News Column

High Mortgage Interest Rates Dampen Kenyan Economy

May 16, 2014

Julius Kithuure

Kenyan property developers say skyrocketing interest rates for mortgages are slowing down real estate development, putting a wrench in the government's target of building 200,000 new housing units in Nairobi annually.

"Generally, when interest rates are lower, developers are more likely to borrow money as doing so costs them less," Kenya Property Developers Association chairperson Emma Achoki told Sabahi. "On the other hand, when interest rates are high, credit becomes more expensive, making many developers shy away from loans."

Because banks use purchased property as collateral and can repossess it if the borrower is unable to repay the loan, most prospective developers do not want to take the risk.

"No property developer wants to lose his property that way, so most developers are [avoiding] borrowing from banks, opting for other alternative sources of financing," Achoki said.

But since there are few alternative sources of financing for housing development, most developers reduce their number of investments or take longer to complete a single project, she said.

"[Nairobi] and other major towns are experiencing rural-urban migration which is driving growth in demand for both residential and commercial property, yet property developers are not able to satisfy this demand because of the financial hiccup," Achoki said.

Surge in mortgage rates stifles home buyers, investors

Even though the Central Bank of Kenya set its rate for overnight loans to commercial banks at 8.5%, the banks have not followed suit. Commercial banks use the Central Bank interest rate to set their prime lending rates, but are still offering mortgages with interest rates as high as 28%.

"The surge in mortgage interest rates started in 2011 when the Central Bank of Kenya increased the benchmark lending rate to 16.5% from the previous 11%, but commercial banks have continued to retain the high rates to date [even though] the Central Bank reduced the base lending rate to 8.5% in 2013," said Caroline Kariuki, managing director of The Mortgage Company, an independent mortgage brokering firm servicing East Africa.

The high cost of lending has contributed to the slow pace of new development in Nairobi, quashing the government's target of adding 200,000 new homes annually in Nairobi, industry analysts say.

New construction amounted to barely 7.5% of government's target in 2013, creating a deficit of 185,000 homes in the capital for that year, according to a report released April 2nd by the Kenya Property Developers Association and HassConsult Real Estate.

HassConsult and The Mortgage Company released another study April 29th called the Hass Property Price Indices, which surveyed real estate data from the first quarter of 2014.

The report blames commercial banks' huge mortgage profit-margins for the slow real estate market.

"They can make reasonable profits but not go for overkill," Kariuki told Sabahi. "There is definitely a need for the government to either develop alternative sources of funding for property developers or to prevail upon commercial banks to lower interest rates so that more Kenyans can afford mortgages."

Kariuki said affordable financing is key to the growth of the Kenyan economy because cheap lending rates would create an appetite among middle-class Kenyans to purchase residential properties, which would lead to a boom in real estate property market.

"In periods of low interest rates, more houses are often built as demand rises and development companies are able to borrow money at a cheaper rate to finance the construction," she said. "The sales of homes also rise as more consumers are able to take out a low-cost loan."

Stagnation in property market impacts entire economy

Nairobi businessman Martin Muli, 47, who owns a repair shop for commercial vehicles in Nairobi, had hoped to venture into the real estate market for the first time in January.

His plan was to borrow 30 million shillings ($344,000) to construct a residential apartment complex with two- and three-bedroom units in Kileleshwa estate. However, he said, the high interest rates made him postpone the project indefinitely.

"I was expecting the interest rates to have dropped because of the falling inflation rate and stiff competition among commercial banks, but they are still unaffordable," Muli told Sabahi.

"If the rates would drop to a single digit, more property developers could afford to borrow," he said, adding that he will continue to wait and see.

University of Nairobi economics lecturer Japheth Osotsi Awiti said the high mortgage rates not only dampens enthusiasm among middle-class home buyers, but may also turn away real estate investors.

"High levels of economic growth generate higher incomes, more investment and increased consumer spending," he told Sabahi. "The expectations of economic stability drive prospective homeowners into the mortgage market."

Awiti said stagnation in the property market causes other sectors of the economy to suffer, especially in related industries such as demand for construction materials and employment of both skilled and unskilled labourers.

"Rising interest rates affect both housing developers and consumers [whether tenants or home buyers] by reducing consumer spending and investment," he said. "Therefore the economy is likely to experience falls in consumption and investment."

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Source: AllAfrica

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