House prices stall as lenders starve sector of financing

House prices slowed in the second quarter of this year on the back of a dismal economic performance, a new report shows.

According to the latest Kenya Bankers Association-Housing Price Index, house prices increased by a marginal 0.98 per cent, the lowest price increase since the third quarter of last year.

House prices grew by 1.73 per cent in the same quarter last year. In the first quarter of this year, house prices went up by 1.10 per cent.

The sluggish growth, said Kenya Bankers Association (KBA), reflected the subdued performance of the country’s economy, particularly following reduced credit extension to the private sector.

“In the real estate, the impact of the constrained private credit is two-fold. On the one hand, it hinders demand of the housing units in the market, since the purchasing power of the potential buyers has been squeezed. On the other hand, it limits the supply of the units to the market since project finance to the developers has been limited,” said KBA Chief Executive Habil Olaka. KBA is the umbrella body for lenders.

Pegged back

During the first quarter of this year, the economy’s real growth was pegged at 4.7 per cent - the slowest quarter-growth since 2013.

“We might see this trend continue in the foreseeable future, especially as the market develops a wait-and-see approach,” said Mr Olaka.

He further explained that capping of interest rates has played a role in constraining credit extension growth to the private sector, but clarified that this was not the only factor.

Since late last year when the rate cap law came into force, credit to the private sector has plunged from a growth of 4.7 per cent to 2.1 per cent, according to Central Bank of Kenya data.

The Banking Act 2016 has placed a ceiling on the rate at which lenders can charge interest on loans. Currently, all banks can charge a maximum interest rate of 14 per cent.

The real estate, said Olaka, has been affected on both the demand and supply sides. On the demand side, the purchasing power of potential home owners has been eroded while on the other end, the slowdown on credit has limited the supply of the units to the market, since the project to developers has been limited.

The latest growth is the slowest since the association started releasing the index in 2015.

KBA Director of Research and Policy Jared Osoro said the trend was an indicator of the lackluster performance of the economy since 2013.

“For so long, developers were influenced by constrained demand and reduction of credit,” he said.

Mr Osoro said many of home owners had become sensitive to cost and are thus, moving away from such high-end houses as bungalows, maisonnetes and townhouses to the low-end market such as apartments.

“Thus, upper-end prices are muted,” said Osoro.

Osoro reckoned the market might be witnessing a re-organisation as developers aligned their investments in areas with high demand. Going forward, he said, developers will concentrate on the low-end and middle markets.

However, these new frontiers would need to be supported with infrastructure, reduced prices of land and use of new technology. Prices have generally gone up by 16 per cent since KBA started releasing the index two and half years ago.

Mr Olaka said most of the houses in the country were financed through credit, but they were not picked up in the formal banking system as mortgages.

“The impact on credit affects all the sectors as opposed to just the mortgages,” he said.