Real Estate Bubble in Kenya. Are we in Trouble or it's a Non-issue?

Before making a conclusion that there is a real estate bubble in Kenya, it is important to note that real estate is not only an investment but a heritage and pride that most Kenyans value. Kenya has experienced different shifts in real estate matters but one thing is clear, Real estate is key and will stand the test of time in all seasons, as we all need somewhere to call home. There are speculations regarding a real estate bubble in our country. However, it is important to first understand what a real estate bubble is, whether our country is experiencing one and how to spot a bubble in our country. A run-up in prices of houses fuelled by demand, speculation and enthusiastic spending to a point of downfall, defines a real estate bubble. A bubble begins when speculators drive up land prices in the name of making short term profits. This leads to increased demand, followed by a stagnation in demand while the supply increases resulting in a sharp drop in prices. A bubble happens in different phases as indicated below:

  1. A great demand for properties where people want to live causing prices to rise faster than the surrounding areas. This attracts speculative investors trying to purchase properties beyond their comfortable income range.
  2. Unrealistic expectations of appreciation of prices within a short time- over-excitement coupled with high expectations of returns begin to inform investors decision-making process. This makes them assume that the prices will appreciate faster than the average rate as influenced by various factors such as population growth, infrastructural development, etc. Such a hypothesis by an investor makes them pay more for a property without proper research.
  3. Inflated property price - When demand is driven by anticipation of price increase in the coming days, rather than the desire to reside here, prices rise artificially.
  4. Busting of the bubble – when the reality dawns to the buyers that it costs more to live than its worth, demand begins to dry up. The prices stagnate briefly, then when developers cannot find buyers, they are forced to lower their prices. This happens slowly at the beginning, but once it becomes clear that there's no demand with the stated price, demand falls even further. Some investors end up sunken on their mortgages due to the price fall.

Why Kenyan real estate is yet to experience a bubble

  • Affordable Housing deficit - data by the National Housing Corporation shows that affordable housing deficit currently stands at 2 million units, growing by about 200,000 units per annum. While the market seems to have a constant supply on high-end buildings, the supply of housing in the low and middle-income segment especially in satellite towns is still low. According to the World Bank, 61 percent of urban households live in slums in Kenya, this means that as a country we have a long way to go in the provision of housing before a real estate bubble is experienced.
  • Low mortgage uptake to finance housing - The demand for housing in Kenya is not driven by easy access to credit, it is estimated that only 1 percent of bank loan portfolios are mortgaged. In general, our country has few mortgages loans estimated at 26,504 by Central Bank of Kenya Supervision Report in 2018. Also, with the interest rates cap repeal in 2019, loan interest rates are expected to rise thus preventing excessive borrowing to purchase properties. Therefore, investors will consider purchasing properties within their incomes as opposed to taking up mortgages.
  • Country's Population growth – the annual population growth in Kenya is estimated at 2.2 percent with a high urbanization rate of 4.3 percent. This creates a large and growing domestic consumer market of approximately 24 million people holding a considerable huge economical and development potential in need of housing, especially in urban areas. The middle class is also growing with a disposable income and they are preferring investing to settle their families in the future in satellite towns where the property is relatively affordable. This creates an overall demand in properties and the supply is still low therefore the country needs to first satisfy the demand before a bubble is experienced.
  • The birth and growth of devolution have opened up investment opportunities across various counties. Further, urban centers in various counties have available development land which allows for developments in satellite towns outside major cities such as Nairobi, Kisumu, Mombasa, Nakuru, and Eldoret. This has distributed the demand for properties across the country as each county has its own housing needs that need to be met.

How then can an investor predict a bubble in any country?

  • Market prices - This data is available on real estate websites. Having such information and comparing figures within the past 1-3 years will provide a clearer picture of how steadily prices have appreciated. One clue that the market may be in a bubble is the rate at which prices are moving up. If prices seem to move too far too quickly, there's a chance that prices are inflated and are primed for a pull-back but if the growth is stable like in the various part of our country then a bubble will not happen.
  • Country' economic outlook - The price of property compared to the incomes of residents is also important. When the prices are higher than what residents can afford then it means that the properties are out of reach for the market. Contrary to this, Kenya has real estate companies offering properties with prices as low as Ksh 199,000 which is affordable for the low and middle-income earners whose demand for housing is yet to be met.
  • Access to credit facilities - Legislations and mortgage companies that make lending easy without proper verification opens an opportunity to buy properties with low variable interest rates only to be devastated by rising interest rates down the road making repayments extremely difficult for homeowners thus leading to a bubble. However, very few investors take up mortgages in Kenya that can result in a real estate bubble.

In conclusion, the real estate grew by 4.8% on average in 2019 as compared to 2018 according to Kenya Bureau of Statistics and this means that this growth is sustainable and a bubble will not be experienced in this sector.