Real estate bubble refers to an increase in property prices in the market owed to increased demand against limited supply, and an eventual slump in the demand for the properties in what is called a ‘burst’. This demand arises due to increased investors need to place huge funds in the real estate sector, majorly borrowed funds, based on speculation that the rising prices will keep on rising with hope of generating higher returns.
A real estate bubble is usually characterized by inflated property prices, increased uptake of debt and increase in property demand.
A real estate bubble has adverse effects on any economy such as; i) decreased home ownership rates due to unaffordability, ii) declined property development activities as investors seek to dispose available property, iii) reduced property investment returns from the bubble burst, and, iv) poor mortgage and credit sector performance due to the high number of defaulted loans.
Despite the rising prices over time, the Kenyan real estate market has not been in a bubble, since demand in the country is supported by fundamentals as opposed to speculation. Some of these fundamentals include; i) increase in population from 38.6 mn people in 2009 to 47.6 mn persons in 2019 according to Kenya National Bureau of Statistics, ii) low credit supply from the high number of non-performing loans which recorded a 6.4% q/q increase in Q4’2020 leading to lenders exercising a more conservative approach while giving loans, iii) real demand for housing currently at 2.0 mn units and growing by 200,000 units annually, and, iv) higher increase in income levels compared to increase in housing prices indicating that there is still room for property prices to grow and match the increase in property prices.
From above it is clear that the real estate sector is not in a bubble but is experiencing normal sector cycles of in line with the economic cycles. However, to prevent a real estate bubble in the future we recommend below measures; i) public-private partnerships to help meet pressing demand, ii) enforcing collaterals when giving loans, iii) economic growth support policies to avoid over reliance on debt for home ownership, and, iv) aggressiveness and innovative solutions in provision of affordable housing.
There lacks a possibility of un-sustained demand that is likely to exceed current supply in the country and the rapid rise and fall of prices is attributable to interactions of forces of demand and supply in the market. Opportunities of investments in the real estate sector therefore exists, and investors can take advantage of the high returns recorded in select themes and areas.
For more information, please see our topical on Real Estate Bubble.
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