By Kosta Kioleoglou
House prices increased by 2.08% during the first half of 2017, according to the latest House Price Index for the second quarter 2017, released last July by the Kenya Bankers Association. This is the result of a downward market trend that started a couple of years ago. The second quarter of 2017 saw the slowest price increase since the third quarter of 2016. While several people read these numbers as a sense of overall price stability, the actual trend over the past four quarters points to the underlying demand and supply characteristics.
In particular, it depicts a demand slow-down on the back of the broader economic environment characterized by a general sense of softening growth and an oversupply of properties in several areas. Since the first quarter of 2013, house prices have risen by 16.67% as at end of the second quarter of 2017 based on the fixed base index (KBA).
During the last four and a half years the Kenya Shilling lost in value on average over 15% against all the strong currencies with the accumulated inflation exceeding 30% as per the available data from Central Bank of Kenya. Average inflation per year for the same period is close to 6.8%. Without getting into a detailed analysis it is obvious that the property market has been producing negative results for this period.
Over the last few months, people have been feeling the pressure from the property market’s slowdown and most of the available reports are now presenting a picture that does not look very optimistic. In reality, even the most positive market reports are now talking about the market’s stagnancy. Analysts, market professionals, journalists, simple people, are all trying to explain these new market dynamics. Some cannot see the obvious and are looking for a scapegoat. The current situation was expected because it was easy to predict.
Markets do operate in circles. Depending on the sustainability and real growth of an economy the circle’s quarters can be bigger or smaller. What is a fact is that there are four quarters for each market around the world. People who try to spread the rumors that the property market is different and you cannot go wrong investing in property are simply wrong. There are so many examples from so many different markets around the world which under different circumstances they all followed the circular course. Dubai, Russia, Spain, Greece, Ukraine, the US are some good examples of markets that did go up for a certain period and then collapsed. Some managed to regain the losses and even made profits again while others are still facing losses.
Kenya is no different in principal. The country does have its own dynamics and characteristics but the main principals of investment, finance and economics apply the same way like in any other part of the world.
So, after an amazing but unsustainable period of booming and a bulls market, the time for the bears market is here. That is not a reason to panic. It is part of the game. The only thing that should worry all those involved in the market as investors as well as those who bought properties with expensive mortgages and loans is the ability of the market to recover. How strong is the economy of the country to be able to survive the downward trends, recover and start regaining profitable positions. So let’s see a few things about the Kenyan economy and that will help you understand how circles and markets operate.
Kenya, for several years has been known as the center of the East Africa Region. The all-time powerhouse of the EAC is now challenged and its previous undisputed status is about to change. Ethiopia has officially overtaken Kenya as East Africa’s economic giant.
According to International Monetary Fund (IMF) figures, Ethiopia’s annual economic output (i.e. Gross Domestic Product (GDP)) for this year was expected to hit $78 billion from $72 billion recorded last year. Their economic growth since 2015 has been pegged at 10.8%, which has helped put a significant gap between them and Kenya. While most of the other countries in the region expect their economies to grow more and more, Kenya’s economy according to the world bank, IMF and all the available forecast is expected to continue slowing down with some of the forecast readjusting at a rate below 5% for 2017.
The economy’s real growth during the first quarter of 2017 was the slowest performance compared to the corresponding quarters since 2013 and is a pointer to the plausibility of the downward revisions of the economy’s growth outlook for the year.
The biggest problem of the country’s economy is that the growth achieved the last years was mainly because of the big infrastructure projects and public expenditure based on huge loans. The private sector’s contribution was minimum. The country seemed not to be ready to capitalize on the ideal global conditions with the oil prices extremely low and the last months the USD sliding close to 15% against most of the currencies around the world.
The account balance deficit over the last years has been growing same as the negative balance between imports and exports (trade) while the external debt has been growing day after day. Inflation is also on the run with the average consumer prices increasing more than any other period within the last 5 years. Unemployment remains a huge headache for the economy. The tourism sector remains inexistent with minimum contribution to the economy while agriculture and primary production sector is suffering because of poor policies, lack of investment and unpredictable weather.
Foreign investment is not enough to support the economy. The Chinese are playing a key role on the country’s infrastructural projects, taking over the management of vital public facilities as they are the only ones who are ready to easily facilitate Kenya’s finance needs, but not without strings attached. Among all these, a prolonged pre-election period is putting more pressure on the Kenyan economy and of course the property market too.
I need to be very clear. Elections are just one of the reasons for the worsening of the market the last months.
During the last years the government had to take some serious measures to protect the Kenyan shilling and economy. The increase of CBR, the interest rate capping and the more intensive monitoring of the banking system by CBK are some of those actions that influenced the economic development and the real estate. Apart from the financial attributes there are other more important factors with bigger effects, the demand attributes of the housing market have largely been influenced by the sustained decline in the pace of credit growth from the private sector.
Private sector credit expanded at a paltry 2.1% in May 2017 compared to 4.7% in September 2016. This decline was against the background of the amended Banking Act that introduced the capping of interest rates. Another big issue for the market is the absence of direct international investors who would supply the market with fresh, extra cash flow, as well as the slowing down of property transactions during the last period causing liquidity and cash flow issues to the current property owners.
In a few words, without easy access to finance, without international buyers and with a stagnated market where the money is stuck in properties, there is no money to support the buying power, causing a slowdown of sales, price decrease suffocating the market.
The rule of supply and demand has been misused in Kenya. Over the last several years there has been a general perception that there is a house deficit of over 200,000 units per year in the country. That is more than correct but it is not a complete argument. The type of units needed has to be defined and the deficit has to be categorized properly in order to describe correctly the current market situation. Although the majority of units needed are for the lower parts of the market, the supply is providing mainly units for the high end. We have to face a paradox.
While there is a huge gap between the demand and the available supply, thousands of units built or under construction are not occupied or sold. Overpriced high end properties, residential, commercial or even vacant urban land are holding huge amount of monies trapped, suffocating the market, not only of the real estate, but jeopardizing the whole economy of this country. On the same page, the price increase during the last years has created a market that is not affordable for the majority of Kenyans who now can only dream to own a house rather than buy one.
Under these circumstances, market demand attributes have continued to influence the supply side of the housing market. They point to the fact that a number of developed units remain unsold for a longer period. This necessitates the adjustments on the part of the suppliers going forward. At the same time, the credit conditions that affect the demand side are binding on the supply side, thus having a bearing on new house developments that will be put to market in the coming year.
What is important to understand is that the future of the property market is most probably going to follow the same bearish course for several years. The problem is that the way the economy is structured the slowdown and shrinking of the property market will have side effects on the whole economy of the country and could trigger a domino effect.
Less new buildings mean fewer jobs. This is adding weight to the existing problem of unemployment. Fewer sales, longer time required to sale, discounted prices eventually with losses are creating cash flow problems in the market. This is a market that needs liquidity in order to sustain the day-to-day needs. An immediate effect to this is what we all live every day.
Banks have closed down, others are downsizing and others are closely monitored by CBK. The stock market has collapsed, businesses are under pressure with big corporations like supermarkets and banks going down, salaries are delayed or not paid for months, debts between individuals, companies and the governments are increasing. Car dealerships are suffering and slowly everyone feels the pressure of an economy that is shrinking.
For those who hope that elections are the reason of whatever is happening and like magic everything will change after elections, I suggest that they should be more cautious and skeptical. It is more complicated than that and goes all the way to the fundamentals of this country.
Easy solutions, fast ways and shortcuts will not lead to the correct direction. Kenya’s economy is now forecasted to slowdown even below 5% this year. It is really worrying that for the last 18 months the expected growth has been revised several times downwards even though we are in a period of favorable international conditions for Kenya. The oil prices are still very low, the USD is sliding, china is investing big in the country among other positive facts, but still Kenya cannot continue its path of growth.
Apparently an economy based on public expenditure, a real estate market targeting local capital and a lot of foreign aid and loans cannot be sustainable. Kenya needs to change course. Restructure its economy in such a way that it will create the conditions for the country to depend less on imports and foreign aid and more on its own resources and strength. That requires more investment in the primary production sector, build up the tourism sector again, modernization of the country to use fewer resources such as oil and other energy sources.
Create a local industry that will minimize imports. Create an economy where this country will produce more, consume less unnecessary imported goods until the GDP will really sustainably grow, unemployment will go down and the average GDP per capita will provide at least basic standards of living to each and every Kenyan. Agriculture, blue economy, tourism, primary production sector should be the focus of this economy and not sales of imported goods and easy ways to make money such as the stock market and unreasonable real estate investments that have been monopolizing the market the last years.
The good thing is that Kenya has not passed the point of no return yet. There is still plenty of time to accept the situation, take any losses, do some damage control, take ASAP corrective actions, and move forward. The government needs to lead towards this direction with relevant policies but also each and every individual has a duty to review the current situation by revising his own way of living. The future of Kenyan is in the hands of Kenyans. Hopefully we will go through this election period peacefully without losing any more time or more credibility. Regardless of whoever wins the elections, 2018 can be a year of change and the begin of an amazing course for this great nation .
Kioleoglou Kosta, Civil Engineer , Msc/DBM REV Valuer by Tegova
RMD for APC