Effects of Interest Rate on Housing Prices in Kenya
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Date
2022
Authors
Koome, Rodrick
Njaramba, Stephen Githae
Journal Title
Journal ISSN
Volume Title
Publisher
IPRJB
Abstract
Purpose: The objective of the study was to examine the effect of interest rate on housing prices in
Kenya.
Methodology: The study used annual quantitative data for period 1960 to 2017. It employed
Nonlinear Autoregressive Distributed Lag (NARDL) in determining the effects of negative and
positive series of interest rates on housing prices.
Findings: A non-linear relationship between interest rates and housing prices was confirmed. Both
the negative series and positive series of interest rate portrayed a negative effect on housing prices
in short run. For long run, positive series have positive effect on housing prices while the negative
series have negative effect.
Unique Contribution to Theory, Practice and Policy: A completely developed theoretical model
putting together all meaningful inter-linkages between macroeconomic variable and price of
housing is absent. The only ultimate way to address the issue is through empirical means. The
findings indicate the presence of a non-linear relationship between interest rate and housing prices.
The Central Bank of Kenya can change the Central Bank Reference rate (CBR rate) to alter the cost
of money and consequently housing prices. In formulating a policy change, the Central Bank of
Kenya should be cognizant of both the non-linear relationship existing between interest rates and
prices of housing and the different magnitudes of effect of the positive and negative series on
housing prices. When housing prices increase, either an increase or decrease the interest rate by the
CBK will result to a downward movement in prices of housing in the short run, but at higher
magnitude from the interest rate decrease. For the long-run, a decrease in interest rate will decrease
housing prices, making housing affordable and improving the standards of living for citizens. Any
upward movement in interest rate will result to a long-run increase in housing prices making
housing more expensive and consequently out of reach of most citizens.
Description
Article
Keywords
Housing, NARDL, Bubble, Interest Rate
Citation
Koome , R., & Njaramba, S. (2022). EFFECTS OF INTEREST RATE ON HOUSING PRICES IN KENYA. International Journal of Economics, 7(1), 32–62. https://doi.org/10.47604/ijecon.1657