Tuesday, April 19, 2011

100% mortgages in Kenya.1st signal of the real estate buble

Firstly, a 100% mortgage is when a bank lends you 100% of the mortgage loan you require. Usually, the mortgage loan will be pegged on the value of the property you are buying. In essence, the bank is betting that the property you are buying will rise in value so that should you default on the mortgage, it can realise the full value of the loan.
The bank has now become a property speculator rather than a keeper of your deposits.

Not clever banking and is a big part of the why the West has just had a huge credit crisis.

Hope Ndu'ng'u at CBK will slow down his policy of being supportive of the banking sector and "take away the punch bowl" (to quote Mervyn King) before banks/Kenyan economy binges on lofty credit.


Ssembonge said...

Fingers crossed.

Empower Kenya said...

your argument is flawed. The latest report on mortgages indicate only 20,000 mortgages in the country. That means that majority of Kenyans have acquired their real estate cash. Mortgages have not started to be repackaged in Kenya, so the banks are assuming the risk (not passing it on to other investor - MBS etc)

Real estate prices are ridiculously high but I do not think there is a bubble.
A good case scenario why inflated prices will not come down anytime soon is: If you purchased your piece of land for Ksh 5M and the economy is tough you will most likely not sell that piece of land for anything less than Ksh 5m. The fact that most Kenyans own the Real Estate outright reduces the possibility of a bubble.

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