Discussion Paper No. 167 of 2014 on Stimulating Supply of Residential Housing for Low Income Earners in Kenya

Abstract

The need to have shelter is indispensable to humanity and is classified among the top three basic needs. However, increase in population, scarcity of fixed assets such as land, escalating house prices, and the rising cost of living have made living inadequate and decent housing an illusion for many Kenyans. We use time series data, 1980-2011, drawn from the Kenya National Bureau of Statistics (KNBS) to determine the factors that would stimulate the residential housing market for low income earners. The Instrumental Variable estimation technique is applied for this study. The study found that Mombasa had a minimum house price of Ksh 2.24 million. This is already above the low cost amount provided by the Housing Bill 2011 for low income earners. Nairobi, on the other hand, had a minimum cost of supply of Ksh 2.12 million. The regression results are unique for the two towns. Whereas Nairobi had the lending rate, the cost of supply, the plinth area, labour and input cost index, inflation and the real interest rate being important in determining supply, Mombasa reported the coefficient, cost of building a house, commercial bank rate and their lagged values as important factors in determining supply. Additionally, treasury bill rate and plinth area were important in explaining supply of residential housing. In conclusion, the study recommends that while the government plays the role of an enabler, private developers should take advantage of the tax incentives to the low income segment. At the same time, they should consider offsetting profit margins with volumes of sales resulting from affordable housing. In addition, the National Housing Corporation (NHC) should devote itself to deliver low cost housing to the low income segment whose needs cannot be met by the private sector.