Discussion Paper No. 126 of 2011 on Is There a Real Estate Market Boom or Bubble in Urban Kenya? A Case Study of Residential Real Estate in Nairobi Metropolitan Region

Abstract

Real estate is a basic need and the largest component of human wealth. Therefore, a change in real estate prices has a significant impact on individuals’ welfare and investment decisions. In Kenya, and particularly Nairobi and its environs, real estate prices have skyrocketed especially since 2003. This has raised concerns and fears that the real estate market is experiencing a bubble. This study tests the view that a bubble exists in the urban real estate market in Kenya. Quarterly data for the period 2002-2009 sourced from private real estate firms, mortgage lending institutions, the Central Bank of Kenya, and the Ministry of Lands was analyzed. Cointegration test was performed to establish the existence of any bubble. The test rejected the hypothesis of residential real estate price bubbles in urban Kenya. The residential real estate price escalation can be explained by economic fundamental changes in the country, among them real GDP, interest rates, financial credit on building and construction, and population growth. Public policies that have been proposed included land banking to curb speculation and urban sprawl, increased financial credit on building and construction to facilitate supply of more houses, declaration of source of money for real estate acquisition to deter money laundering in the real estate market and finally, establishment of a real estate database to ensure information symmetry and provide data for analysis and decision making in real estate sector. The study was highly constrained of data, hence rejection of bubble phenomenon should not be taken without caution. Nonetheless, the study lays the ground for further investigation into the escalation of real estate prices in the Kenyan urban market.