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Dr. Robert Helsley on Real Estate Market, Cycles and Overheating

  Aug 6, 2015

Last year World Bank’s report on Kenya’s gross income per capita raised the country’s economic status to the Middle income level, making Kenya the 9th largest economy in Africa and the 4th largest in Sub Saharan Africa. This acquired status, is not only on the merit of Kenya meeting the $1025 GDP per capita threshold, but its progressive growth patterns; proof of the buying power of Kenya’s shilling. The real estate industry cannot go unmentioned in this discussion as the sector contributes 4.8% of the GDP.

The lucrative real estate business in Kenya has attracted vibrant investment, with pieces of land across major cities selling like hot cakes. The stampede for “rush while stock lasts,” is one to take blame for top of the roof housing prices, which analysts have described as the “real estate bubble”. Analysts keen on market demands have already predicted its burst, but will this be any time sooner? Exploring these dynamics was none other than Dr. Robert Helsley, Dean Sauder School of Business, and Director of the University of British Columbia center for Real Estate and Urban Economics.

Packed with eager listeners all awash with optimism on the fate for real estate, Helsley was sure to put to perspective dynamics of the underlying factors surrounding the real estate boom. He drew illustrations from top growing cities such as Tokyo, Vancouver, San Francisco, Las Vegas, and Los Angeles among others.

Real estate bubble: Real or sham?

Bubbles in the real estate industry, are the extensive deviation between the primary price of the asset and the foreseen future price. Bubbles in housing markets are hard to identify ex ante, since fundamentals are generally strong in rising markets, and expectations are unobservable.

Expected future prices are major players when it comes to dictating housing outlay. People may think that the current prices are justified, since the prices are expected to increase in the near future. Future capital gains which can dominate current prices are often the reason for the real estate bubble. People will expect that the prices will go up by 20% after a decade; where as looking back at the records, the market prices have recorded a constant aptitude of 3% for the past two decades. Divergence into the property value is as a result of the ridiculous expectation of the future prices.

Reasons for increased market pricing

Housing is the largest expenditure to a household, recording large percentages of equity. Aside from wealth, housing assets are merit good, where consumption has a ripple effect towards other features of collective good. People who own homes are more protective of their neighborhoods as well as their environs, unlike when they are renting. Housing assets are also one of the largest economy boosters.

Another prevailing trend is the growing of oversees real estate investment. The sole reason for price hike is the demand and supply analysis of the housing sub-markets. Every time there is a shock in demand, there is a reflection in prices, whereas quantity cannot be able to match the demand. Factors which spur up the demand include: Population growth, income increment, rapid immigration rates, among others features. High prices of ownership can be justified if the growth of the capital asset of the house can be anticipated in the future. As cities grow, there is a lot of productivity expected. This can only be tarnished if the utility decreases (people living in such areas, no longer enjoy certain amenities due to congestion levels, and transit costs and ease).

However, in some cities such as Las Vegas, the supply response complied with the demand, leading to the bubble bursts whereby housing and land rates declined. On the other hand, cities like Vancouver have continued to experience the hitch hiking prices, as the demand cannot meet the supply. This has forced the prices to remain elated.

Putting Nairobi into context, it is less likely for the city to foresee a bubble burst, as there is still low supply of housing, although the demand is high.

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