A steep rise in interest rates has slowed down mortgage sales leaving key homes market players such as Housing Finance with a 39 per cent drop in sales in the first quarter of the year.
Interest rates are the cost that consumers bear for using borrowed money to buy things. The higher the rate, the more the money the borrower must pay back to the lender.
People take mortgages to buy houses or homes and then pay back within a specified period of time.
The good thing for the lender is that a mortgage or a home-loan is often more secure because the borrower uses the property purchased as collateral to guarantee repayment of the loan.
This happens when the borrower gives the lender a lien against the property giving the financier the authority to foreclose (terminate the repayment contract) if the borrower does not repay as agreed.
Generally, when interest rates are lower, people are more likely to borrow money, as doing so costs them less. Conversely, when interest rates are high, credit becomes more expensive making many consumers to shy away from loans.
In the more recent past, Kenya has seen increased rural-urban migration drive growth in demand for both residential and commercial property in major cities.
And in Nairobi, for instance, the improvement of road infrastructure and construction of bypasses are increasingly opening up the construction industry, creating more opportunities in satellite towns such as Limuru, Thika, Mlolongo, Kiambu, Ruiru and Lang’ata.
The government is also developing an ICT city in Konza, on a 5,000 acre piece of land that is expected to come with research centres, universities, hotel facilities and social and technology centres among others — making an attractive offer that should help drive the construction industry growth in the long term.
The proposed Lamu development corridor — that includes port, railway, road and pipeline to Ethiopia and South Sudan — is another project that should help boost the property market growth.
The increasing participation of commercial banks in the mortgage market since 2004 following the sudden and steep decline in government borrowing from the domestic market and accompanying drop in interest rates to lows of between 12 per cent and 15 per cent has highly boosted demand for housing. This has also contributed to the growth of the property market.
More recently, however, a number of factors have led to a rise in the rates with far-reaching consequences on the property market.
Inflation rose rapidly in the last quarter of 2011 to 19.7 per cent in November, up from 5.4 per cent in January even as the shilling plummeted to historic lows of 107 to the dollar.
Between late July and early December 2011, the Central Bank of Kenya’s (CBK) Monetary Policy Committee raised the Central Bank rate from 6.25 per cent to 18 per cent, and commercial bank raised their rates in response.
This 12 per cent increase made it more expensive for commercial banks to access borrowing from the CBK and led to an increase in interest rates on financial products offered by the banks.
As anticipated, the high rates have hit the property market, causing a slowdown in mortgage sales from its very low base. The CBK data indicates that only eight per cent of Kenyans can afford mortgage.
This has turned the dream of owning a home into a mirage for most of the population despite the projection that Kenya’s population will hit 60 million by 2030 and more than 50 per cent of them will be living in urban areas.
These numbers only point to one thing; that demand for new housing can only go in one direction — up.
Besides, the challenge of interest rates can be partly overcome through proper insight into the home loans market where cost of credit range between 19 per cent and 28 per.
Research by the Mortgage Company has found that I&M Bank is currently the cheapest mortgage provider at 19 per cent while Bank of Africa is on the top end with 28 per cent.
Scant information on the best mortgage rates has discouraged many potential buyers are now keeping an eye on different mortgage offers and changing interest rates so as to make an informed decision.
Despite the high rates, the prospects for mortgage sales in the long-term appears promising.
Hope that the rates can drop soon remains alive, mainly driven by falling inflation rate and competition among the banks for customer —especially with the entry of SME financiers into the retail market.
Co-operative Saccos are giving banks a run for their money and chama (group) accounts are opening everywhere.
With this kind of competition, we anticipate that interest rates will drop in the stimulating growth in mortgage sales. If the rates would drop to a single digit level, more people would afford to borrow.
This should be possible if banks put more focus on the volumes to get more business whereby they would drop the rates so as to attract more borrowers.
While it is true that the rise in interest rates has slowed down mortgage sales it is anticipated that this scenario will not hold for long and probably sometime early next year after the elections the market will be back on track.
Mr Diaz is a financial and property consultan