Why Kenya is headed for property market collapse

The face of every Nairobi suburb is changing rapidly and dramatically. Flats, shops, petrol stations, hotels, pubs and office blocks are replacing maisonettes, town houses, trees, green parks, community centres and footpaths.

The leafy upmarket areas of Westlands, Lavington and Karen are fast becoming a jungle of highrise buildings. The once green city is slowly becoming a concrete jungle — hot, windy, dusty and mosquito-infested.

The developments are putting pressure on an already creaking system. Electricity outages have become more frequent. The roads are clogged, rubbish lies everywhere, and the city has become smelly, and less and less green.

While the housing developments have mushroomed at an astronomical rate, there has been no concurrent development of adequate infrastructure such as roads, schools and hospitals. Home ownership rate in Kenya is still quite low.

The country has a housing shortage, and it can only get worse. Hong Kong is the world’s most expensive place to buy a home. Nairobi is not far behind and is likely to be in contention for that least coveted position of being the most expensive city. Unlike in Hong Kong, land is not in short supply in Kenya. Think of property and all logic seems to fly out of the window.

Greedy developers are making a killing from Kenyans’ obsession with property. Consider this – an undeveloped acre in Upper Hill and Westlands is priced at between Sh350 million and Sh500 million, Sh300 million in Kilimani and Sh200-250 million in Kileleshwa, Lavington and Milimani. It is not that the land sits on a goldmine or an oil well.

Undoubtedly, this has no parallel anywhere in the world. The pricing is simply irrational and goes against all conventional norms. Many of us in the industry continue to be baffled every day.

A three-bedroom apartment in those areas is selling at Sh15-25 million on average. A similar 100x150 square metre property in a high-end area with modern infrastructure in the US is generally priced at $150,000 or Sh12,900,000 at today’s exchange rate.

A town house on a quarter acre located in an upmarket Cape Town neighbourhood is cheaper than a three-bedroom apartment in Kilimani. The trend is the same in all major countries such as Malaysia, Australia, Germany, France, US and UK. In an ideal property market a three-bedroom apartment in a top-end Nairobi suburb should not fetch more than Sh8-12 million.

MIDDLE CLASS OVERSTRETCHING

A few years ago, the high housing prices and the robust market were blamed on piracy money and remittances from the diaspora. Since the capture of Kismayu by the Kenya Defence Forces and increased multinational presence in the Indian Ocean, piracy has almost been eradicated and with that piracy money has dried up.

Remittances by Kenyans in diaspora have also sharply dropped because they are getting better deals in their host countries. The property prices are comparatively lower in those countries than in Kenya.

It has further been argued that high demand against low housing supply has been pushing up prices. Kenyans toil day and night to buy a home. Unfortunately, the middle class have been overstretching themselves to get on the housing ladder.

Banks charge high interest rates, making borrowing very expensive thus contributing to the housing shortage. Land is fast becoming unaffordable for most Kenyans hoping to own a home close to the workplace and public services. It is not surprising that the housing market is not as robust as it used to be five years ago.

All the signs show that the market is overheating, particularly in Nairobi. The confidence in the market is waning. The middle class that ought to be driving the market can no longer afford the prices quoted. Even people with well-paid jobs are being priced out. Greed and get-rich-quick attitudes are driving property inflation at a dangerous rate.

There is also a misconception among property owners that the value of their property will only go up. They ought to understand that busts follow speculative bubble: periods of intense buying activity, much of it speculative investment with the promise of easy profits. And the rocket that propelled the housing prices has now lost steam and stalled.

The government ought to be aware of an impending collapse of the property market. A property slump will affect the whole of Kenya’s economy. Industry analysts warn that the property market, particularly in Nairobi, could face several years of stagnation.

There has been a huge speculative run, and the longer it continues, the greater the risk of a correction, meaning a sustained period of stagnation which would hit the economy badly. Property market is generally viewed around the world as a barometer for economic growth or recovery and is a useful indicator of demand pressures in the economy.

Falling property prices eat into the revenues of the government, which relies on the housing market for a high percentage of its income. The overall effect of a slump in the property market on the economy would be severe. By influencing consumption spending and spending on investments, house prices have a significant impact on the broadest measures of gross domestic product.

HOUSING BUBBLE

A prudent government will come up with a policy that will provide a measure of certainty that will forestall a bubble and too much negative equity.

In the developed world, the property market is viewed as one of the major pillars of the economy.

Britain’s leading chartered surveyors, the Royal Institution of Chartered Surveyors, is so concerned with the high housing prices that it recently published a report calling for the Bank of England to consider imposing a five per cent limit in annual average house price appreciation and to use its regulatory powers to make mortgage lending scarcer and more expensive as a measure to cool the market.

The call was unprecedented but the chartered surveyors argued that a cap on annual house price inflation will divert the country from a “dangerous” debt bubble that will result in huge negative equity. What concerns them in Britain ought to concern us in Kenya.

There is a lot of economic justification in a firmly anchored house price expectation.

However, our industry is on an auto-pilot as Lands Cabinet Secretary Charity Ngilu dances from one manufactured crisis and unnecessary controversy to another. (READ: Ngilu and land team boss differ over roles)

There is uncertainty about the fundamentals that drive house prices in Kenya. But it is generally agreed that infrastructure and supply is the primary determinant that drives the property market.

Given the high-blood-pressure-inducing traffic jams in our city, it is understandable why people would want to live near their workplace. It is why all developments in Nairobi are within 25-km radius from the central business district. These areas supposedly have better road networks, high concentration of government services, hospitals, schools and better security.

In the developed world, a person can live 100km from his place of work. In the UK, one can live in Liverpool and work in Manchester or Birmingham. It is for the same reasons that many people now live in Thika and drive to the city for work. In driving terms, you are better off living and commuting from Thika than using Mombasa Road. Road and rail infrastructure would certainly open more land for development and bring sanity to the property market.

The emphasis is on improved commuter systems to alleviate constraints in land availability. The ongoing road expansions, bypasses, and railway should be viewed in that light: to decongest and take investors out of the city which will have the twin effect of bringing down housing prices and avoiding stagnation.

The government should consider the widening of existing roads especially Mombasa Road to alleviate land availability in Nairobi and open up the surrounding counties for those with jobs and businesses in Nairobi. And for those who have Sh500 million to spend, you may consider paying Dr Alfred Mutua, the Machakos governor, a visit.

DEVOLUTION

The immediate hope is that the devolved system of governance would erode the current market dynamism.

The government ought to realise that the National Housing Corporation has failed in its mandate of providing affordable housing and as a vehicle for stabilising the housing market. NHC should develop a low cost and upper middle class system. It must invest in properties that are in line with the recent trend in the market: Gated communities with few houses rather than what can only be described as elevated slums.

The property prices will not be affected by the kind of apartments that are usually built by NHC. It needs to develop reasonably priced houses for high-end markets and to build more housing units each year.

A prudent investor determines a property’s value on the purchasing powers of its target buyers, and sets house prices in parity with their wages. For the tens of thousands of families paying off a mortgage on their house, a fall in property prices would undermine the value of their assets relative to their liabilities, making them less inclined to go out and spend.

That’s not all. Falling property prices – and even the fear of falling property prices – will also affect the economy.

As it stands, buyers, particularly the first-time ones, are being stretched to the limit borrowing heavily to raise mortgages they need to join the housing ladder. They are betting their future on the hope that prices will continue to rise and not stagnate or crash.

In the event of a bubble, many are likely to be left with homes worth less than their loans.

We should rethink before it is too late.

The writer is an advocate of the High Court of Kenya based in Nairobi.