Higher interest rates, rising inflation dampen housing market momentum

Kenya Bankers Association Chief Executive Habil Olaka (left) and Director of research and policy Jared Osoro during the release of housing price index in Nairobi yesterday. [PHOTO:WILBERFORCE OKWIRI/STANDARD]

House prices in Kenya increased marginally by 0.2 per cent in the last three months from 2.75 the previous quarter due to a rise in interest rates and inflation, according to Kenya Bankers Association (KBA).

In its quarterly Housing Price Index (HPI), this softening signals stabilisation of overall house prices in line with the supply-demand dynamics that were influenced by effects of a slowdown in economic growth and emerging macroeconomic instability - rising inflation and weakening exchange rate.

A rise in the Central Bank Rate (CBR) and Kenya Bankers Reference Rate (KBRR) is expected to further dampen demand for housing in the coming months as commercial banks and other mortgage lenders adjust their mortgage rates accordingly.

monetary policy

At its July 7 monetary policy meeting, Central Bank of Kenya (CBK) raised the CBR by 150 basis points, from 10.00 per cent to 11.50 per cent— its highest level since October 2012. The bank, which typically holds a monetary policy meeting every three months, is expected to make further adjustments at its August 5, 2015 meeting.

"The Kenya shilling exchange rate volatility and a tightening in monetary policy has seen a marginal increase in prices as a result of decrease in demand. While the middle-income segment of the housing market has remained strong, we have seen less activity on the lower end of the market," said KBA Director of Policy and Research, Jared Osoro.

He also noted that a significant movement has been recorded on apartment prices - which is now a favourable choice for those in the middle class. There has been a slowdown in Kenya's overall economic growth from 5.7 per cent in 2013 to 5.3 per cent last year.

"Expectation that the projected resumption of robust growth may not be realised is filtering into demand for houses especially in the middle and low-income segments," according to the KBA Housing Price Index report.

The report added that exchange rate volatility and inflationary pressure, which have occasioned the tightening of monetary policy, has also shifted expectations towards a high interest regime.

"This has apparently shaped the decision making of households seeking to use mortgages for purposes of acquiring homes," said Osoro.

"It is not only cost of credit that drives price of housing units but price of land which is influenced by availability of social amenities and infrastructure," he said.

The KBA's survey also shows apartment prices are moving more than those of maisonettes or bungalows. Demand for units is also influenced by location and availability of social amenities and a preference for gated communities, implying the importance of convenience and security.

price trends

The Housing Price Index was introduced by KBA as a tool to guide stakeholders in the housing sector on price trends and underlying dynamics. These stakeholders range from investors and developers to existing and potential homeowners, lenders, academics, market analysts and policy makers.

According to KBA Chief Executive Officer Habil Olaka, the intention of the association is to provide the market with an improved analytical tool for tracking the housing sector, based on both qualitative and quantitative characteristics that underpin price movements.

The index shows a negative relationship in price movements between bungalows and apartment prices across all the regions.