Buying land is a game of musical chairs

It is said Kenyans like to jump into get-rich-quick schemes. From pyramid schemes to initial public offerings, keeping quail to tenderpreneurship and sports betting, many Kenyans have burnt their fingers.

At times the idea starts credibly before all rush in to kill it with over-supply. Long before quailomania there were a few farmers who made a decent return supplying quail and other rare fowl to a niche market of consumers with a discerning taste.

Almost every Kenyan desires to buy land today, some to put up homes and greenhouses but many for speculative purposes. There is a belief that one cannot go wrong with land, that land will always appreciate in value. True story, yet there is a lot of misunderstanding about it.

There is nothing special about land appreciating in value over time. What makes land more attractive over the other safe investments is probably the perception of its simplicity, that one does not have to do anything for it to appreciate in value; one simply needs to buy and keep it.

This seems to fuel speculation that has made land rather over-priced. Take, for example, a piece of land that took 10 years to grow its value by 100 per cent in market value in the 1980s but now takes two years, yet nothing seems to have changed fundamentally to warrant a growth greater than the real-time value of money.

While land is low-risk, it is not as risk-free as many would like to assume. One can lose money on land through man-made degradation, pollution, natural calamity, war, or crime (including corrupt land transfers).

Ruthless businessmen have come up with ways of “determining” the future value of land. They tell prospective buyers to buy a particular parcel today at price A because in a year the same parcel will be selling at price B.

Enron was one of the world’s biggest energy companies until 2001, when it crashed. One of the illegal schemes that Enron’s executives engaged in was to acquire interest in land blocks for purposes of oil and gas prospecting.

FUTURE PROFIT

They would then decide how much future profit they were going to make and then inflate Enron’s share price, making millions from executive bonuses and insider trading. 

The over-pricing of land is pushing vulnerable families to sell their parcels for a quick buck, usually without much in the way of alternative investment. It also drives local inflation that, again, hits the same families hardest.

Entrepreneurial development could also be adversely affected by hoarding land that is close to good infrastructure. Idle land that is overpriced out of the reach of small-scale investors is not good for economic growth. Equally, trading of land in itself as a commodity rather than as a factor of production is bad for employment creation. More jobs would be created if households invested their savings in active businesses instead of buying land to keep. Active businesses also tend to create products that enhance consumer choice.

At the national level, over-priced land poses the risk of inflating Kenya’s economic performance, reflecting an unrealistic growth in GDP. A good apartment in a good location that has been on the market for several months is certainly overpriced, given the housing deficit in Kenya. 

Kenya needs to take a fresh look at its land management policies and enact proper laws.

In the meantime, the land bubble will continue defying fundamentals, driven by funds from external sources such as the diaspora and proceeds of fraud and economic crime, including money looted from unstable African countries.

Land buyers need to understand that it is a game of musical chairs. When the music stops, many will be those who sat down in good time and enjoyed their cake, but also many will be left standing, empty-handed. The consolation, however, is that economies tend to rise and fall, with an upward trend in the long-run.

Peter Chando is auditor, Nation Media Group.

[email protected]