When, in 2010, the Central Bank of Kenya and the World Bank released a joint report showing that 92 per cent of Kenya’s urban dwellers could not afford mortgages, former Institution of Surveyors of Kenya (ISK) chairman Reginald Okumu received the news with a sense of triumph.
To him, the truth was finally out. “This is an indictment of the government’s housing policies over the decades. We cannot all be homeowners,” he said.
Since his university days in the 1990s, Mr Okumu has been a staunch advocate of affordable rental housing.
He believes that at any one given time, the vast majority of the population of any nation will always be tenants.
The government, therefore, has a responsibility to come up with policies that encourage the development of rental housing, he says.
His argument became even more poignant last week when the latest Hass Property Index report revealed that many would-be home buyers have resorted to being tenants because high interest rates have put mortgage out of their reach.
According to the survey, which covered the first three months of this year, mortgage applications have virtually disappeared in the low-middle end of the market, a development that has affected the volume of sales, with closures taking far longer and buyers coming through in small numbers.
Matters have been made worse by a slowdown in the production of new housing stock because most developers are reported to have put on hold some construction projects, postponed some phases, or reduced the number of homes they are constructing because of the high cost of loans.
“Against this backdrop,” said HassConsult’s property development director, Farhana Hassanali-Hashmani, “we have seen sharp rises in the asking prices for rentals in the first quarter across all segments of the market.”
At the upper end, she said, near-static rentals have finally seen an upward movement in the past three months by five per cent.
“This was the first significant quarterly rise in that market for over a year,” said Mrs Hassanali-Hashmani, while releasing the survey findings in Nairobi last week.
She said apartments, which only two years ago were in oversupply, had registered the greatest increase in rental rates — a 5.6 per cent increase in the past three months.
This, she said, offered a clear signal of a sustained surge in apartment rents… across all quarters, and cumulatively amounting to rent inflation in this market segment.
“We believe this push for higher rents for apartments is now set to be sustained for some time as landlords seek to improve yields at a time when the supply of new apartments is now slowed and buyers are holding off on home purchases and renting instead,” she said.
But people like Mr Okumu, currently a director at Ark Consultants, a Nairobi-based real estate firm, are concerned that it is the lower-middle and low-income groups that will suffer the most since they can neither afford mortgage nor do they have access to decent affordable rental housing.
“I think we have given rental housing a raw deal in this country. The reality is that the number of people who can own a home is very small.
“Why then don’t we focus more on providing quality affordable rental housing?” asks Mr Okumu, who estimates that 80 per cent of Kenyans are renters.
Most of these, he says, are the low-income and lower-middle income groups.
“The houses built for sale are for the upper-middle and upper class. The lower-middle and the lower class are renters and are, therefore, the ones who feel the pressure of rental increases most.”
Mr Collins Kowuor, the chairman of ISK, also thinks the government is putting “too much emphasis” on home ownership and doing little to encourage investment in affordable rental housing by private developers.
“I think in its new role as a facilitator in the housing sector, it is important for the government to balance between home ownership and provision of rental housing.
“The fact that over 80 per cent of the country’s population are renters calls for policies that ensure that we have affordable rental housing, especially in this era of counties, otherwise more slums will continue sprouting up,” said Mr Kowuor.
He said private developers are reluctant to invest in rental housing because it takes up to 12 years for them to recoup their investment, as opposed to houses developed for sale, which are sold as soon as they are ready, thus give them immediate returns.
“Most developers would rather put up a housing development, sell it, then move on,” he said, adding that the government had also failed to give tax rebates and other incentives to developers of rental housing.
In his undergraduate thesis in 1995, Mr Okumu recommended that national housing policies be reviewed to “remove bias against non-owners”.
“Kenya’s housing policies favour house ownership to a very great extent. Since not all households are owners, it is appropriate that the needs of the tenants (rental housing) be taken into consideration,” he wrote, proposing the setting up of rental housing schemes and putting in place measures of that would encourage private developers to venture into rental housing.
According to the World Bank, many countries, mostly emerging economies, are culprits in the neglect of rental housing.
The bank says that although many countries have in recent years witnessed a rapid development of residential mortgage markets, rental housing remains underdeveloped and underfinanced in many emerging economies like Kenya.
“Despite compelling reasons for enabling a vibrant rental sector, the sector has received, at best, limited attention in many developed countries and emerging economies in comparison to home ownership,” says the World Bank in a 2009 publication titled, Housing Finance Policy in Emerging Markets.
This neglect, the publication says, has led to the emergence of slums.
“An inhospitable environment facing the rental sector is directly reflected in the large portion of the housing stock that is outside the bounds of formality.
“Without alternatives to buying a formal dwelling, which is often unaffordable to a large portion of the income distribution, households resort to informal housing, be it owned or rented.”
The bank says that home ownership has been actively supported by many governments on the grounds that it promotes citizenship, essentially by giving a stake to individuals in the society.
Ownership of one’s home has also been seen as providing many social and economic benefits such as the free usage of the space, allowing families to set up businesses or income-generating activities within the premises.
In many countries, the rental sector houses the youngest and poorest parts of the population, notes the World Bank.
It adds that in emerging economies, many renters would not be able to buy property even if mortgage finance were more developed.
The challenge facing policy makers, it says, is thus to provide affordable rental housing opportunities for these categories. One of the tools that can be used to achieve this, according to the bank, is rental subsidies.
According to the World Bank, a healthy formal rental housing sector is important because it is a natural outlet for households that do not have sufficient income to afford buying a home or have not saved enough to meet down payment requirements for ownership.
Young adults and the poorer fractions of the population fit into this category.
A vibrant rental market is also seen as key to active resale and flexible labour markets — mostly because of transaction costs, ownership entails high mobility costs, which can end up penalising mobility.
Affordable rental markets also make it easier for households to accumulate down payment funds and thus promote mortgage markets, increase the value of housing assets, and facilitate the fluidity of resale housing markets.
“The importance of a functioning formal rental market is all the more crucial when the mortgage market is not fully developed because access to ownership is more difficult,” states the World Bank publication.
In 2010, Mark Kiragu, then a masters student at the University of the Free State, Bloemfontein, South Africa, argued in his dissertation, which was on housing finance for low-income households in Nairobi, that the urban reality in Kenya calls for availability of affordable rental units for those who cannot afford home ownership.
“Rental housing should be a key aspect of the housing policies,” he wrote, noting that affordable rental housing is a major area of demand among the population that cannot afford home ownership and people who, perhaps by choice, are keen on being renters.
The government, he said, should create a conducive environment by coming up with “pro-poor policies”, legal, and regulatory frameworks that recognise that a large segment of the urban population is economically active in the informal sector.
Such policies, according to ISK’s Kowuor, should encourage gradual ownership of property for the low-income groups and could include the tenant-purchase scheme that was once experimented by the National Housing Corporation over two decades ago.