Dollar inflows from the Diaspora affecting prices of property

By Daniel Cheruiyot

There is a general feeling that property prices are rising too fast and may soon go beyond the reach of most Kenyans.

The big question is: What are the causes and why can’t the market forces correct the situation?

In a free property market, the forces of demand and supply are expected to automatically correct changes in prices and make them stabilise at an equilibrium. But property prices have continuously appreciated since 2003 without signs of abating, even in an economic downturn, raising fears of a bubble.

case misunderstood

This anxiety is founded upon recent property price hyperinflation which caused financial mayhem around the world. While it is documented that the high prices in some countries were driven by very low interest rates, careless lending and bad mortgage packages, Kenya’s case is not adequately researched and therefore less understood.

Many investors regard real estate as the best form of investment. [PHOTOS: MARTIN MUKANGU/Standard]

These individuals are better off when the local economy is not doing so well because their purchasing power is boosted through conversion of stronger international currencies to a weaker shilling. For example, when a developer raises the price of a property from Sh9 million ($145,000) when the exchange rate is Sh62 to the dollar, to Sh11.7 million ($145,000) when it is Sh81 to the dollar is of no consequence to those with access to dollars because the price is basically unchanged, but is a big issue to the local fellow.

A noteworthy proportion of property is bought by individuals from neighbouring countries or their Kenyan relatives. These investors use profits from business enterprises spanning several countries to buy property in Kenya because it is safe, close to their countries of origin and more investor friendly than most countries.

high prices

As a result, prices in estates like Eastleigh, South B, South C and other areas preferred by these communities have sky rocketed. Some of the rich and famous mainly from Europe have invested heavily in the coastal towns of Mombasa and Malindi driving up prices beyond imagination.

Eldoret has experienced a similar impact through athletes who earn money abroad and invest in real estate within the town instead of farming.

Some investors view property as the only suitable option because their religion forbids putting money in interest earning investments and, because of this, cash accumulated in business is invested in real estate irrespective of the price or returns.

mortgages handy

A number of employers guarantee mortgages to their staff at concessionary interest rates as low as 5 or 6 per cent and nominal down payments while the average market rate is 14 per cent. This arrangement allows employees to buy houses in a cheaper way and service the mortgage comfortably using house allowance, which in most cases are higher than the market rent for the houses.

Lack of serviced land for expansion, poor infrastructure and insecurity exacerbate the problem by restricting supply and limiting options to a few areas, thus causing prices to rise disproportionately in preferred estates.

It is, therefore, hard to predict when prices are likely to fall because of the complexity of the market situation. But to mitigate losses stakeholders in real estate should focus their marketing on Kenyans working abroad.

The writer is the head of valuation at Regent Valuers (K) Ltd