Morris Aron
28 October 2008
Nairobi — Kenya's classiest houses are set to suffer falling prices for the first time in a decade as inflation, falling remittances and tighter mortgage terms squeeze cash out of the market.
Property marketers say apartments in Nairobi's leafy suburbs and build-to-sell bungalows in Mombasa may be hit hardest, as global economic meltdown hits Kenyans abroad, limiting their participation in the local market. Until now such housing has been a big investment magnet for Kenyans working overseas, as well as a point of entry for local professionals buying their first houses.
Analysts say that with half of all middle class houses bought using mortgages and about 15 per cent paid for with remittances, the double blow of fewer mortgage loans and falling transfers from overseas, is certain to lead to far fewer house buyers.
"Any drop in the level of remittances may lead to less housing units being sold while supply continues to build," said Mr Maina Mwangi, the head of property at Knight Frank, a property firm. "Such developments always lead to a market correction as eventually supply for the specific housing class outstrips demand," he said.
A market correction in real estate market would mean a general drop in the pricing of houses to reflect the true level of demand against supply. Latest central bank statistics indicate that remittances from abroad dropped to $36,567 million in September from $44,137 million in August -- the third consecutive month and the lowest since December 2006.
Kenyans in the diaspora -- who predominantly buy-to-let upper-middle and upper houses account for about 20 per cent of home buyers. Any decline in their participation against a build-up in supply is therefore expected to culminate into a dilution of demand whose ultimate result should be a drop in prices.
Locally, a large number of those who rely on home loans to buy houses (the upper middle class) account for close to 50 per cent while off-plan residential sales (the lower middle class) account for the remaining fraction of the market. Yet more than 70 per cent of new developments are being priced and targeted at the fixed upper middle class clientele leading to an oversupply.
With inflation rocking the domestic economy and remittances dropping, players say a large scale market correction with a bigger impact than post election violence may be looming. Last year for example, plots and properties on Nyali Sandy Beach in Mombasa were the most sought after with an acre going for as high as Sh35 million up from Sh20 million four months before the international marathon that promoted the area across the borders.
Similar price surges were recorded in property hot-spots around Nairobi, Nakuru and Eldoret. But save for Nairobi where prices have been on a steep rise since April, the advent of the post-election turmoil, has seen property prices plummet by as much as 40 per cent.The trouble in the housing market is being deepened by the fact that mortgage financiers such as Housing Finance, Kenya Commercial Bank and CFC Stanbic are increasingly adopting conservative lending practices to shield themselves from exposure in a market sitting under the shadow of a global financial crisis.
This decision -- which some of the players say they have made as part of business etiquette -- means that fewer loans will be disbursed to buy or build property as more house buyers are screened under stringent credit worthiness procedures. This tightening of mortgage lending comes at a time when inflation is at a record high, pushing up the cost of living and wiping out disposable income in thousands of households.
High inflation also means that the cost of constructing houses will continue to rise with the surge in the prices of construction material making a market correction most painful for developers.
While the majority of property marketers see a gloomy outlook, a small group of hardcore players maintain that a market correction is unlikely to occur in Kenya because demand far outstrips supply.
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