Kenyan houses are unreasonably expensive

 

According to KRA, only 20 per cent of residential landlords in Kenya had declared their rental income by July 2015. PHOTO | FILE

By BRITT GWINNER and DEAN A. CIRA

In Summary

• Affordable homes remain a mirage to the majority of households with average incomes.

How many Kenyan families can afford a Sh29 million house? HassConsult, a Kenyan real estate consultancy, says Sh29 million was the average price for houses and apartments in the middle and upper market at the end of 2015.

This is about the same as the price of a 90 square metre apartment in Berlin, a much wealthier country than Kenya.

Very few Kenyans can afford a house at the amount. According to a 2013 World Bank survey, 75 per cent of households in Nairobi, one of Kenya’s wealthiest counties, had monthly incomes below Sh22,500. These households can only afford a mortgage of up to Sh500,000. 

To afford a mortgage on the lowest priced formally developed house in the market, a household would need a monthly income of Sh70,000, a figure still out of reach for most urban Kenyan families. 

HassConsult’s price index reflects market reality: Kenya’s formal real estate industry caters primarily to wealthy people.

Meanwhile, up to 90 per cent of city dwellers rent, with the majority of these in informal settlements. Seventy per cent of Kenya’s housing stock is nine square metre shacks, built with wood, tin, galvanised iron sheets, and latticed wood strips.

Most urban households can only afford to spend Sh7,400 per month on housing. Why don’t formal developers build decent, safe, and sanitary homes that more families could afford?

First, construction costs are 30 to 40 per cent higher in Kenya than in many other countries. In part because builders target the high-end of the market, work on small volumes, hence, they are unable to take advantage of economies of scale in building methods and materials procurement.

Kenyan residential projects rarely exceed 250 or 350 dwelling units in a given construction phase, and few projects rarely reach 1,000 units in total.

Even if a few builders were to deliver 5,000 to 10,000 units each year in large scale projects, they would still be addressing only a part of the 200,000 units needed each year in Nairobi alone.

But, such scale would reduce construction costs significantly, and create tens of thousands of jobs in the process, as is done in India, China, Colombia, and other places.

Second, Kenya’s slow and costly property titling system makes housing more expensive. The sub-division process for large tracts of land can take years, and costs hundreds of thousands of shillings in legal fees.

As a result, if a builder were to construct a dwelling unit in a week, it would still take over two months to legally register the sale of the unit to the buyer, and even longer to register a mortgage lien if the buyer is unable to pay cash.

Meanwhile, the builder continues to pay interest on the construction loan as he awaits the sale and mortgage registration. Naturally, this financing cost is passed on to the buyers.

This results in property listings with higher prices for those purchasing through a mortgage, a phenomenon that the authors have not seen in any other country.

Third, urban land costs are very high given that developers often have to install the infrastructure for water, sanitation, and roads. The high cost of providing infrastructure makes serviced land count for as much as 60 per cent of total development costs in Nairobi.

County governments often lack the resources to provide this essential infrastructure, even to the edge of land parcels to be developed, as would be the normal practice in most countries.

The small-scale of Kenyan housing developments, and the private costs of providing public infrastructure has a cost. It is much cheaper to provide infrastructure for 5,000 units than for 500 units.

What would an efficient housing industry look like? It would use industrial methods to produce more than 100,000 houses and apartments priced between Sh800,000 and Sh8 million each year.

Counties would ensure provision of roads, water, sanitation, and solid waste management. Land cost would represent no more than 10 to 20 per cent of each dwelling unit.

Each property sale and mortgage would be registered in one or two days, with total transaction fees paid to authorities and professionals capped at three per cent of the property value.

In a more efficient market, banks would be able to process and approve a mortgage application in a day or two, using the borrower’s credit bureau history, evidence of savings and earnings, and a third party valuation of the unit.

For new developments with a limited number of housing types, a separate valuation would not be required for each unit. The purchase and mortgage contracts would be identical for every transaction, providing appropriate and balanced protections to each party.

Such a system would provide developers, banks, and savings and credit co-operatives with the opportunity to serve the majority of Kenyans, and build beautiful cities in which the majority of households have a direct stake. 

Gwinner is principal operations officer at International Finance Corporation, and Cira is lead urban specialist at World Bank, Nairobi.