In the recent released housing index report by Kenya Bankers Association, the third quarter of 2015 showed a marginal 1.26 percent increase in price, which was a relative faster increase compared to the 0.2 percent increase during the second quarter. This could be attributed to demand on some house units responding to both the prevailing and expected overall economic conditions. The economy recorded a growth of 5.5% which showed a slowdown from 6% that was recorded during last year’s corresponding quarter. In addition, as the economy entered the third quarter of 2015, there was an inevitable tightening of monetary policy on the back of volatility in the foreign exchange market.

As would be expected, there was a shift of expectations towards a high interest rates regime that is shaping the decision making of households seeking to take mortgages towards home acquisition. The index[1] using a fixed base has a sharp rise from 103.88 to 107.34 representing a 3.46 percentage rise. In comparison, the index with a moving base had marginal rise of 1.26 per cent. This is because for a fixed base, the current prices are matched to those of the base period which are likely to be lower. In the case of a moving base, the current prices are matched to the immediate preceding quarter hence the marginal price rise.

The determination of the qualitative and quantitative parameters that drive the house price changes is based on the estimation of a hedonic function. The estimates indicates a revealed preference of houses still continue to be influenced by their size more specifically the plinth area, number of bedrooms, whether the house has a balcony, master Ensuite and to a lesser extent whether a house has domestic staff quarters. This is consistent with what was observed in Quarter 2 of 2015. Similarly, consistent with Quarter 2 of 2015, the demand for houses on offer was influenced by the location of the house (therefore the kind of social amenities available such as proximity to good roads, shopping malls and centres, schools, health centres among others), a preference for gated communities (implying the importance of convenience, scenic value from uniform house designs and security), and the characteristics that will be appealing to the increasingly discerning households.

Buyers opt for homes in more affordable region 2[2] .Looking at the index with Q1_2013 as the fixed base the apartment prices appear to be a bit more volatile compared to prices of bungalows and maisonettes. This confirms the fact that the rising middle class is preferring apartment to bungalows and maisonettes as they are more affordable among the three types of houses. However, from the regional index decomposition, we note that the prices for apartments region 3[3] and region 2 are moving faster compared to prices in region 1 on quarterly basis with index for region 3 and region 2 standing at 105.21 and 103.37 respectively compared to 100.74 for region 1[4] in quarter 3. This is for the fact that in region two and three, the crude average price is on upper level (beyond Ksh 25 Million for region 3 and between 10 Million to 19 Million for region 2) which could be an incentive for skewed market in favour of such regions given the high profit margins likely to arise from them. For the moving base, similar trend as for the fixed based is evidenced. Apartment prices seem to be changing faster across all the regions compared to maisonettes and bungalows. Comparing all the regions, prices for region 2 seem to be in an upward moving more compared to region 1 with that of region 3 stagnating. This could imply potential home buyers considering acquiring houses from region 2 which are more affordable compared to region 3. Further looking at both the moving base and the fixed base sub regional indices, it’s clear that there is a negative relationship in price movements between bungalows and the apartment prices across all the regions is easing and in some moments prices for both bungalows and apartment are moving in similar directions. This is an implication of the number of old bungalows offered in the market declining meaning that prospects for redevelopment of old bungalows into new apartments are becoming dismal.

Reference Link: http://www.kba.co.ke/images/stories/hpi/HPI%20issue%204.pdf

[1] Technical note: The index follows a Laspeyers index method. In this method, the index is computed by getting the ratio the estimated current quarter price from the hedonic method multiplied the weights of the preceding quarter to the price of the preceding quarter multiplied by the respective weights of that quarter

[2] REGION 2 Thindigua (Kiambu Road), Kiambu, South B, Kabete, Komarock, Imara Daima, Membley, Buruburu, Rongai, Waiyaki Way (Uthiru, Kinoo, Kikuyu, Regen), Mbagathi road, Ngong Road, Langata.

[3] REGION 3 Kileleshwa, kilimani, Lavington, Westlands, Spring Valley, Riverside, Milimani (Kisumu), Milimani (Nakuru), Runda, Karen, Garden Estate, Parklands, Ridge Ways, Muthaiga, Loresho, Kitsuru, Adam Arcade, Nyali, Mountainview

[4] REGION 1 Athi River, Mlolongo, Mavoko, Nakuru, Ngong, Ruaka, Syokimau, Embakasi, Kahawa Wendani. Thika, Mtwapa, Utange, South C, Kitengela, Kiembeni, Nyeri, Likoni, Eldoret, Ruiru, Kilifi. Thika road (Kasarani, Roysambu, Ruaraka).