Effect of lending rates on real estate pricing in Nairobi, Kenya

Abstract

This paper studies the effect of lending rates on real estate pricing with the aim of showing the causation effect of the lending rates on real estate prizing. It is a descriptive study that used regression and the main data analysis method. The data was collected for the four classified parts of the city from the Real Estate Agents in Nairobi. The key finding is that lending rates have an effect on real estate prices. Other factors held constant lending rates played a key role in house pricing in the period from 2004 to 2008, whereby 43.6% of the changes in real estate prices were explained by changes in lending rates alone. The relationship developed in the absence of other factors is 66% strong: However, lending rates remain as one of the factors that affect the pricing of houses in Nairobi as other unidentified seasonal factors also plays a role. Figures in the year 2008 alone shows that these other unidentified seasonal factors came to play that over shadowed the effect of lending rates whereby despite the rates remaining constant house prices surged up. Evidently too when the rates escalated in 2011, they had a minimal effect on pricing which went up slightly. Therefore the unidentified seasonal factors have a strong effect that neutralizes the effect of lending rates. Herein these seasonal factors are important whereby investors need to identify them in order to make informed decisions. 2008 provides a typical example whereby the real estate prices increased at a high rate before reducing the momentum the following year. Further studies need to be carried out to establish seasonal factors that heavily affect the real estate pricing. Similarly a study need be done to highlight the effect of movement of lending rates on real estate development to show if number of units build over a period changes with the lending rates.