Rent hike fears pose threat to inflation

Finance Minister Robinson Githae’s decision to make all landlords tax compliant is bound to result in inflation rate staying high or even going up, hence undermining efforts that has seen the rates gradually come down over the last two months.

The unfolding timid situation is informed by the big chunk that housing spend account in the consumer price index. The weight of housing in the consumer price inflation basket is only second to spending on food and has the potential to fuel inflation if there is a major price change in rent charges. Consumer Price Index (CPI) is the measure of the weighted aggregate change in retail prices paid by consumers for a given basket of goods and services.

The rate of inflation has come down in the course of this year from 18 per cent in January to 12.22 per cent last month. It was expected to further go down, even reach under 10 per cent in the coming months, especially following the recent rains that have resulted in reduction in food prices.

CPI basket

It is however feared that this trend might be reversed should landlords make real their threats to increase rent to pass on the cost of paying income tax for rent income to Kenya Revenue Authority.

Housing, which is lumped together with water, gas and electricity in the inflation basket, is the second largest item in the basket and accounts for 18 per cent of household spending. The largest item is food and non-alcoholic beverages that account for 36 per cent.

Tax experts say should the landlords go on and increase rent, the country would have a difficult time getting the inflation rate down to five per cent, which is the target by the Central Bank.

Nikhil Hira tax partner at Deloitte East Africa noted that it is probable that rent will go up, which could in turn lead to one off inflationary pressures.

 “Not all landlords have been declaring their income. The new measure of mapping residential and commercial houses by KRA is designed to find and bring into the net those landlords that have not been declaring their income. The issue is going to be in the poorer section of the country (slum areas or rural areas) where it is likely the income is not being declared,” said Hira.

“These landlords when brought into the tax net may resort to rent increases, which could cause one off inflationary pressures.

However, we must also remember that rents are generally arrived at based on supply and demand. It may not be in the interest of landlords to raise rents.”

He noted that the move was aimed at bringing into the tax net landlords with commercial and residential property in low income and rural areas.

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