There is No Real Estate Bubble in Kenya, Says Cytonn

A real estate bubble refers to an increase in property prices in the market owed to increased demand against limited supply, and an eventual slump in the demand for the properties in what is called a ‘burst’.

This demand arises due to increased investors’ need to place huge funds in the real estate sector, majorly borrowed funds, based on speculation that the rising prices will keep on rising with the hope of generating higher returns.

A real estate bubble is usually characterized by inflated property prices, increased uptake of debt, and an increase in property demand.

From Cytonn research, some of the causes of a real state bubble include;

i) wider mortgage offerings

ii) access to cheaper credit

iii) overall increase in housing demand against limited supply, and, iv) bullish speculations for the real estate property market.

A real estate bubble has adverse effects on any economy such as;

i) decreased homeownership rates due to unaffordability

ii) declined property development activities as investors seek to dispose of available property

iii) reduced property investment returns from the bubble burst

iv) poor mortgage and credit sector performance due to the high number of defaulted loans.

Despite the rising prices over time, the Kenyan real estate market has not been in a bubble, since demand in the country is supported by fundamentals as opposed to speculation. Some of these fundamentals include;

i) increase in population from 38.6 mn people in 2009 to 47.6 mn persons in 2019 according to the Kenya National Bureau of Statistics

ii) low credit supply from the high number of non-performing loans which recorded a 6.4% q/q increase in Q4’2020 leading to lenders exercising a more conservative approach while giving loans

iii) real demand for housing currently at 2.0 mn units and growing by 200,000 units annually

iv) higher increase in income levels compared to an increase in housing prices indicating that there is still room for property prices to grow and match the increase in property prices.

From above it is clear that the real estate sector is not in a bubble but is experiencing normal sector cycles in line with the economic cycles.

However, to prevent a real estate bubble in the future we recommend below measures;

i) public-private partnerships to help meet the pressing demand

ii) enforcing collaterals when giving loans

iii) economic growth support policies to avoid overreliance on debt for homeownership

iv) aggressiveness and innovative solutions in the provision of affordable housing.

There lacks a possibility of un-sustained demand that is likely to exceed the current supply in the country and the rapid rise and fall of prices are attributable to interactions of forces of demand and supply in the market.

Opportunities for investments in the real estate sector therefore exist, and investors can take advantage of the high returns recorded in select themes and areas.

For more information, please see our topical on Real Estate Bubble.