David Ndii: In the law of one price, market cannot solve housing problem

A 2019 study estimated that Mukuru slumlords collect Sh2.8b rental income per year from 100,000 households occupying 680 acres. This works out to Sh340,000 per acre. In essence, Mukuru slumlords earn Muthaiga/Runda rents on shacks built for at most at most Sh5m per acre. A one acre Runda/Muthaiga property will set you back Sh200m and rent for Sh250,000 per month at best. We are talking here of rental yield of 80 percent in Mukuru vis a vis 2 per cent in Muthaiga. Rental yields in the sprawling high density informal tenements such as Pipeline, Umoja, Githurai are in the 20-30 per cent, compared to between 5 and 8 per cent in upmarket areas such as Westlands and Kilimani. Studies estimate that we require 250,000 housing units a year but commercial market is supplying 50,000 of which only one percent ie 500 units are affordable, leaving an annual deficit of 200, 000 units. This begs the following question. If the returns are so high, why is the market not shifting capital from low return leafy suburbs to decent affordable housing. Lets do the math. The break-even cost of upmarket residential development in Nairobi is in the order of Sh80,000 per square metre. A 10 sqm Mukuru sized single room works out to Sh800,000. A Sh200m Muthaiga/Runda property translates to 250 Mukuru sized bedsits which at Sh2500 is Sh625.000 pm, 2.5 Runda/Muthaiga rents. And that is "social housing" segment i.e for the lowest income groups. Affordable housing is defined as costing not more than 25 per cent of monthly income. Average monthly wage income in formal employment is Sh50,000 which works out to an affordable housing threshold rent or mortgage outlay of Sh12,500. The math for this segment is even better. Break-even price of a 20 sqm studio flat works out to Sh1.6m. Our Sh200m Muthaiga is equivalent to 125 units with a monthly rental income of Sh1.56m, six times Muthaiga/Runda rental incomes. If the market worked as it should, money should be flowing out of Muthaiga/Runda to affordable housing. In turn property values in the leafy suburbs ought to fall until the returns are comparable across all market segments. We call this the law of one price. The long and short of it is, the market cannot solve the housing problem. The market will not eliminate slums. If the free market could, one of the market players proclaiming the virtues of the free market would be minting billions not running cat and mouse games with angry investors. The bedrock of public finance is taxation, and taxation is anything but voluntary. People who have no children in school and those who opt for private schools have no choice in the matter of being taxed to finance public education. In economics we define public goods as things we cannot exclude people who don't pay from benefits such as national defence, or street lighting. Both education and housing do not qualify. They are private goods. But our Constitution includes both as socioeconomic rights. That the government has chosen to finance realisation of housing right by way if a compulsory savings scheme rather than tax does not change the fact that paying up to finance public things is not a choice. Some well-heeled Kenyans, all home owners in the leafy asked me the other day why government was compelling them to save for houses they don't need. I in turn asked them how many had working children in their late twenties and older still living at home. Quite a few did, and even those who didn't remarked that this was a concern. The reason for this anomaly is that houses in their social class are unaffordable. Their pay can only afford those crowded unsightly neighborhoods that are regularly featured in the media. A retired senior executive narrated how his son caused a situation at home a few years ago when he announced that he was moving to Kinoo. This caused concern about security, as well as how the parents and siblings would visit him. The young man did move but not for long. It so happened that his parents had invested in an upcoming apartment development. The parents sold him one unit on easy terms he could afford. Few young people even among the well to do are as lucky as the young man. The National Housing Development Fund offers the well to do a means to give their children a start in life with gift of a deposit on a decent affordable house that they can visit without driving through raw sewage and fear of donating side mirrors to the underprivileged. But clearly when our toxic politics are at play, some us will readily cut off our nose to spite face. In his memoir Lee Kwan Yew recounts the resistance he faced in the early years of the now globally acclaimed public housing program, including forcibly moving people from slums into apartments. Singapore's public housing program is financed by compulsory savings scheme. Notably, Singapore's public pensions scheme also includes compulsory saving for education. Evidently the Lee Kwan Yew fan club incessant exhortations to emulate Singapore are not informed by knowledge of the Singapore story. It suffices to say that if Kenya was Lee Kwan Yew's Singapore, we would not be having this conversation.

David Ndii: In the law of one price, market cannot solve housing problem

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David Ndii: In the law of one price, market cannot solve housing problem

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