Effects of mortgage pricing volatility on real estate returns to mortgage firms in Kenya

Abstract

Financing is a very important component of investing in real estate. In general, when investors desire to obtain financing, they usually pledge, or hypothecate, their ownership of real estate as a condition for obtaining loans. In Kenya, it is estimated that 234,000 new housing units are required every year yet only 20,000-30,000 units per year are currently being produced and a mere 20% of these are affordable to low and moderate income families. The mortgage market in Kenya has increased from 7,600 in 2006 to over 20,000 homes in 2013 but hikes in interest rates has slowed down mortgage uptake. The prevailing high interest rates as a result of a stringent monetary policy being pursued by CBK as an effort to fight high inflation has dampened the mortgage market further. The population of the study comprised all the forty-four commercial banks and one mortgage finance company registered with the central bank. The study used secondary data collected from the Central Bank of Kenya, Kenya National Bureau of Statistics and Banks published financial statements starting 2009 – 2013. The data obtained was analyzed using multiple linear regression technique. The study established that there existed a positive relationship between mortgage pricing volatility and real estate returns. Interest rates volatility affects a bank‘s underlying economic value. The value of a bank‘s assets, liabilities is affected by a change in rates because the present value of future cash flows. Generally the interest rate risk is the exposure of a bank‘s financial condition to adverse movements in interest rates. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholders‘ value creation. However excessive interest rate risk can pose a significant threat to a bank‘s earnings and capital base. The study recommends that commercial banks in Kenya should assess their clients and charge interest rates accordingly, as ineffective interest rate policy can increase the level of interest rates and consequently Non-performing Mortgages. Mortgage firms should also apply rigorous policies on loan advances so as loans are awarded to those with ability to repay and mitigate moral hazards such as insider lending and information asymmetry.