A bubble is basically is an economic cycle characterized by a rapid rise of asset prices followed by a decline which is unwarranted by the fundamentals of the asset and driven by exuberant market behavior.
This is so for the real estate. The property prices escalate for the general population to afford which ultimately results in a sharp decline in demand for the same. This in the long run comes to bubble burst. For this to occur, there has to be external forces that cause great disruption in the market changing the behavior pattern of investors.
The real estate sector, accounting 9 per cent of Kenya’s GDP has consistently outperformed other asset classes in the past decade or so, incurring minimal losses while consistently generating returns of between 25 percent and 30 per cent. This is according to a report released by Cytonn Investments.
Some of the red flags of a bubble that investors ought to take a keen look at:
- Ease of access to debt or mortgage. Cheap mortgages would mean a majority of the population would be in a position to buy houses. This easily rouses demand for housing that further leads to rise in cost of acquiring a home.
- Very high speculation in this market results in increased demand and therefore rise in prices. When this ultimately does not prevail in the future, it results to a sharp decline in prices
- Overvaluation of housing resulting from high demand. This eventually leads to a bubble as the prices become too expensive to the public.
These red flags are evidenced from case studies of the United States property bubble, Baltic States property bubble and the Spanish property bubble.
Kenya’s Real Estate Overview
Kenya’s real estate market has grown immensely experiencing a boom in line with the country’s economic growth. The market has grown tremendously over the recent decades to become one of the leading contributors to the nations GDP. According to the Kenya National Bureau of Statistics the RE contribution has grown from 4.8 per cent to 8.4 per cent between the years 2010 and 2016 with a slight decline in 2017 due to a prolonged electioneering period which has later on began trending on an upward move.
Some of the leading factors that haven’t prompted a bubble yet in Kenya are;
- Low credit supply- With the introduction of the banking amendment act of 2015, there’s been a steep decline in credit advancement. This has essentially minimized the supply of cash in the market. What this means is most Kenya’s opting to own homes opt for payments using other options other than mortgage alternative.
- Demographics-Population continues to grow rapidly. With this increasing so does the disposable income thus creating a demand for property. A bubble alternatively is solely driven by investors’ interest in capital growth therefore holding it for a while before reselling at very high prices.
- Stable economy-Kenya has experienced a growing GDP on average approximately 5.5 per cent in the past decade or so. The growing GDP has equally supported the Real Estate sector. In a bubble economy, the burst is often followed by a recession where there is normally a contraction of the GDP.
- High demand- Report by World Bank indicates the country has a deficit of 2million units with the National Housing Corporation estimating an annual demand of 200,000 units. Housing units provided annually is roughly 35,000. This would mean demand for property is expected to be on the rise.
- There is a proportionate rise in both incomes and property prices as indicated by KNBS (2017) report. Between the years 2015 and 2016, there was a 9.1 per cent increase in earnings against 7.4 per cent increase in property prices a bubble often results from a credit driven market. When household is overridden with debt beyond the property value, then the ultimate result is a burst. Indicates. This report clearly indicates that there is still room for property prices to grow in order to match the population’s income.
- There is equally a lot of incentives by the governments with regard to land zoning regulations allowing developers to maximize and densify on their pieces of land. This is unlike the case studies of the states that experienced the bubbles where there is limited supply of land and thus a lot of regulations not in favour of developers.
From the above factors, there is a clear deduction that the real estate market is still within the developer’s space to bring out as much as is needed. The confusion coming about the RE sector is basically cyclic rise in demand, peaking market which then falls followed by a bottom out then a rapid price increase. This is because demand and supply for property hasn’t leveled off, as RE in Kenya is still on the rising phase. Supply is essentially way lower than the demand.
Also Read: Kenya’s real estate sector slumps
By Hilary Hagai
Hilary is an Investment Analyst with Cytonn Investments in Nairobi.