Bankers craft new house pricing index

Money Markets 

Houses in Runda. The Kenya Bankers Association is proposing a new housing valuation index to include individual features and factor in depreciation. PHOTO | FILE 

By CHARLES MWANIKI

In Summary

• KBA expects that the index will be used as a risk management tool for banks for those providing mortgages and those using property as collateral for issuing loans.

The Kenya Bankers Association (KBA) is crafting a new housing index to include individual house features and factor in depreciation. The KBA index is proposed as an addition to the market data released quarterly by realtors such as Hass Consult and Knight Frank and which largely track prices in high-end properties in Nairobi.

KBA director for research and policy Jared Osoro and researcher David Muriithi say the conventional housing price index models (dubbed repeated sales model) assume house price index from one period to another is wholly accounted for by pure price movement, ignoring factors such as depreciation of the house.

“Repeated sales model assumes that the characteristic parameters of different houses are fixed over time. This is unrealistic given that specific house characteristics are underpinning factors towards price movements,” said Mr Muriithi in his presentation of the outline of the new index released last Friday.

The repeated sales model does not use all of the available selling prices and cannot provide separate price indexes for land and structures. KBA says it will look to generate a quality-adjusted price index capturing the change in the quality of the house by taking into account the fact that changes in house prices are not independent of quality of the property.

It will factor in the index— expected to be ready in early November—features such as a balcony, gym , borehole, fireplace, garden and backyard when determining the valuation of houses.

Other considerations are the number of bedrooms, bathrooms, type of house (bungalow, maissonete, apartment, town house) number of floors, location of the house, presence of servant quarters, swimming pool, garage, access to shopping malls and availability of parking space.

KBA expects that the index will be used as a risk management tool for banks for those providing mortgages and those using property as collateral for issuing loans.

“It will also be a good proxy on the state of the economy, and a tool for identifying stating value of financial assets,” said Mr Muriithi.

The move by the bankers’ association to launch its own index comes at a time when the Kenyan property market has come under increased attention over fast-rising house prices, coupled with a low uptake of mortgages.

Speaking at the KBA research conference last week, Central Bank of Kenya governor Njuguna Ndung’u said rising house prices was due to constrained supply. On the index, he said the information collected would be used by financial policy makers as an indicator, especially of price stability.

Prof Ndung’u noted that fears of a property market bubble may be misplaced because a large number of Kenyans buying houses are not doing so for speculative purposes.

“The middle-aged group is not buying housing units in urban areas in order to resell. They buy to generate income and bequeath them as inheritance,” said Prof Ndung’u.