A woman was walking along the beach when she stumbled upon a Genie’s lamp. She picked it up and rubbed it, and lo-and-behold a Genie appeared.
The amazed woman asked if she was going to receive the usual three wishes.
The Genie said, “Nope…due to inflation, constant downsizing, low wages in third-world countries, and fierce global competition, I can only grant you one wish. So …what will it be?”
The woman didn’t hesitate. She said, “I want peace in the Middle East. See this map?
I want these countries to stop fighting with one another.” The Genie looked at the map and exclaimed, “These countries have been at war for thousands of years. I’m good, but not THAT good! I don’t think it can be done. Make another wish.”
The woman thought for a minute and said, “Well, I’ve never been able to find the right man. You know, one that’s considerate and fun, likes to cook and helps with the house cleaning, gets along with my family, doesn’t watch sports all the time, and is faithful. That’s what I wish for … a good mate.”
The Genie let out a long sigh and said, “Let me see that bloody map!”
In April this year, I wrote two opinion pieces on the real estate sector and the peculiar Kenyan habit of uninformed property investing.
At that time, most of the feedback was around one question: “Is there a property bubble in Kenya and when will it burst?” To which my response was: “Perhaps at this rate, only a genie in a lamp would know.”
The fact was that a lot of the property transactions in Kenya then and now are cash based, which is further evidenced by a Central Bank of Kenya survey showing that as at May 2010 there were 15,049 mortgages in the Kenyan financial sector.
Assuming that the mortgage growth rate was the same as the 2009 to 2010 growth rate of 14 per cent, then May could have had a little more than 17,000 mortgages. In the greater scheme of things, banks — and credit therefore — have little or no effect on the buy side of real estate sector of our economy.
Their impact is primarily felt on the supply side since a number of the housing developments are done on the back of bank financing. But I digress.
In April, inflation was just starting to flirt with double digit ranges, interest rates were (artificially) low and, most importantly, there was no war on Al-Shabaab in Somalia.
The mythical “pirate money” that many Kenyans attribute to the spiralling property prices in some areas of Nairobi and Mombasa, was allegedly trickling into the economy as land/house owners took the purchase money and went on to buy developed units and other tracts of land in unchartered territory, thereby fuelling a secondary demand for real estate.
“Pirate money” aside, there was genuine cash circulating in the economy, also being used to buy undeveloped tracts of land as well as complete housing developments. So developers were happy, undeveloped property owners were happy, everyone was happy.
Inflation then started to bite in the second quarter of this year oiled by soaring fuel prices and escalating food prices.
The cherry on the icing on the cake was, undoubtedly, the insane shilling depreciation against the major currencies followed by the flip flopping Central Bank interventions that finally resulted in what Economics 101 has taught all along: raising of interest rates to reduce effects of inflation and currency depreciation.
So the property punter now has less buying power for their speculative real estate forays, as more money is required for basic consumption.
This means less cash is available for investing in the real estate sector.
The property developer who now has to contend with a significantly higher interest expense, will pass this onto the price of the developed property and suddenly finds himself with a large housing stock that he can’t move as fast as he did last year due to price.
Of course, there looms the clear and present danger of default as the construction debt needs to be serviced and sales are dwindling. This means more dead stock available with fewer takers.
The government, which launched a military offensive in Somalia with no defined sell by date, will move valuable budgetary allocations — from a budget that’s already in deficit — to defence spending.
This war is going to cost us a lot. So the government has to do one of two things — borrow more money from the market to finance its incremental expenditure (probably) or raise our taxes (with an oncoming election year, I highly doubt it but who the heck knows?).
War creates uncertainty, and last week’s cowardly terror attacks in Nairobi’s central business district only heightens the propensity to view Kenya’s investment climate as risky.
Risky investment climates demand risk premiums and our interest rates in my view will not be coming down in the short-term.
So what’s the conclusion? We have a war on one hand to wrap our peace loving minds around, as well as an election year to navigate that has a minefield of constitutional unknowns.
Throw in several tablespoons of high interest rates and a cup of significant inflationary pressure and you have created the recipe for a potential property bubble burst. Former United States Secretary of Defence, Donald Rumsfeld’s famous February 2002 quote aptly applies to us.
Addressing the media regarding the absence of evidence linking the government of Iraq with the supply of weapons of mass destruction to terrorist groups, he said: “There are known knowns. These are things we know that we know.
There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”
With all the pressures facing our country in the coming year, the real estate sector’s future performance is easily an unknown unknown.