The effect of interest rate volatility on real estate prices in Kenya

Abstract

In Kenya, interest rates are making mortgages even more unaffordable but demand for housing continues to outstrip supply. “Every six months or so, Kenya’s top mortgage financiers, organize bus tours of Nairobi’s developments. Participants stream onto buses that drive out to the developing zones of Nairobi. Such has been the pace of property development that some of the blocks of flats, townhouses and bungalows are still only served by undeveloped infrastructure like dirt roads.” Inflation which is a great determinant of interest rates has been a major challenge in the Kenyan economy. The inflation rate in Kenya was recorded at 6.67 percent in August of 2013. The rate averaged 11.67 Percent from 2005 until 2013, reaching an all-time high of 31.50 Percent in May of 2008 and a record low of 3.18 Percent in October of 2010. The objective of this study was to establish the effect of interest rates on real estate prices in Kenya. Descriptive study was undertaken. The population of this study consisted of all properties–standalone house/bungalows/cottages/villas, town houses/maisonettes and apartment constituted in the Hass Property Index. This study adapted a census study of all the properties in the Hass Property Index. Secondary data collection technique was employed, and was done through the analysis of data from the Hass Property Index and from the Central Bank of Kenya Monetary Policy Committee data base, all of which is publicly available. A simple regression model analysis was used. The study concluded that interest rates do influence real estate price in the Kenyan market. Average house prices had been on the rise for the 8 year period to 2012 and the lowest value for house prices was 15,070,019.00 in years 2009 and 2006 while the highest was 27,132,758.8767 in 2012. The study also concluded that the lowest interest rate value was 2.77 in 2011 while the highest was 18.52 in 2012. The study recommends that the Government should provide an enabling environment for higher economic growth rates so as to “put” more money into more pockets and ensure more people can afford mortgages/homes.