out four years ago. It reported that mortgage, as a home financing alternative was taken up by only six per cent of respondents, compared to a whopping 54 per cent of Kenyans who preferred personal savings as their mode of home financing.
Indeed, Kenya is in ‘kindergarten’ in terms of the property market; an economy too young to experience what happens in Europe. In contrast, in western economies, credit is a phone call away.
So, there are two key indicators of a property bubble: Firstly, people are unable to service their mortgages. Once they are stuck here, banks come calling in to repossess the property. You can go out there and try to resell the property but it will not be taken up, because everybody is under economic stress. So you end up selling these properties at a throw-away price.
Secondly, property prices drop fast because there is oversupply but less demand. A bubble is characterised by poor property uptake or as low as below 10 per cent. And Kenya is way off this line; there is more demand and under-supply. There is a shortage of more than 300, 000 homes annually!
The demand for real estate is increasing, being fuelled by our growing population. About 27 per cent of the 51 million Kenyans live in urban areas (an estimated 14.2 million in 2019). All these millions require habitats. And we are growing so fast that every 20 seconds, one birth is registered, according to the CIA World Factbook.
Kenya has also seen an exponential middle-class growth. These are the people who are easily able to construct their own homes and are, therefore, fuelling a lot of growth in real estate.
Kenya also has a huge number of expatriates. These are people who are working for international organisations such as the United Nations, the IMF, and the World Bank and for big multinationals that have established their regional hubs in Kenya such as Google Kenya, Foton East Africa, Visa Inc, and Volvo. These are people who require prime properties in Kenya.
Kenya has also been witnessing a lot of diaspora inflows. According to CBK, Kenya received Sh274 billion in 2018 and it is being projected that the country will receive more. If you look at countries such as Nigeria, they received USD 25 billion in 2018 (according to a recent report by PricewaterhouseCoopers (PWC), and Kenya is close on the heels. About 60 per cent of remittance money in Kenya goes to property with the other percentage going to support families and these are the people who are making the real estate prospects continue looking up, way into the future.
The country is also seeing huge amounts of infrastructural developments, wing further augmentation of real estate in the country. The government and development partners have been rolling out huge projects that range from Lapsset Corridor Programme, the Standard Gauge Railway, major bypasses around main cities to the Turkana Wind project.
Bottom line, the possibility of whether there is a potential property bubble burst in Kenya is just but a far-fetched theory.
—George Wachiuri is the CEO, Optiven Group.
Email: [email protected]
