Lessons from the American housing market

Historically, investors consider real estate a stable, almost stodgy, asset class. Illiquid property does not face the same volatility as stocks.

So a drop in housing prices of only 14 per cent is considered a crash.

In the past, housing crashes were extremely rare.

However, analysts have been stunned by recent events in the United States.

The housing market is only now recovering from an unprecedented decline. Home sales (number of homes on the market) hit bottom in early 2008, declining by over 40 per cent from their peak.

Housing starts (new homes being built) reached their lowest point in mid-2008, falling 55 per cent from their highest point.

By the end of the crisis, effective house prices are predicted to fall on average, from their peak to the lowest point, by about 13 per cent.

What can Kenya learn from this?

Some erroneously assume that what happens in the United States will happen here.

But two things are important to bear in mind.

One, the United States housing market became uniquely bad.

Unsustainable housing demand was inflated by easy credit: a significant drop in interest rates and the proliferation of reckless lending practices.

Many “creative” and “aggressive” products entered the market.

Teaser adjustable rate mortgages gave borrowers a lower initial rate at the risk of future rate increases and negative amortization mortgages let borrowers pay less than the market interest expense by borrowing against the future value of their home.

Interest-only mortgages reduced monthly payments by eliminating amortization while low-to-zero down payment mortgages allowed borrowing without a down payment.

The incredible NINJA loan specifically targeted people with no job, no income and no assets.

So in retrospect, the housing bubble burst in the US is not surprising. Reckless borrowing combined with imprudent underwriting standards to produce toxic results.

In time, the whole house of cards came tumbling down.

This chain of events was only approximated in the United Kingdom, second only to the United Stated in consumer lending flexibility.

Second, other comparable jurisdictions, like Canada and Australia, which maintained caution in lending did not experience the same market declines.

Likewise, the Kenyan housing market is well insulated from these types of practices.

Here, a heavily regulated banking sector remains quite conservative, some say too much so, in their underwriting criteria.

Even while innovating in their lending, they continued to only qualify borrowers with the ability to service those loans over time.

And many banks continue to hold rather than offload their loans to the capital markets.

Consequently, while housing prices will always fluctuate with local supply and demand, fears of an American-style market meltdown are unfounded.

Dr. Macharia is the principal of Scion Real, a real estate advisory firm