Kenya Property market analysis: reviewing the House Price Index – KBA Quarter


Just a few days ago, the Kenya Bankers Association released the House Price Index for the first quarter of 2016. The 1.4 % increase of the index presented reflected an uptick in house prices during the first quarter of 2016, with the movement representing a not very promising future for the country’s most popular sector of the economy.

The 1.4% increase on the period of the first quarter is following 3 years of very mild price changes. This is confirmed by the evolution of the KBA-HPI, which as at the end of the first quarter of 2016, had risen by 9.08% since the base period of the first quarter of 2013.That is an average of 0.232% per month or an average price increase of 2.79% annually. The index according to the information provided by the KBA official website, is measured by averaging the price changes in the house purchase prices including mortgage financing and refinancing appraisals, giving a very good picture of the market trend.

Analyzing how the house price index has been moving over the last few years, it is easy to understand that every first quarter is usually the best quarter for the market. Last year’s first quarter had an increase of 2.75%, followed by a very small 0.2% increase during the 2nd quarter. This year’s first quarter’s performance is almost half compared to the same quarter a year ago and I really hope that the second quarter will not follow the same trend.

There are different ways to explain an index and its movement over time. Some can compare this quarter to the previous and say that the market has positive signs based on the fact that there was an uptick in house price during the first quarter of 2016, and that this movement represents a reversal of the mild decline rate of growth seen in the previous quarter.

I cannot argue with that. What I do say though, is that in order to understand the real dynamics of a market you cannot isolate two figures and make statements or take decisions or come up with conclusions. If this HPI were the HPI of Germany where inflation runs at approximately 0.15% annually, then the market dynamics and the market trend would be very positive.

The fact though is that this is the HPI issued from the Kenya Bankers Association for the Kenyan Market. The Kenyan inflation during the first quarter of 2016 was running with an average 7.03% (2016 Kenya Bureau of Statistics data), and that means the returns of the Real Estate Market are not even close to the current inflation. With simple words, as long as the increase of prices is not equal or bigger than inflation then in reality every year the real Value of properties is going down.

Following up to a previous article, I need to say that there is no reason to panic or get disappointed from possible past investment choices you made. This quarter is simply one more sign that you need to be careful and follow up with the markets. It is also very important to start analyzing a bit more the data that is provided from different sources.

For example, apart from the KBA HPI, there are other house price indexes published quarterly from private institutions and companies, presenting a completely different picture of the market with some of them claiming even double digits of price increase during the last 12 months. Someone has to be very careful on the data used to export these reports. I am not saying that the methodology used to analyze the data is wrong or that the results of the report are wrong. What I am saying is that, if a report is based on asking prices for example, then it does not represent the real market dynamics.

We all know very well that the asking price can diversify a lot from the selling price. If the asking price of a house was Sh10, 000,000 a year ago and the seller was willing to give a discount of 5 or less% then the final purchase price would be at Sh9, 500, 000. If the same house today has a starting price of Sh10, 500,000 but because of market challenges, the seller agrees to sale the house for Sh9, 750,000, then the increase on asking price will only be 5% (from Sh10M to Sh10.5M), but comparing the real sales price we will find easily that the price changed by only 2.6%.

Using asking prices as the source of data to determine a house price index is an option but according to my opinion, the only data that represents the real market dynamics are the actual sales and maybe the use of mortgage financing and refinancing appraisals.

To add on to that, when you decide to invest in the real estate, you need to start understanding more about finance and economics. You need to have a basic knowledge that will help you make the right decisions.

The real estate market is not operating in the vacuum. It is directly affected by the microeconomics as well as the macroeconomics of the country and in several cases from regional as well as international economic turbulences both with positive and negative effects.

A quick outlook of the Kenyan market today shows lots of signs that should make people worry. The last 12 months have been really challenging for the economy, the government, the currency and almost every sector of the market, creating questions for the near future.

Over the last few months, the banking system has been fragile and cannot support access to easy and cheap finance. The continuously growing external debt and account balance deficit are setting the base for discussion about how the economy will survive over the next years. The GDP growth, based mainly on the infrastructure projects and huge foreign and local borrowing, although sounds promising, in reality does not establish the base for future growth, unless things will change very soon.

Leaving behind the big words and impressive terminologies, simply have a look around, open your ears to listen to the voices of the markets, the devastation of people who cannot sell for months, the anger of those who are expecting payments and they only get excuses for delays amongst so many other signs, then you realize that it is time to reevaluate the situation. The upcoming election is another element that everybody knows it will affect the market.

The 1st quarter 2016 house price index is not something shocking or new to anyone who is following the market. It is neither a reason to panic or get disappointed. It is though a good reason for consideration and becoming vigilant.

Kosta Kioleoglou, REValuer, Civil Engineer Msc/DBM
R.M.D for Africa Plantation Capital



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