|Entrance to Nyayo Estate in Embakasi, Nairobi. [PHOTO: MARTIN MUKANGU/STANDARD]|
By Muchiri Waititu
One early morning way before sunrise in September 2008, the Embakasi Police Station Commander was hastily alerted by the station officer in charge. Apparently, there was a congregation of unidentified people at the National Social Security Fund’s Nyayo Estate and the crowd kept growing.
By 4.00am, there were already over a hundred people and the crowd was still swelling in direct proportion to the security apparatus concerns. By 4.30am, the concerns had reached the top echelons due to the proximity of the national airport and the army barracks.
The puzzle was only dissipated when it was realised that the good citizens were only pursuing the right to own a house in the Nyayo Estate after the NSSF had advertised the sale of Phase Two. The houses were being allocated on a first come first served basis and the early birds were rewarded appropriately because the units had been sold out by midday.
Urban myth or not, the anecdote forms the basis of today’s topic; is the housing bubble about to burst?
As a consultant, an occupational hazard you get used to is the dissipation of free advise to strangers in social joints. A typical ice breaker starts with the pro-bono client setting the tone with his declaration that he purchased a plot in Katani an year ago and has recently been offered a price that is twice the original. “Isn’t this a clear case of a bubble about to burst?”, he will ask.
A property bubble, like any other investment bubble is caused by a dramatic increase in housing prices fuelled by demand, speculation and the?belief that recent history is an infallible forecast of the future.?
Housing bubbles usually start with an increase in demand usually due to sudden availability of cheap credit or improved infrastructure, in the face of limited supply which takes a relatively long period of time to replenish and increase.?
Speculators then enter the market, believing that profits can be made through short-term buying and selling thus further driving demand.?This is the scenario that is currently playing out very markedly in areas around Thika Road, Mombasa Road and Namanga Road areas.
At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices — and?the bubble bursts.
So is the bubble going to burst? According to the definition above, the ingredients required for this are exponential supply and reduced demand. Looking at all major statistical indices, housing supply has actually been falling for the past year or so.
The value of building plans approved by the Nairobi City Council reached an aggregate high of Sh20.9 billion in July last year and has been dropping ever since. In February it stood at Sh9.6 billion. Main reason for this is primarily believed to be the appreciation of bank interest rates.
For the bubble to pop, you also require to have demand that is progressively waning and that mortgage uptake is on an upswing. At this point, none of these two factors are in evidence. Due to interest rates that remain in the clouds, there has been a general reluctance for the public to take mortgages. The entire mortgage portfolio remains at a total of 20,000 for all banks, a very low, almost negligible figure compared to developed nations which have mortgage pre-dominated sales which will range at 80 per cent of the total sales on average.
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There have been various reports of prices tumbling in apartments around Kileleshwa and Kilimani areas in Nairobi in the past year or so leading some to believe that the bottom had finally fallen off. However, this needs to be taken in context. No units have been left unoccupied or unfinished and rental averages have remained flat.
Will the property bubble finally burst? We cannot quite foretell so the jury is still out on this. It is like asking if a healthy 35 year old man who runs ten kilometres every day will die of heart failure. It is possible but highly improbable. All vital signs in the real estate industry are very promising; demand is still very high with a growing population and growing economy across most sectors of the economy. Demand still outstrips supply by a huge factor.
With the advent of new mega projects such as Tatu City and Konza City, there will be huge growth in planned neighbourhoods therefore releasing the inflation pressure on existing areas. Historically, prices in established neighbourhoods have always risen primarily due to better infrastructure. Once a neighbour has put up a borehole or a commercial centre, then suddenly there will be a spike in prices since more amenities are available in the area.
This brings us back to the Nyayo Estate story. These are stories you will only hear in the developing world as there still exists a huge disparity between supply and demand.
The horde at the gate screaming for affordable houses agrees with me. The property bubble will not burst anytime soon.
The writer is an architect in private practice and also vice chairman, Architectural Association of Kenya, Construction Project Management Chapter.