A high interest regime since the last quarter of 2011 has impacted on Kenya's residential property market, with mortgage lenders recording slowed sales in the first half of 2012. A jump in interest rates from an irresistible 14 per cent average - which lured many into borrowing - to an average of 23 per cent raised borrowers' monthly repayments.

Prospective buyers, even those who had booked houses off-plan, pulled out, leaving developers stranded. Some opted to continue renting in the meantime while others moved down the property ladder to buy stock meant for the lower middle-income. "When interest rates are high, it does not mean the urge to buy a house goes away. People simply look at what else the market is offering that does not compromise their budgets," said KCB S&L Mortgages divisional director Joram Kiarie.

Banks followed the advice the Kenya Bankers Association (KBA) to stem possible defaults and a jump in non-performing loans (NPLs) by adjusting loan tenures for existing clients. However, CBK's banking sector performance report for second quarter of 2012 shows the stock of gross NPLs jumped to Sh57.5 billion in June from Sh53.7 billion in March - a 7.1 per cent increase.

Real estate sector NPLs increased to Sh6.5 billion from Sh6 billion, a 8.3 per cent jump in the period. The country's top two mortgage lenders have recorded slowed growth in new sales in the last six months to June 30, attributed to the high interest rate regime. Housing Finance, which was the top residential mortgage lender in the 2011 CBK mortgage report, said the high cost of finance and slowed mortgage uptake impacted on profits. "One of our biggest challenges has been interest expense on deposits which has continued to increase year-on-year, thereby affecting our profit margin," Frank Ireri, HF's managing director, said when he released Q2 results.

HF's gross NPLs jumped four per cent to Sh1.56 billion in June from Sh1.50 billion in March. Its mortgage sales dropped by 27 per cent in the period to Sh4.8 billion. Ireri said disbursement of new loans totalling Sh3.5 billion has been slow. KCB S&L Mortgage's loan book grew by about 25 per cent in the six months to June 30, amounting to about Sh30 billion, according to divisional director Joram Kiarie. "We had anticipated growth of about 35 per cent for the period but a high interest regime definitely slowed mortgage uptake. We have however had a good pick up in new sales from April through to June," Kiarie told The Star.

A growing number of developers are still struggling to pay monthly instalments as they hold an unmoving stock of houses for sale in the middle- and upper-income segments. Such developers are now turning to lure cash buyers from the diaspora and members of housing schemes - who can get loans at relatively lower rates - in the hope that this will move the stock and offset outstanding loans.

The CBK residential mortgage survey for 2011 showed higher property prices have raised the average mortgage loan size to Sh5.7 million in December 2011 from Sh4.1 million in May 2010. Kiarie said mortgage rates are unlikely to come down to the levels last seen in early 2011 with the general election looming in March 2013. "My fair estimation is that if the next MPC (Monetary Policy Committee) sitting lowers the CBR, banks will most likely reciprocate perhaps by the same margin," he said.