Tuesday, November 18, 2008

UK/US Housing Market & Impact on Kenya's Real Estate

Economic growth in most if not all western economies is fuelled by consumer spending. Consumer spending is in turn fuelled by cash (or more specifically, credit). That is stating the obvious. What doesn't seem obvious to many is that most secured personal and even business loans tend to be secured against properties.

Since the credit crunch started lenders have pulled back credit lines. This means that among other things, first time-buyers can't find affordable mortgages at current house price. Neither can buy-to-let buyers. These two sectors have fuelled growth in house prices over the last decade. This means that sellers have to cut house prices. They in turn have lower deposits for their next homes, cue more price cuts until we get to negative equity. At negative equity,every mortgage borrower has to find additional capital to get a mortgage. Then? Both first-time buyers and those moving homes have to save more. Which means less spending.

This also has implications for Kenya Estate for Diaspora funds that find their way home into real estate. Real estate in Kenya has since 2002 been funded by 3 sources;

  1. Diaspora or NRKs (non-resident Kenyans)
  2. cheaper and accessible loans
  3. and savings in that order. And possiblly NGOs and foreign real estate funds (funded via savings and real estate equity)...
Most diaspora funds used in the real estate in Kenya have been funded from borrowings on housing equity held in their UK/US homes. With most of that equity disappearing (most houses bought since 2005 might be in negative territory by mid 2009), NRKs may find themselves having to not only look for additional funds if they want to invest in Kenya, but also diverting normal savings to cover this negative equity. 2ndly, affordability for resident Kenyans will become an issue.

The only type of real estate that will continue appreciating will be plots...

1 comment:

Damian Lee said...

Hi MainaT,

Nice posting, thanks for sharing...
Real Estate industry is becoming a hot place for many people...