Kenya needs to build two million affordable city homes to meet its housing deficit and stem the growth of its sprawling slums, already home to six out of 10 urban households, the World Bank said on Wednesday.
Investment in housing would also create jobs, improve economic growth and strengthen the east African country's financial sector, it said.
"Many Kenyans are unnecessarily living in slum dwellings, because of limited supply and lack of affordability," the World Bank said in a report.
"The problem will only become more acute over the next decades without a serious focus on housing and the finance of housing for the average Kenyan."
Africa has the fastest growing cities in the world, with 40 percent of its one billion people in towns and cities, but most new homes target the middle and upper classes as it's easier to make a profit from high-end sales.
Although only one in three of Kenya's 44 million people live in cities, its population growth is largely urban. Most Kenyans will live in cities by 2033, the World Bank predicts.
Kenya needs to produce 244,000 homes a year to meet demand but less than a quarter of this number are being built, it said.
With rapid urbanisation, the situation is worsening as Kenya's cities are growing by 500,000 people a year, it said.
Nairobi is one of Africa's most expensive cities for housing, with 2013 prices almost triple those of 2000, it said.
The cheapest home formally built by a developer in 2012 cost more than $15,000, it said, more than 10 times the average annual income of $1,340.
One of the main problems is a shortage of finance.
There are fewer than 25,000 mortgages in Kenya as banks have limited access to long-term funding, it said.
Less than 10 percent of Kenya's housing credit is in the form of bank mortgages, with most people borrowing from savings and loan cooperatives, funded by members' deposits, it said.
More Kenyans could own their own homes if the private sector set up a mortgage refinance company to provide cheap, long-term funding to mortgage lenders from the capital markets and other investors, it said.
This could increase the number of outstanding mortgages in Kenya to 140,000 by 2022, with one-third of borrowers having low or informal incomes, it said.
The World Bank also called on the government to improve access to land, provide basic infrastructure and speed up mortgage registration and title transfers.