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Concerns as banks tipped to inflate housing bubble

Concerns as banks tipped to inflate housing bubbl

By Steve Umidha

Kenya’s expected property market boom is eliciting an uncomfortable sense of déjà vu, in what experts now predict could usher in the often dreaded ‘housing bubble.’

In a new worrying report titled Whispers from Kenya, by investment firm, EFG Hermes, the firm believes that the financial institutions and particularly commercial banks among other factors will largely underwrite the foreseen bubble.

“We think structural changes are needed to improve the outlook, which looks stagnant at best. If not, the bursting of this bubble could have a significant impact on listed financial services companies and in particular, the banks,” states the report.

When a housing bubble appears, housing firms get wealthier and demand more bank credit and during such periods, banks cannot increase their credit supply, as the bubble does not immediately affect their wealth. Therefore, the bubble initially lowers credit to non-housing firms.

Launched last week, the report sees further signs of the froth in its latest findings that is also blaming the erratic land prices as a possible cause for effervesce.

“High land prices (per acre) of +USD500k and +USD100k in the suburbs and satellite towns of Nairobi, respectively, there is a disconnect between buyers and affordability. These unfavorable structural challenges are nothing new, but we believe this has finally started to show as the masses have been crowded out,” reads the report which has also poked holes on the unproven housing deficit.

Kenya is estimated to have a housing deficit of over 2 million homes, which increases by around 200,000 per annum and yet there are just 50,000 new houses being constructed annually, but this fails to have a significant impact on demand.

EFG Hermes is questioning these figures and affordability should the demand be met.

“When you scratch the surface and look past Kenya’s housing deficit of 2mn homes, growing 200k units annually, you see a market where affordability is stretched to the point where only 12.3 percent of urban households can afford to buy the cheapest new build house (USD26k / Sh2.7mn) built by a developer /contractor,” marvels the survey.

While there is no doubting the excess demand for housing, the challenges around affordability mean that resolving its housing deficit is becoming increasingly illusive, according to the investment firm.

“While there is excess demand for housing, we believe the low levels of affordability make bridging the current gap very challenging. This in turn is exacerbated by high land and property prices, particularly in Nairobi. It is hard to see where the growth will come from.”

Current land prices in the high-end residential segment have fallen significantly from their peak levels over the past four years in key areas that were previously known to be expensive like parklands and Ruai for instance.

The construction industry on the other hand is projected to grow by 4.5 per cent year-on-year this year as the sector recovers from the negative impact of the Covid-19 pandemic.

In the last year the market has seen home prices overheating, with mortgage rates rising alarmingly.

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