Will Kenya’s property bubble burst?
Posted by Administrator on March 9, 2012
Every six months or so, Kenya’s top two mortgage financiers, Housing Finance and KCB, organise bus tours of Nairobi’s property developments.
Gathering at the break of dawn on a Saturday, participants stream onto buses that drive out to the developing zones of Nairobi. Such has been the pace of property development that some of the blocks of flats, town houses and bungalows are still only served by dirt roads.
Now, this housing push is grinding to a halt. Inflation rose for most of last year, making people review their spending and postpone property investments.
In November 2011, the inflation rate hit 19.7 percent, up from 5.4 percent in January, according to the Kenya National Bureau of Statistics.
Between late July and early December 2011, the Central Bank of Kenya’s (CBK) Monetary Policy Committee raised the central bank rate four times, from 6.25 percent to 18 percent, and commercial banks raised their rates in response.
They say they are renegotiating with their clients to ensure there are no defaults, but how much the renegotiations will help the banks’ balance sheets will only become apparent later in 2012 when they release the results.
Kenya is also in the middle of campaign mode with presidential and other elections due at the latest by March 2013. Since the return of multiparty politics in 1991, Kenya has always registered a slowdown or negative growth in an election year.
18.9 percent Kenya’s inflation rate in December 2011, up from 4.5 percent a year earlier
Early in the year is not a good time to gauge the market, with people still recovering from the Christmas holidays and paying school fees.
An offical at Housing Finance hinted that interest rates may fall in the next few months.
“At the moment, the market is quite slow. We’ll only see the true effect of the interest rates spike from March for home owners, and March-April for developers,” she said.
At the moment, Housing Finance is offering new mortgages at 23 percent, compared to existing fixed mortgages at 14 percent. These are worrying times for some mortgage holders.
A senior lecturer at the University of Nairobi woke up one morning to find that his bank had increased his and his wife’s monthly repayments by KSh64,000 ($750).
The couple had just bought a house on the outskirts of Nairobi for KSh10m to be repaid over 10 years. They had a choice: restructure the mortgage or struggle with the new rates.
Restructuring would have meant increasing the repayment period to 20 years with only a KSh15,000 reduction in monthly repayments.
They chose to go with the new rates. “I’m not sure what capitalist model our banks have chosen. The repayment rates are unsustainable and are breeding corruption,” says the 38-year-old lecturer, who asked not to benamed.
So is the Kenyan property market experiencing a bubble that is about to burst? It would be easier to answer that question authoritatively if the country had a national property index.
However, a number of credible indicators point to the answer being no. A World Bank-CBK baseline study of the mortgage market in November 2010 put national demand at 205,823 housing units per year with a supply of about 50,000 per year.
It found there were only 13,803 mortgage accounts as of June 2010. It also reported that most property developments concentrated on the higher end of the market and that most people funded their housing projects using cash.
This has left a huge gap in supply for the poor and, for the vast majority of Kenyans, buying a house still remains a distant dream.
The study helped bankers review their knowledge and assumptions about the sector.The report revealed that the average mortgage was KSh4m, so CfC Stanbic Bank now offers a 100 percent mortgage for properties worth between KSh3m and KSh10m.
It previously offered such loans only for properties worth KSh7m or more.
All this was just a dream before President Mwai Kibaki came to power in 2002. At that time…
18.9 percent Kenya’s inflation rate in December 2011, up from 4.5 percent a year earlier.
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