Relationship between economic growth and real estate prices in Kenya

Abstract

Real estate investments and prices are good measures for reflecting expected real estate demand, and serve as good predictors of economic growth (Knight Frank, 2011). The "real estate" market and industry will be considered here to include both land and improvements, their selling and rental prices, the economic rent of land and returns on buildings and other improvements, and the construction industry. Economic growth leads to an increase in the middle class of a society. Hoskins, Higgins and Cardew (2004) find that GDP growth, inflation, and unemployment show significant correlations with composite property returns Given the importance of the real estate sector, it is important and paramount to interrogate the relationship between the sector and economic growth. There are two ways to measure real estate demand and these involve an evaluation of real estate investments and real estate prices. As demand for real estate increases, real estate prices rise and therefore real estate investors will increase their in real estate to meet the demand and therefore it can be said that real estate prices and real estate investments are directly proportional to real estate demandRecently, economists propose a collateral effect of house prices that, increase in real estate prices help relax home owners borrowing constraints and increase their actual consumption since housing wealth is easy to collateralize Tracking the Hass Housing Price Index and Kenya‟s GDP numbers over a period of five years , data was retrieved from different sources but aligned in equal time and periods , reviewed and subjected to regression analysis and tested for significance. The results indicate that there is a relationship between the variables revealing that a quarterly change in housing prices yields a quarterly change in GDP. The data collected and analysed indicates that property is a strong asset class which has been under exploited in portfolios. More consideration should be made by institutional investors. Real estate prices have been stable during recession and political instability.