There is No Housing Bubble in the Kenyan Market – Cytonn Real Estate

The  Kenyan market is not experiencing a bubble but a normal real estate cycle, and the rapid price increments witnessed are as a result of low supply and high demand.

This is according to Cytonn Real Estate who reviewed the market alongside the United States and Ireland as case studies.

In their review, they noted that the Kenyan real estate sector’s growth can be demonstrated by the rise in building approvals, which increased by 128.2 percent to 308.4 bn in 2016 from 135.1 bn in 2012, as per The Kenya National Bureau of Statistics, Economic Survey 2017.

Additionally, the average price for a house has increased to Kshs 31.4 mn in 2016 compared to Kshs 7.1 mn in 2000, a CAGR of 9.7 percent. “This is a clear indication that real estate has become the ideal investment diversification portfolio for investors,” they note.

They observed that “As a result of the sector’s resilient performance despite the long electioneering period, the property prices have held with the low increases in both rents and asking prices, investors have ascribed this to a possible property bubble. This is due to: high returns, oversupply in some themes such as commercial office and peaks and troughs in price growth.”

Related:

Is There a Real Estate Bubble in Kenya? -Cytonn Report 

There’s no Property bubble in Nairobi says Knight Frank Kenya 

Cytonn however, says the key constraint in the real estate sector are:

More people taking on more debt. However, in Kenya today, the key constraint is access to credit as the government is crowding out the private sector given the 2016 interests rate cap law.

Relaxed lending standards. Despite the Kenyan government lowering interests rates, institutions have tightened their credit supply to the private sector, especially for long-term loans such as mortgages, as evidenced by the slowdown in private sector credit growth, at 2.0% in October 2017 compared to 4.6% in October 2016 and 19.5% in October 2015,

Historically low interest rates. From our case studies, interest rates declined to below 7%. In Kenya, The Bank Amendment Act of 2015 capped bank lending rates to a maximum of 14.0%, which is 4% above the Central Bank Rate that has remained at 10% throughout 2017,

High demand from high levels of speculation. Unlike in a bubble where most of the demand is driven by speculators, in Kenyan the demand is driven by real demand which is estimated to be at least 200,000 units p.a.

The incredible rise in house prices. As is evidenced in our case studies, a housing bubble is characterized by most often than not, a triple digit growth in prices and as per the IMF standards, the decline in a bust must be at least 14% over a period of 16 quarters. In Kenya however, the prices are growing, albeit softening, with 2016 recording an average appreciation rate of 7.4%, which slowed to 3.8% in 2017..