As a hopeful future home owner, the subject of Real Estate is one that is close to my heart. Owning a home is a dream that almost everyone harbours and is not a reserve for teenage girls. As it is a matter that is of significance to me, I am worried about the current prospects for home ownership in Kenya. A look around property websites and magazines will reveal that a typical first-time buy in an area like South B, South C and Langata or even a first time apartment in Kileleshwa, Kilimani or Parklands will put you back around 10 million shillings. This is a round figure and is not reached at by any statistical analysis. The question is that is this affordable?
This can be answered in two ways, if one was to pay straight upfront cash then ofcourse it wouldn't be affordable to first time buyers. In this case then, is it affordable through a mortgage? My own analysis confirms that even through a mortgage this is still too much to pay. Why? you may ask. Given an interest rate of 15% on a 20 year mortgage, then your monthly payments would have to be Ksh 131,700. As most banks and mortgage lenders usually prescribe that you pay a third of your salary, then this would mean that you should be earning a net salary of Ksh395,100 before tax. If one includes taxes which in Kenya would mean a base tax of 6,761 plus 30% of 395,100 which is the marginal rate. This information was obtained from the latest Kenya Revenue Authority (KRA) PAYE guide. This would add up to a total tax bill of Ksh125,291. When we add these sums up, it would mean that you need to earn a gross salary of Ksh 520,391 to afford such a house. The worst part is that after you have finished paying for your house 20 years down the line, you will have paid Ksh 21,602,949 in interest alone.Clearly this leaves a lot to be desired as starting salaries are far from 520,391 for the vast majority of urban citizens. The 2009 Economic survey carried out by the ministry of planning puts the urban average income to be about Ksh23,000. This makes for gloomy reading for many of us who would want to buy a house.
These factors are made worse, when one realises that the average age of Kenyans according to the CIA world factbook is 18.1 years. This means that the core mass of potential homeowners is yet to reach a home buying age. Therefore, 10 - 14 years down the line, there will be a huge surge in home demand as this critical mass seeks shelter adding to the upward movement of house prices. This housing problem is evident in the statistics, from the 2009 FinAccess Review carried out by FSD Kenya, only 17.1% of the urban population live in their own houses. Furthermore, a third of homeowners acquired their homes through inheritance. Therefore Kenyans are not a home buying people.
So why then are houses so expensive? and why is it so hard to afford one. I have hypothesised in the past in casual conversations that a weak transport infrastructure is a big part of why houses are expensive. Most housing areas in Nairobi lie within a 6 km radius of the city center. These include areas such as South B, Eastleigh, Langata, Runda, Ridgeways, Muthaiga, Westlands, Kilimani, Kileleshwa and others. This proximity to the city center and other areas such as industrial area are a major factor in the high prices. If one was to take the same radius in a city like London, then Piccadily, Kensington Gardens, Fulham and Grosvenor Park would be their equivalents. These are traditionally very expensive neighbourhoods in London. If there was a good transport infrastructure, then people can easily commute to the city center from areas such as Kitengela, Athi River, Ngong and Ong'ata Rongai in 20 mins. My university Campus is approximately 20 kilometres away from the city center in Johannesburg and it only takes 25 minutes to get to the city center. A good transport infrastructure would lead to developers building decent housing communities targeted to high income families in areas such as Kitengela and Mlolongo. I for one wouldn't mind buying a house in such an area if I was guaranteed easy transport to the city center and some security. However, the government seems to be taking positive steps towards this by their recent heavy investment in infrastructure.
Another issue could be the fact that Kenya has very weak anti-money laundering legislation if any at all. A look at the latest key economic indicators published by the National Bureau of statistics puts the aggregate value of the council building approvals for residential houses in 2008 to be 18,749 million shillings, if one compares this with the amount of credit advanced towards building societies in the same year approximately 681 million shillings by half year, you would notice a big discrepancy. Of course this is a very bold claim as credit was advanced to non-building societies for residential purposes. However, the point to be made is that there is a significant cash aspect in both the construction and acquisition of homes in Kenya. Stricter money legislation in the country would maybe leave a significant amount of these buyers and developers at bay. As Warren Buffett says "you only find out who's been swimming naked when the tide goes out".
This is an important issue as with any economy, resources should be directed to their most efficient use, if people are spending too much on housing, then areas such as education, research, and even domestic tourism are not invested in therefore reducing the value added to the economy. I am sure there are a number of other factors that affect house prices in the capital. Please share with me your opinions and give me feedback on any of the issues raised here.
I'm just curious about the laws regarding land allocation in Kenya. Is land available and is it affordable? And if so, what would you estimate the cost would be of building a house rather than buying one?
I will not pretend to be an expert on land laws in Kenya but I will refer you to www.kenyalaw.org here you would find the info on land matters. However, Ash there has been an issue with material specification in Kenya. The current law specifies that construction should be done using brick and mortar. At the moment there is a bill in parliament which if passed would allow materials such as inter-locking bricks, pre-fabricated bricks and even timber to be used for construction. This would severely reduce the costs of construction. Furthermore, the Kenya Bureau of Standards in a recent study found that plastic piping is much more convenient to use rather than metal pipes, through their recommendation, builders will start using the plastic pipes further lowering their costs. However, I cant furnish you with exact estimates, but construction is cheaper than buying. In Kenya, as the builder of the house you have to avail yourself throughout the process to avoid rogue contractors pushing up your costs. If you dont have the time it can be really tricky
Building may be cheaper than buying but it seems like land prices have gone up dramatically and inexplicably the past few years. I find it hard to believe that the current prices of land in Kenya reflect the actual worth of the land. I mean I know it's difficult to put a 'real' monetary value on land but still I don't understand the rise in prices and I'm not sure it's simply inflation...
Faith, thats so true. One would be better off buying an apartment because Land in areas like Kilimani, Kileleshwa, Westlands, Upper Hill and the likes range from 30 to even 70 million per acre. This is because these sites are snapped up by developers who put up apartments. For home construction, we should look to areas such as Athi River, Ngong, Kitengela and such. In Runda, Karen and other upmarket areas land sells for about 10 million per half acre. Clearly things dont add up when one realises that GDP per capita in Kenya is only 1600 dollars
Samora, I was reading some analysis on the trend in the income/housing price ratio. Although this was based in the UK, its significant that they were saying that once that housing prices get beyond 4 times the average income, you have a bubble. In Kenya, the multiple is now around 10 in Nairobi!
Maina, I wanted to include such an analysis comparing the income/price multiple across countries however, I couldnt get data for Kenyan median incomes. The economic survey gives average data, however anyone who took stats 101 knows that taking average data for incomes is misinformed. Thanks for the comment... As the post said, we will soon find out who has been swimming naked.
True, in fact ever since the City Council rezoned parts of Lavington, Kileleshwa, Upper Hill and Kilimani around the early nineties from low density housing to Medium/high density housing as well as for medium density commercial developments, land prices in those areas skyrocketed and that's why housing developers build apartments as preferred choice of housing. Housing prices are also distorted by the many Kenyans in the diaspora who have alot of money to spend thus pushing up the cost of housing beyond the reach of many Kenyans.
Samora, i agree with you, and another reason why land is so expensive is due to the money laundering in kenya, money from pirating in somali has infiltrated nairobi and people are buying land with cash!! and the banks cannot benefit from money that is "floating" so their interest rates have to be higher than necessary. it's a good thing transportation is on it's way, thika highway is looking good and so is the mombasa one, so hopefully people can live outside nairobi and commute comfortably. another thing we should consider is that, a big chunk of land in kenya, not just nairobi, is in the hands of (forgive me but it is the turth) the kikuyu "mafia" Uhuru kenyatta and Beth Mugo own land in coastal region that does not belong to them, and they do not utilize it at all!!! it's quite sickening, but maybe you can do another article on that. i always stress the fact that conflict in africa arise from land and resource ownership and benefits not trickling down to the people. i have digressed,.... anyway, good work samora,