Interest rate cap fails to trigger mortgage uptake, owning land

Sakina Hassanali of Hass Consult: Commercial banks are more cautious in lending. PHOTO | SALATON NJAU 

By BRIAN NGUGI, bnjoroge@ke.nationmedia.com

In Summary

• The asking price for land in Nairobi increased by a marginal 0.8 per cent in the fourth quarter of last year and 5.1 per cent year-on-year.
• The rate marks the lowest growth rate for Nairobi’s property market in eight years and comes amidst a bank credit squeeze.
• Analysts had argued the rate cap was likely to incentivise potential home buyers who have been locked out of the mortgage market.

The recent capping of interest rates has failed to trigger an uptake of mortgages and ownership of land, real estate firm Hass Consult’s survey shows.

Hass Consult research and marketing manager Sakina Hassanali said the asking price for land in Nairobi increased by a marginal 0.8 per cent in the fourth quarter of last year and 5.1 per cent year-on-year.

On the other hand property prices in Nairobi suburbs increased by a marginal 0.1 per cent in the same period and posted a 7.6 per cent return over the year.

The rate marks the lowest growth rate for Nairobi’s property market in eight years and comes amidst a bank credit squeeze.

“The subdued performance can be attributed to the slow growth in credit as a result of the interest rate cap law which has failed to live up to market expectations,” said Ms Hassanali when the firm released its 2016 quarter four and annual Hass property index and Nairobi land price index.

The index includes quarterly changes in asking and letting prices in Nairobi’s 18 suburbs and 14 satellite towns.

“In the last quarter, the market was optimistic that the interest rate cap law would result in advancing more affordable credit that was expected to increase loan uptake and spur the property market. Unfortunately, this has not been witnessed as commercial banks are more cautious in lending,” added Ms Hassanali.

The Banking (Amendment) Act 2016, which came into force on September 14, sets the maximum lending rate at four percentage points above the Central Bank Rate (CBR).

READ: Banks get critical IMF backing in fight against interest rate controls

The law also sets the minimum returns payable by banks on customer deposits at 70 per cent of the CBR.

The CBR is currently set at 10 per cent, meaning that banks are barred from charging interest on loans above 14 per cent.

Financial institutions offered mortgages at between 12 and 21.4 per cent before the rate caps. The public had been sold the low rates as good news for Kenyans dreaming of owning homes.

Analysts had argued the rates were likely to incentivise potential home buyers who have been locked out of the mortgage market.

“Accessibility and affordability of mortgages will become a reality now. More people have been netted into the basket of being able to borrow or take up a mortgage in the banking sector. This is a big development for the housing and construction industry,” Britam Asset Managers chief investment officer Elizabeth Irungu said.