PERSPECTIVE
A Real Estate Bubble
In Kenya Is Not
Envisaged At All
By George Wachiuri
T
he question of whether Kenya
is about to witness a real estate
bubble burst has recently been
popping up in some quarters and most of
the time, propagators of this issue, have
been as far from the truth as the earth’s
geographical poles.
So, what is a Real Estate
Bubble?
A real estate bubble is an economic cycle
characterized by a rapid escalation of
property prices followed by a contraction.
A bubble is created by a surge in property
prices unwarranted by the fundamentals
of the property and driven by exuberant
market behavior. When no more investors
are willing to buy at the elevated price, a
massive sell-off occurs, and puff! - causing
the bubble to deflate.
Bubbles can often be hard to identify,
due to difficulty in accurately estimating
intrinsic values. Fundamentals can be
estimated from rental yields or based on
a regression of actual prices on a set of
demand and/or supply variables.
A bubble simply happens with the change
of market psychology moving from ‘These
property prices seem irrationally high but
they are increasing incredibly fast, so let’s
buy a property a.s.a.p.’ to simply ‘This
property prices seem irrationally high
and they are not increasing incredibly fast
anymore so let’s just wait and see’ then the
burst will occur.
According to Investopedia, a housing
bubble ordinarily starts with an increase
in demand, in the face of limited supply,
which takes a relatively long period of
time to replenish and increase. Speculators
enter the market, further driving demand:
Then at some point, demand decreases
or stagnates; at the same time supply
upsurges, resulting in a sharp drop in
prices - and then the bubble bursts.
Usually, the housing market is not as
A real estate bubble is an economic cy-
cle characterized by a rapid escalation of
property prices followed by a contraction.
A bubble is created by a surge in property
prices unwarranted by the fundamentals of
the property and driven by exuberant mar-
ket behavior. When no more investors are
willing to buy at the elevated price, a mas-
sive sell-off occurs, and puff! - causing the
bubble to deflate.
60 MAL29/19 ISSUE
prone to bubbles as other financial markets
due to the large transaction and carrying
costs that are associated with owning
a property. However, a combination of
very low-interest rates and a loosening of
credit underwriting standards can bring
many borrowers into the market and fuel
demand.
After that, a rise in interest rates and a
tightening of credit standards can lessen
demand, causing the housing bubble to
burst.
Talking of interest rates, over-borrowing
from banks to fund property purchasing is
a key ingredient to real estate bubble.
This has been witnessed in matured, first
world economies such as the United
Stated of America, Australia, China and
Poland, amongst others.
Kenya not a Credit
Economy
Here in Kenya though, we are not a credit
economy, we are a consumer economy. We
do not depend on borrowing as much, to
finance our projects such us building our
family homes. In fact, Kenya has very few
mortgages - actually insignificant: There
were 26,187 mortgage loans in the market
by December 2017 (according to the
CBK’s Bank Supervision Annual Report
2017) slightly up from 24,059 recorded in
December 2016, out of a population of 51
million Kenyans as per the latest United
Nations estimates!
Our low figures as quoted by CBK are also
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