Is our housing bubble about to burst?

Is Kenya’s housing bubble finally approaching its sell-by-date?

This question came to my mind last weekend after visiting a newly-completed housing project in the outskirts of Nairobi whose owner was worried about the prospect of selling the units.

And this owner, a new developer, had a good reason to be worried: Since the 32 apartment units were completed in April, only six have been sold.

Unlike a while back when most new apartment units in many parts of Nairobi used to be sold off-plan, this new developer’s experience has been different.

True, there have been some inquiries, but they hardly translated into real sales.

The problem, the developer said, was that some prospective buyers who had initially showed interest backed off after the interest rates went up, saying they could no longer afford mortgage at the new rates.

Having borrowed money to put up the project, the developer is worried that, should the houses not sell in the next few months, the banks may start coming after her.

Hard stuff, given that it is her first project as a developer.

So, can we conclude from this developer’s bad experience that the housing bubble is bursting? I do not think so.

For one, the latest Hass Property Index survey released mid-July warned that if there are no further cuts in the interest rates (the report acknowledged the Central Bank of Kenya’s recent reduction of the base lending rates from 18 per cent to 16.5 per cent) in the next few months, then “we are not likely to see much new real estate activity before mid-2013 for completion by 2015, and will have built in a near two-year hole in building progress”.

Simply put, the survey warned of a severe housing shortage in the next two years if things do not change.

That should be good news for people with new housing stock, like the developer above.

But who will buy if people cannot afford mortgages because of high interest rates? Perhaps cash buyers, who, statistics show, are the majority, will snap them up.

But if the severe housing shortage the Hass Property Index warns about takes place (never mind that the country has been experiencing a biting housing shortage for decades), will we finally see the real estate bubble burst?

This, of course, is a decade-old question, which has been asked numerous times since the so-called property boom started in the country in the early 2000s.

So, are we really on the cusp of a property bubble?

I think an understanding of what a real estate bubble is and what causes it may give some clues.

In his new book titled The ABC of Real Estate Investment in Kenya, Mr Kariuki Waweru notes that housing bubbles usually start with an increase in demand in the face of limited supply.