It is often said that housing/land prices in Kenya always go up and can never go down. You just cannot fail if you invest in real estate in Kenya. But is this really so?
According to The Standard, a report by the Central Bank of Kenya and the World Bank indicates that only 1 in 10 Kenyans can afford to buy the home they live in, even if they get a mortgage (assuming they even qualify to get it).
I think the question must be posed: What is a bubble? According to Wikipedia, An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is “trade in high volumes at prices that are considerably at variance with intrinsic values”. It could also be described as a trade in products or assets with inflated values.
Specifically regarding housing/real estate bubbles, Wikipedia further says: A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements, followed by a reduction in price levels.
Now, back to the Central Bank report. Here are a few selected excerpts from the report:
- only eight per cent of Kenyans — 320, 000 households — can afford a mortgage was shocking
- for one to buy a house worth Sh2 million, for example, one must have a net salary of Sh100,000, and service the loan at Sh42,000 a month for a period of 15 years at an interest rate of 14.5 per cent. Those earning less have no place in the mortgage industry and must find another way of owning their dream house
- The shocking revelations also indicate that the total mortgage loan book in the country is only 16,000 accounts, while the total value of mortgage loans, as at the end of December last year was Sh133.6 billion. This means that, technically, only 16,000 people/organisations in the whole of Kenya have taken up mortgages
- It is also an indication that buying property in Kenya is predominantly for the rich, who opt for cash sales as opposed to mortgages.
- Professionals in the housing sector say the findings reflect the high level of speculation on land that has pushed property prices through the roof
Only 1 in 10 Kenyans can afford to buy the home that they live in, and even fewer Kenyan can afford to take up mortgages. In my mind, this report clearly indicates that the Kenyan real estate market is in the middle of a bubble. Real estate prices have gotten to be so high that the great majority of Kenyans just cannot afford real estate.
Sooner or later, this bubble will burst and prices will come crashing down. Many of the “me too” real estate developers and investors will lose vast sums of money. It is just a matter of time…