Property in Athi River on the outskirts of Nairobi

A section of Nairobi’s Runda neighbourhood. The scale of the Kenyan real estate mortgage is too small to cause any alarm in the economy, some analysts observe. There are only 20,000 mortgages in Kenya, representing a minute per cent of the home-eligible people in the country.

Let’s take the population of Kenya as 44,037,656 (July 2013 estimates) and for ease of argument, assume that 5 persons make up a household, all things being equal. Kenya potentially has 8.81m households or if 10 persons make up a household, the number reduces to 4.4m. Using these indicators, if Kenya has only 20,000 mortgages and each mortgage represents a household, Kenya is so far away from being considered a significant real estate market to warrant any excitement. Using a small sample of data that points to excessive and undue off-the-cuff demonstration of imagined wealth of a few does not make a market, the way seasoned practitioners consider emerging markets. Kenya currently does not have the legal and financial infrastructure to attract global real estate resources because it is basically a transaction economy that has not seriously transformed to gain the confidence and rally of bigger than flash-in-the-pan resources.

A rise in interest rates and tightening of credit standards can lessen demand, and if the demand continues to drop while supply continues to rise, a sharp drop in prices may result, leading to market collapse. That is natural.

This is a natural response to basic aspects of demand and supply, driven by cost of money.

By 2012, for instance, it cost $1,800 (about Sh153,000) per square metre in the upmarket Karen and $1,500 in Mombasa, which was very high compared to New York and Dubai.

This is using a snippet of data from an unknown enclave of Nairobi, Kenya to compare with New York and Dubai. What New York? The state or city?  When in the city of New York? What section of the city? Dubai is exaggerated. The money that fuels and drives the city in the desert does not make sense to anyone except the ‘sheiks and oiled dealers’ that build at all cost, defy their own emotions and want the world to see them as having arrived. Dubai is unconventional and therefore, must be excluded from further consideration. Using Mr. Mbataru’s price indicator of $,800/m or $$167+/- per square foot, for a very small section of Nairobi is misleading. Using a handful who can purchase expensive automobiles as an indication of a growing auto-market is building hope on quicksand.

Of course all these factors fuel some speculation, which is normal in a market. This drives up prices and can be dangerous in an unregulated land market like Kenya’s.

Exactly the point. But I do not understand ‘unregulated.’ Is it price control? The market sets prices on assumption that buyers and sellers are duly informed and they are not under any pressure to enter into any transaction. The Kenyan market is uncommonly high because the supply is sporadic and demand excessive, and only affordable to/by persons whose source of purchase is hardly questioned. In a cash-is-king market, that is what happens. But if ‘cash-is-king,’ how come that nations that are basically ‘cash-and-carry’ economies are not Kings? It is because cash is inelastic while credit is elastic. The elasticity of money is fungible, which helps to create wealth and underpin the strength and soundness of any economy. Kenya’s economy is inelastic.

Most commentaries on the ever-rising prices of real estate in Kenya easily fall into an emotional warning of an approaching bubble burst. But a deeper analysis of the fundamentals influencing property prices suggests that the market is not about to experience a burst any time soon, and there are several reasons why this might be the true position.

What real estate market is mentioned? Are we talking of working class real estate - single family – detached and semi-detached homes available for the working class? If yes, what definition is applicable? How many civil servants, teachers, policemen/women - basically the workforce, can afford decent home prices in Kenya? What is the salary – average household income of Kenya’s working class family?  How does what they earn compare to average house prices in Kenya? Kenya’s real estate market is not structured. There is no seasoned data and trend analyses to warrant excitement that will attract global interest. It is basically ‘mine-is-right’ sentiments occasioned by exuberance that goes to support the typical African mentality of using a handful of unwarranted data to measure and back suspicious conclusions. To get there, however, we need to first understand what a real estate bubble is. Experts define it as a rise in housing prices fuelled by demand, speculation and the belief that recent history is a perfect forecast of future behaviour of the market. Housing bubbles, therefore, usually start with an increase in demand... in the face of limited supply.

A combination of very low interest rates and easy credit can bring borrowers into the market, fuelling demand. Speculators then jump into the fray, believing that profits can be made through short-term buying and selling, and thus further driving up demand. A rise in interest rates and tightening of credit standards can lessen demand, and if the demand continues to drop while supply continues to rise, a sharp drop in prices may result, leading to market collapse. That is natural.

Well, the above is convoluted and twisted to make it sound intelligent. Bubble and burst are exactly what they are; rise and fall. There is market correction that can be occasioned due to regulations, pricing, financial excesses, fraudulent conducts, and so forth. Every market goes through these cycles. Some see it coming and adjust while others are blinded in their pursuits, and then suffer. But at the end, real estate is an immobile asset and its value is influencds to a small extent by the global economic situation but mainly by local factors. There are often pockets that appear immune from market shocks but everything gets its shock treatment and thereafter, comes correction, lessons learned and results.

Other general economic and demographic trends can also create a housing bubble. However, due to the large transaction costs associated with owning a house, real estate markets are not traditionally as prone to bubbles as other financial markets. For example, it took almost 70 years for the US to experience another housing bubble burst after the Great Depression.

Nothing could be farther from the truth. US has had many housing bubbles and bursts since the Great Depression and often, it has nothing to do with the last one. In mid-80s, US had real estate driven structural adjustment occasioned by excessive lending and activities in real estate when savings and loans regulated by now defunct FSLIC – Federal Savings and Loans Insurance Corporation, a US agency exhibited exuberance and slept at the wheel. The situation dragged banks regulated by FDIC – Federal Deposit Insurance Corporation to also fail and majority of its real estate loans went into default. The reaction was to create FADA – Federal Asset Deposition Agency, FDIC as Receiver and later RTC – Resolution Trust Corporation, to handle the assets of failed insured financial institutions. To address some of the factors that were considered to cause the burst, Congress passed Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), a United States federal law enacted in the wake of the savings and loans crisis, which led to re-organization, recapitalization and consolidation of banks, first opening US up for branch banking with classification of NA – national association banks [big ones] and community banks often licensed within each state. The most recent burst learnt nothing from the last one but the market has corrected given responses from Congress and Wall Street institutions. US real estate sector is so diversified and huge that there are many facets to each and they are equally deep.

Yet the current fear of a real estate market bubble in Kenya is fuelled by the recent collapse of property prices in the US and Europe. These, however, are radically different markets. An analysis of the US bubble burst, for instance, shows factors that do not exist in Kenya.

Real estate is an immobile asset and in a global economy linked by many factors, shock waves can be felt inside and outside of a locale. But given that Kenya is hardly a market of significant volume and consequence, what causes bubble and burst, may have nothing to do with what goes on outside of Kenya. Kenya is not on the radar of most seasoned real estate industry experts looking for seriously and strongly emerging markets. With poorly defined and quantified sectors, and limited scope legal and financial framework, Kenya is basically left to its own devices – more like the ‘go-knock-yourself-out’ scenario. With mere 20,000 mortgages, majority secured on loan facilities that placed weight on the personality/political status of the borrowers as opposed to sound asset underwriting codes, such debt collateral has no appeal to outside investors. Therefore, the dance in the square about Kenya's property market mirrors the saying, 'no one ever says mama’s soup is sour even when it stinks and hardly digestible.'

First, what would surprise many Kenyans is that the US housing market controls have been very relaxed so that almost everyone with some disposable income can get a mortgage.

For those familiar with US real estate market, we do not speak of ‘controls’ but rather of regulations. Regulations may be lax and as result, loopholes exist which get exploited. Welcome to the imperfections in a capitalist market. Such imperfections and regulations often get addressed in a reactionary mode and the market re-launches until such a time when an event unrelated to the last happens and gets everyone to the table. Even with all the burst, all together there were less than 5% of existing mortgages that were in serious default. US real estate is robust, rugged and huge that it has innate corrective measures to bounce back and absorb its earlier losses.

But the Kenyan mortgage system is very rigid, small and controlled by the numerous legal and financial regulations. While the US government policy encourages low-income households to own homes, the Kenyan market is highly in favour of up-market and middle class ownership. Secondly, the interest rates in the US before the burst were enticingly low. At one per cent, many rushed to take loans and invest in the real estate sector, which offered more returns. A lot of people took several mortgages, a trend which ended up releasing more houses into the market. This is different from the Kenyan scenario, where interest rates have never been very friendly to the ordinary Kenyan wishing to own a home, and where the average Joe is apathetic to bank loans.

Loans are a significant aspect of any economy because lending is a trust, stability and reliability indicator such that loans can be interest-only and or amortizing. Most people in Kenya are anti-loans because there is hardly trust in the system and the banks are so limited in their capacity to make loans that they are more like ‘knee-jerk’ lenders. They are in cohort with the political class to exploit the uninformed. This is why  Kenya’s  politicians and political figures enjoy higher borrowing per capita than their counterparts across the world. Loans are given as favors and have nothing to do with economic benefits to the borrower or community/country at larger. If truth were to told and we employ the saying, ‘we appreciate statistics for what they show but thank God for what they do not reveal,’ Kenya’s banks have an undue load of loans made to politicians that are uncollectible and a burden on their books. Challenge me and I will reveal the numbers.

So when the US interest rates climbed up sharply in 2007, many Americans were unable to service their mortgages because most of them were variable interest packages, which means servicing the mortgages became difficult. Many people lost their houses through foreclosures, further releasing more houses into the market, and of course, leading to a sharp fall in prices. Thirdly, the relaxed mortgage system in America and the low interest rates simply fuelled speculative madness to a level not seen in Kenya. The belief that house prices could only go up brought all players into an irrational enthusiasm: no one questioned the sustainability of the prices, not the government, and neither the mortgage lenders nor the investment bankers. Not the credit rating agencies, and in the least not the homebuyers.

The reasoning is fundamentally flawed because it is not anchored on statistics. It is a pass without passing rigorous test.

Fourthly, the scale of the Kenyan real estate mortgage is too small to cause any alarm in the economy. There are only 20,000 mortgages in Kenya, representing a minute portion of the home-eligible people in the country. Further, many Kenyans who want to own a house simply buy cash, while many more just buy some land and construct their own homes. If there is any housing bubble, it will be in a few areas in Nairobi and Mombasa, mostly in the upmarket estates.

Well said, Kenya’s real estate is a mom-pop industry with occasional wannabe players without referees. Who wants such a market, except money launders looking for unsophisticated markets driven by under-the-table dealings and cash-is-king culture? But they are never ‘King’ with all their cash. The author is yet to mention what terms and conditions an average Kenyan looking to borrow can obtain financing for a single family home. It does not come easy to get banks in Africa share such terms and conditions. There are no Fair Lending policies backed by Truth In Lending regulations to force banks to disclose their lending practices.

Fifthly, many county governments in the US had imposed land use restrictions that created a land shortage, driving the prices of houses through the roof. By 2007, prices in some areas were 120 per cent of their market value.

This is another misrepresentation. In US, land use regulations are primarily the functions and preserve of city governments. US County governments only get involved in land use plan in areas that are not formal municipal entities and or areas called unincorporated and or extra territorial jurisdictions – ETJs. Only the state of Oregon in US has a statewide land use regulations. If the author is using the Kenya equivalent of County government as US states, he has demonstrated lack of depth in comparing and contrasting. US Cities grant land use zoning ordinances that allow and permit certain uses. Only the city of Houston, among US major cities, does not have zoning ordinances. It relys on deed restrictions to handle its land use - hence its plethora of jumbled and huddled uses. The author is probably not informed on the subject of land use and zoning and how it is handled in US.

In Kenya, at least for now, there are no such strict rules and regulations and land is easily available. So, what is driving the property market in Kenya? It is true that Nairobi’s real estate prices are some of the highest in the world. In fact, property market analysis firms such as Knight Frank and Citi rank Kenya’s real estate prices as some of the highest in the world, in the league of New York, Miami and Dubai. By 2012, for instance, it cost $1,800 (about Sh153,000) per square metre in the upmarket Karen and $1,500 in Mombasa, which was very high compared to New York and Dubai. Some new apartments in Mombasa are reported to cost Sh100 million apiece — and there are few remaining!

This is a feel good analysis and conclusion. Kenya is not the ‘next best thing’ for massive investments in real estate because the infrastructure for expanded and extensive capacity does not exist and will not exist in the next 30 years. Assuming that Kenya takes proactive interest to address its capacity for extended play and role, it will take decades to see the result. It is a transaction economy with limited transformation that will jump-start sectors. Hardly any city in Kenya has regular water supply. Outside of Nairobi and Mombasa, what is there for Kenya to brag about except its open veld controlled by tribal landlords who do not understand land economics? The recent creation of county governments, US equivalent of states, is new and confusing that the handlers are not equipped to make a difference. Of the 47 counties, maybe 5 are viable, the rest are dependent on monetary allocation from Nairobi, in a beggar-master give-us-our-daily-bread culture. Real estate is a product of legal and financial frameworks whereby rights as in bundle, are owned and sold, and one does not have to befriend and or romance a political figure and or tribal landlord to own a piece of land. As long as land ownership in Kenya is still traditional and people build homes with cash, its impact will remain inelastic, and inelasticity does not ignite wider scope.

Some regard this as pure madness, and in a way it is. But there are several reasons why that Sh100 million price tag, though nauseating to some, makes sense to an increasing number of buyers. One, the country is a ‘growth hot spot’ and has been attracting increasing global investment in the last decade. This is confirmed by the number of global corporates and NGOs pitching camp in Nairobi. Google was first here, followed by General Electric.

The author uses less than one percent activities to judge and measure an undefined and unquantifiable market. Assuming he is right, Kenya’s  Sh100m is a dollar equivalent of $1.176m. How many Kenyans can afford this price tag? How many CEOs of the companies mentioned live in such houses? If they do, which is unfortunate, the cost is passed back to Kenyans. Africans are so naïve that they think because things are expensive in their country, that is proof of wellbeing. The foreigner does not care because the average Kenyan is subsidizing their livelihood while they are making the natives feel good. Of all the noise and chant, Kenya does not have 5,000 homes valued and priced at above $1m, if it does, it is a pie in the sky. Kenya does not have 10 seasoned CEO’s that command worldwide respect. There are hardly 10 companies in Kenya that have a corporate value of $10b nor is that a local Kenyan company whose stock trades at an equivalent of $10 – Sh850 per share. The executives sent to African countries are usually middle level who are given a hero’s welcome and their utterances are celebrated by locals who do not know how to ask hard questions. When the desirable is not available, the available by default is seen as desirable.

And then chic hotel chains like Herriot, Accor, Starwood and Kempinski joined the party. The managers of these businesses and organisations require offices, homes and accessories that match international standards. With the discovery of key minerals, and the expansion of infrastructure across the region, notably to Ethiopia and South Sudan, this investment trend can only intensify.

All of Kenya does not have 5,000 5-star hotel rooms and with average daily rates that run in neighborhood of choking $300 per night, it is outrageous. How many Kenyans can afford such rates? Foreigners stay in hotels because it is the only place they are sure of security, regular light, water and some comfort. They don’t mind paying for such temporary comfort. Kenya’s hospitality annual room volume based on the total number of rooms sold basis is less than one million rooms or an equivalent of 2,734 rooms daily. What most in Kenya will consider 3-star room to us in US is a glorified Motel 6 room or lower class of Holiday Inn.

Two, analysts have attributed the high property prices to the ongoing economic shift from the West to the East, with Africa and the Indian Ocean as the fulcrum. More concretely, wealthy people from Europe and America have been pouring money into Africa, and Nairobi and Mombasa are some of the most popular destinations. Up along a nondescript stream on the slopes of Mt Kenya, high-value bungalows have been cropping up. Many rich Kenyans and foreigners are rushing there to own a piece of the mountain. And you would be surprised to know who own some of those highly guarded villas along the coast and upmarket Nairobi.

Show a trend with numbers. Anyone believing in the hype and rise of China and India, is a student of marginal thinking. India is still a largely underdeveloped country and more than 90% of its population live in unimaginable poverty. As for China, its story is good but again, rural China is like ‘Siberia,’ far removed from the glittering cities of Shanghai and others, all hiding the poverty while promoting ‘Johnny-Just-Come’ wealth, on a binge. There is no alternative to US and despite its challenges, US worst days are far better than China and India best days. The two have another century of consistent and uninterrupted moves to achieve and delivery a population with average access to reasonable quality of life. I do not lose sleep on what India and China are doing because they are still ‘C’ countries.

They are ‘the who is who’ of international corporate, culture and entertainment. Further, many savvy investors prefer buying in Africa as the European, Middle Eastern and Asian real estate markets are considered mature and prices there can only go down. Three, the Kenyan middle class has been expanding rapidly in the last decade. The World Bank estimates that Kenya’s middle class (populated by those able to spend about Sh200 per day) now stands at 34 per cent of the total population.

Kenya’s Sh200 per day is a US dollar equivalent of $2.35 per day. Kenya’s per capita income is $1,800, and may someone help me understand how one who earns such amount can migrate to a middle income class? How many Kenyans earn an average of $60,000 annually? In what sectors? Kenya’s economic rise is like expecting the sun to rise from the west, it is possible but very improbable. Prove me wrong in 30 years.

This is the class that is, by socialisation, unattached to their rural backgrounds, hence prefer buying small plots in the cities. Since prices of property in prime areas like Karen are way above what they can afford, most follow infrastructural development. That is why land along the Nairobi by-passes was quickly gobbled up when the bulldozers and earthmovers rolled in. The reason some analysts think the Kenya market is a property bubble is that most people want to be as near the city as possible. That is natural, but economic sense quickly pushes people out of the city, where land is cheaper and easily available, hence the current exodus towards Thika and Machakos. Note that the traffic jam on Thika Road is quickly stretching towards Roysambu despite the super highway!

The author dabbles into emotional commentary. There is nothing wrong with one feeling good about their country and seeing all stars, but where is realism backed by sound laws and regulations? It is absent in what most Africans say and write about their country. They want change and see change but they are limited in scope and understanding on how to harness and deploy what really matters to unleash the potential. The fundamentals are absent for Kenya. Kenya is an example of a country that since independence, never had any civil war or military leadership. Good record. But check out Ethiopia that has had hard and tough times. Its fundamentals - economic prospects are far better than Kenya's. Ethiopian million Birr has a US dollar equivalent of nearly $60,000 while chest thumbing and fist clenching Kenyan with Sh1m has mere $11,765. If money talks, who talks the loudest under this example? In 1975, Kenya was the first African country to enjoy IMF support. So having a stable civilian rule is not a panacea for growth and development. There are other factors and Kenya as an example of an African country that has enjoyed stability since independence is not a good example of a sound and viable economic engine. It is still a basket case.

Fourth, a lot of diaspora money has been going into the real estate sector. Many Kenyans living abroad and wishing to build a house or invest in real estate been using relatives and friends to oversee the projects. Data related to this practice is not formally available, but what is clear is that there is a lot from abroad. Of course all these factors fuel some speculation, which is normal in a market. This drives up prices and can be dangerous in an unregulated land market like Kenya’s. There is most likely going to be a market correction, but certainly not a crisis as was in the US. The feared bubble burst is just that: fear. Further, it is important to note that, like all bubbles, it is difficult to predict a real estate one. Bubbles are easier to understand and analyse after they burst. Like the overinflated balloon, one only knows that it has burst after the ‘pop’!

Unfortunately and contrary to proven route for having a successful economy, remittance is not money that makes it happen. Some countries send far more than what Kenyans abroad send, and they are still trudging and teetering. Economic development is fundamentally a law and finance combination that seeks to entrench rules and regulations on monetary and fiscal policies with unending tweaking to keep abreast of current demands, with good results. Having a PhD in Economics or any related field, is not Economic Development. Relying on remittance is like one waiting for ‘manna’ from Heaven. Remittance is basically emotional money sent to make one’s family left behind feel that ‘we still love you and here is something as show of love – go to Western Union and get the almighty Dollar.' It is consumer money and not money for infrastructure. Relying on it as proof of sustenance is like waiting for rain in a desert to make the ground fertile.