PHOTO | FILE A new housing estate in Thika. While housing developments
have mushroomed at an astronomical rate, there has been little
development of infrastructure such as roads, schools and hospitals.
NATION MEDIA GROUP
The face of every Nairobi suburb is changing
rapidly and dramatically. Flats, shops, petrol stations, hotels, pubs
and office blocks are replacing maisonettes, town houses, trees, green
parks, community centres and footpaths.
The leafy
upmarket areas of Westlands, Lavington and Karen are fast becoming a
jungle of highrise buildings. The once green city is slowly becoming a
concrete jungle — hot, windy, dusty and mosquito-infested.
The
developments are putting pressure on an already creaking system.
Electricity outages have become more frequent. The roads are clogged,
rubbish lies everywhere, and the city has become smelly, and less and
less green.
While the housing developments have
mushroomed at an astronomical rate, there has been no concurrent
development of adequate infrastructure such as roads, schools and
hospitals. Home ownership rate in Kenya is still quite low.
The
country has a housing shortage, and it can only get worse. Hong Kong is
the world’s most expensive place to buy a home. Nairobi is not far
behind and is likely to be in contention for that least coveted position
of being the most expensive city. Unlike in Hong Kong, land is not in
short supply in Kenya. Think of property and all logic seems to fly out
of the window.
Greedy developers are making a killing
from Kenyans’ obsession with property. Consider this – an undeveloped
acre in Upper Hill and Westlands is priced at between Sh350 million and
Sh500 million, Sh300 million in Kilimani and Sh200-250 million in
Kileleshwa, Lavington and Milimani. It is not that the land sits on a
goldmine or an oil well.
Undoubtedly, this has no
parallel anywhere in the world. The pricing is simply irrational and
goes against all conventional norms. Many of us in the industry continue
to be baffled every day.
A three-bedroom apartment in
those areas is selling at Sh15-25 million on average. A similar 100x150
square metre property in a high-end area with modern infrastructure in
the US is generally priced at $150,000 or Sh12,900,000 at today’s
exchange rate.
A town house on a quarter acre located
in an upmarket Cape Town neighbourhood is cheaper than a three-bedroom
apartment in Kilimani. The trend is the same in all major countries such
as Malaysia, Australia, Germany, France, US and UK. In an ideal
property market a three-bedroom apartment in a top-end Nairobi suburb
should not fetch more than Sh8-12 million.
MIDDLE CLASS OVERSTRETCHING
A
few years ago, the high housing prices and the robust market were
blamed on piracy money and remittances from the diaspora. Since the
capture of Kismayu by the Kenya Defence Forces and increased
multinational presence in the Indian Ocean, piracy has almost been
eradicated and with that piracy money has dried up.
Remittances
by Kenyans in diaspora have also sharply dropped because they are
getting better deals in their host countries. The property prices are
comparatively lower in those countries than in Kenya.
It
has further been argued that high demand against low housing supply has
been pushing up prices. Kenyans toil day and night to buy a home.
Unfortunately, the middle class have been overstretching themselves to
get on the housing ladder.
Banks charge high interest
rates, making borrowing very expensive thus contributing to the housing
shortage. Land is fast becoming unaffordable for most Kenyans hoping to
own a home close to the workplace and public services. It is not
surprising that the housing market is not as robust as it used to be
five years ago.
All the signs show that the market is
overheating, particularly in Nairobi. The confidence in the market is
waning. The middle class that ought to be driving the market can no
longer afford the prices quoted. Even people with well-paid jobs are
being priced out. Greed and get-rich-quick attitudes are driving
property inflation at a dangerous rate.
There is also a
misconception among property owners that the value of their property
will only go up. They ought to understand that busts follow speculative
bubble: periods of intense buying activity, much of it speculative
investment with the promise of easy profits. And the rocket that
propelled the housing prices has now lost steam and stalled.
The
government ought to be aware of an impending collapse of the property
market. A property slump will affect the whole of Kenya’s economy.
Industry analysts warn that the property market, particularly in
Nairobi, could face several years of stagnation.
There
has been a huge speculative run, and the longer it continues, the
greater the risk of a correction, meaning a sustained period of
stagnation which would hit the economy badly. Property market is
generally viewed around the world as a barometer for economic growth or
recovery and is a useful indicator of demand pressures in the economy.
Falling
property prices eat into the revenues of the government, which relies
on the housing market for a high percentage of its income. The overall
effect of a slump in the property market on the economy would be severe.
By influencing consumption spending and spending on investments, house
prices have a significant impact on the broadest measures of gross
domestic product.
HOUSING BUBBLE
A
prudent government will come up with a policy that will provide a
measure of certainty that will forestall a bubble and too much negative
equity.
In the developed world, the property market is viewed as one of the major pillars of the economy.
Britain’s
leading chartered surveyors, the Royal Institution of Chartered
Surveyors, is so concerned with the high housing prices that it recently
published a report calling for the Bank of England to consider imposing
a five per cent limit in annual average house price appreciation and to
use its regulatory powers to make mortgage lending scarcer and more
expensive as a measure to cool the market.
The call was
unprecedented but the chartered surveyors argued that a cap on annual
house price inflation will divert the country from a “dangerous” debt
bubble that will result in huge negative equity. What concerns them in
Britain ought to concern us in Kenya.
There is a lot of economic justification in a firmly anchored house price expectation.
However,
our industry is on an auto-pilot as Lands Cabinet Secretary Charity
Ngilu dances from one manufactured crisis and unnecessary controversy to
another. (READ: Ngilu and land team boss differ over roles)
There
is uncertainty about the fundamentals that drive house prices in Kenya.
But it is generally agreed that infrastructure and supply is the
primary determinant that drives the property market.
Given
the high-blood-pressure-inducing traffic jams in our city, it is
understandable why people would want to live near their workplace. It is
why all developments in Nairobi are within 25-km radius from the
central business district. These areas supposedly have better road
networks, high concentration of government services, hospitals, schools
and better security.
In the developed world, a person
can live 100km from his place of work. In the UK, one can live in
Liverpool and work in Manchester or Birmingham. It is for the same
reasons that many people now live in Thika and drive to the city for
work. In driving terms, you are better off living and commuting from
Thika than using Mombasa Road. Road and rail infrastructure would
certainly open more land for development and bring sanity to the
property market.
The emphasis is on improved commuter
systems to alleviate constraints in land availability. The ongoing road
expansions, bypasses, and railway should be viewed in that light: to
decongest and take investors out of the city which will have the twin
effect of bringing down housing prices and avoiding stagnation.
The
government should consider the widening of existing roads especially
Mombasa Road to alleviate land availability in Nairobi and open up the
surrounding counties for those with jobs and businesses in Nairobi. And
for those who have Sh500 million to spend, you may consider paying Dr
Alfred Mutua, the Machakos governor, a visit.
DEVOLUTION
The immediate hope is that the devolved system of governance would erode the current market dynamism.
The
government ought to realise that the National Housing Corporation has
failed in its mandate of providing affordable housing and as a vehicle
for stabilising the housing market. NHC should develop a low cost and
upper middle class system. It must invest in properties that are in line
with the recent trend in the market: Gated communities with few houses
rather than what can only be described as elevated slums.
The
property prices will not be affected by the kind of apartments that are
usually built by NHC. It needs to develop reasonably priced houses for
high-end markets and to build more housing units each year.
A
prudent investor determines a property’s value on the purchasing powers
of its target buyers, and sets house prices in parity with their wages.
For the tens of thousands of families paying off a mortgage on their
house, a fall in property prices would undermine the value of their
assets relative to their liabilities, making them less inclined to go
out and spend.
That’s not all. Falling property prices – and even the fear of falling property prices – will also affect the economy.
As
it stands, buyers, particularly the first-time ones, are being
stretched to the limit borrowing heavily to raise mortgages they need to
join the housing ladder. They are betting their future on the hope that
prices will continue to rise and not stagnate or crash.
In the event of a bubble, many are likely to be left with homes worth less than their loans.
We should rethink before it is too late.
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