House prices suffer as Diaspora cash runs out

By Morris Aron

The housing market is set for a drastic fall in prices for the first time in over a decade, as high cost of living and dropping remittances from the Diaspora squeeze the purchasing power of households.

Homes in Nairobi’s upper-middle income areas and build-to-rent bungalows at the Coast — which have witnessed significant price appreciation in the past five years — will be hit hard when the bubble bursts.

"It is true, the number of residential proper ty transactions have gone down," said Mr Reginald Okumu, a property consultant with Arc Consultants.

Sales inventories of several property companies seen by The Financial Journal paint a grim picture of the last six months. Out of ten property companies operating in Nairobi and Mombasa, less than half have in the last five months successfully concluded two or more residential property transactions.

Market players say areas in Nairobi, which will be affected include apartments in South B and C, Kilimani, Kileleshwa and some sections of Langata, where properties are valued at between Sh6 million to Sh12 million.

"We are bound to see property prices in the said areas begin to fall if the situation persists," said Okumu.

Tale-tell signs

Players say that as the situation gets worse, such reports are bound to become more common in the market and there are also possibilities of increased foreclosures due to mortgage defaults and developers holding back planned projects.

Incidentally, the areas predicted to experience a market correction have witnessed unprecedented rally in house prices in some cases prices doubling every two years.

Reports are abound of property owners considering downward price revisions or offering huge discounts to buyers or both in order to stimulate sales. "Nobody is saying it, but property prices in the in the upper middle income apartment market are falling," said Mr Robert Yawe, a property consultant in Nairobi.

According to a sales agent in Kilimani area, buyers can now get up to ten per cent discount off quoted prices if they prove serious. Property experts have warned that such appreciations are possibly not supported by economic fundamentals and as such making the market vulnerable to a correction in case of changes in socio-economic conditions.

The crunch is also seeing developers of properties, which were initially built exclusively for sale converted to rentals.

Property crunch

"It is not uncommon to see buildings which previous were for sale being rented out. Last month, we were told to remove ‘for sale signs’ and replace them with ‘for rent’ signs because nobody was buying," said a sales agent with one of the leading property firms in the area, who asked not to be quoted for fear as being reprimanded.

The crunch in real estate business has claimed its first casualty among property developers who bet on value appreciation to build and sell houses.

A bubble burst describes a scenario characterised by falling property (or share) prices after a period of sustained steep rise due to a drop in demand brought about by market forces. The phenomenon has happened in the developed real estate markets in the world with the West including the United Kingdom and recently in the US at the begging of the sub-prime mortgage which lead to the global credit crunch.

Mortgage loans

This is bad news for developers who secured huge loans to construct properties, as they will have to spend more to service their mortgages, or risk foreclosure.

Analysts say that the harsh economic climate characterized by high inflation, fear and reports of job losses coupled with tighter lending practices has fueled the phenomenon leading to the middle class shying away from taking up mortgage loans resulting in a drop in demand for houses.

High inflation trends coupled with the effects of the post election violence and global credit crunch saw the country’s economic growth plummet to 1.7 per cent last year from 7.1 per cent the previous year and is bound to grow by only three per cent this year.

High inflation also means that the cost of building materials such as cement and timber would continue to remain high for developers leading to high input costs whereas property prices continue to fall. The development also means that individual’s purchasing power is eroded while tighter lending would see fewer people secure loans to buy homes leading to a drop in demand.

According to a recent survey by Federation of Kenya Employers released recently, 7,000 workers from 500 companies were laid off in the first half of last Year as companies’ adopted cost cutting measures to shield themselves from the weak economy.

Another key driver of demand, remittances from the Diaspora have been significantly falling according to the estimates from central bank statistics leading to a drop in the number of intending to buy houses.

Statistics from central bank indicate that remittances from the Diaspora fell to $39.5 million in January, the lowest figure since December 2006 — but has since maintained an unstable swing to forth with the month of May recording $49 million.

Finance experts say that massive job losses in the Diaspora has seen the many Kenyans living abroad send less money to undertake investment decisions such as property development opting instead to subsistence assistance to families. A huge portion of remittances are now being channeled into buying food, paying school fees and other daily expenses as opposed to development projects such as investing in property.

Job losses

Estimates indicate that international transfers account for about 30 percent of sales while the retail mortgage market accounts for close to 40 per cent of the sales in the upper-middle income residential property market while the rest are cash buyers.

"Drop in international remittances is bound to impact negatively on demand for property as it means less people will be looking to buy houses," said Mr Maina Mwangi the head of property at Knight Frank, a property firm.

Reports of job losses and news of companies planning or laying off individuals is making many adopt a wait-and-see attitude and fuelled the slowdown.