As interest rates soar to record levels and inflation continues unabated, economic growth is threatening to stall as major sectors that have been propelling growth begin to stumble. Further increases in interest rates are likely to spell catastrophic results for these pillars of the economy, say analysts.
CONSTRUCTION AND REAL ESTATE
The country has since the beginning of the decade enjoyed a vibrant property market hinged on increased purchasing power from a growing middle class and a growing economy. Banks and home loan lenders, alive to the huge potential for sustained growth in this sector, had announced substantial interest rate cuts, cutting mortgage rates by between 1.5 and 4.5 per cent in 2010.
The appetite for these loans was reported by the Central Bank as having outpaced the growth in demand for credit to businesses and households in the year to June 2010, emerging as a new driver to the banking sector’s profitability.
A year later and the tables having turned. Prevailing interest rates have now shot up to 26 to 30 per cent with even mortgage loan providers having revised their rates to around 19 per cent. Aware of a possibility of increased number of loan defaulters, banks have also tightened their lending criteria to discourage further borrowing.
However, as mortgage-financed buying stalls and some homeowners lose their homes on defaults, the bigger impact is being felt by developers. Developers face increased costs for construction materials, but are also now proving unable to refinance projects they have begun. Banks are likewise no longer lending to developers for new projects, on the basis that returns are unlikely to cover the prevailing interest rates and the property sales outlook is weak.
The Nairobi City Council (NCC) has already recorded a dip in the number of approved building plans this year, down by 9.7 per cent on last year as a result of developers postponing projects. Developers who are already building are meanwhile factoring in their own higher costs of debt servicing into increased property prices, which the market seems unlikely to support.
This outpricing of high and middle-end homes, and the greater cost and scant finance for self-building, is putting more pressure back into the middle and lower end rental market, and might see some rent rises at that end of the market.
Combined with curbs on other infrastructure spending, this impending standstill in real estate is set to have a huge impact on employment. The construction industry currently employs about one million people with an estimated annual wage bill of Sh3.2bn.
Already, the Kenya National Bureau of Statistics has reported a sharp decline in the quantity of cement sold, a key indicator in the construction sector, with sales down by 7.4 per cent between August and September. A slowdown in the construction industry, say analysts, could have a ripple effect throughout the economy, affecting other sectors related to the industry like transport.