Housing Market Fundamentals and Housing Prices in Nairobi City County, Kenya
Nyachiro, Daniel Omanga
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In Kenya, housing prices persistently rose from the year 2005 to 2018. An increase in housing prices is beneficial to an economy, but a persistent increase raises concerns over housing affordability and the potential risk of an unstable housing market. Empirical evidence indicates that variations in housing prices have been associated with market fundamentals. However, the extant literature documents contradictory findings on the nature of relationships: this formed a good basis for this study. The general objective was to assess the effect of housing market fundamentals on housing prices in Nairobi City County, Kenya. The specific objectives were to determine the effect of per capita income, interest rates, construction cost, inflation, and credit supply on housing prices in Kenya; the mediating effect of housing supply, and the moderating effect of investor sentiments on the relationship between housing market fundamentals and housing prices respectively. The study was anchored on the efficient market theory, rational expectations theory, permanent income hypothesis, real estate market equilibrium theory, and stock-flow model. The study adopted the positivist philosophy and an explanatory research design. The target population was 163,000 residential buildings units put up for sale in Nairobi City County, Kenya, over the period 2005-2018. The study was a census that used secondary data sourced from five distinct sources. The study employed linear and nonlinear autoregressive distributed lag (ARDL) models. Additionally, the study evaluated the moderating and mediating role of investor sentiment and housing supply on the relationship between market fundamentals and housing prices. The linear ARDL outcome indicated that per capita income, interest rate, inflation, and construction cost significantly affect housing prices in the short run. The nonlinear ARDL model outcome indicated that interest rate, inflation, and credit supply have a significant asymmetric impact on house prices in the short and the long run. Equally, the outcome indicated that per capita income and construction cost had a significant asymmetric impact on housing prices only in the long run. Further, the study found that investors' sentiment significantly moderates the relationship between housing market fundamentals and housing prices in the long run. Finally, the study found that housing supply partially mediates the relationship between housing market fundamentals and housing prices in both horizons. The study concluded that housing prices have a strong downward price stickiness due to changes in the interest rate; have a relatively rigid reaction to inflationary pressure; credit supply and housing supply are key factors in the determination of dynamics of housing prices; and that investor sentiments have a persistent role in pushing prices away from equilibrium prices. This outcome implies that stable macro-economic and macro-prudential policies and reduction of building costs and supply restrictions would stabilise housing prices in Kenya. The findings also imply that investor sentiments can lead to mispricing relative to rational expectations. The study recommends that Central Bank of Kenya in collaboration with financial institutions to come up with innovative housing finance products that take into account incremental housing and mixed planning to cater for the lower and middle income households; the Central Bank of Kenya should also fast track creation of a mortgage liquidity facility to enhance long term financing to lenders; the Government of Kenya should consider harmonisation of the fee structures and procedures of planning, approvals and titling across the national and county governments to shorten the process of property registration; The Kenyan State Department of Housing and Urban Planning should enhance review of policies around planning and infrastructure provision to reduce supply restrictions and encourage incremental housing; and finally the Capital Markets Authority and Institute of Surveyors of Kenya should develop a nationwide real estate sentiment index to mitigate systematic risk associated with speculative housing development.