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Why owning a home in Kenya has become harder

Arial view of Civil Servants Houses at Ngara in Nairobi on October 17, 2012. Photo/SALATON NJAU
Arial view of Civil Servants Houses at Ngara in Nairobi on October 17, 2012. Photo/SALATON NJAU 

The average size of a home loan rose to Sh6.4 million in the past two years pushing the dream of financed home-ownership further away from the majority of Kenyans.

Central Bank of Kenya data shows that a general rise in property prices forced potential borrowers to apply for higher amounts.

Commercial banks have Sh122.2 billion worth of home loans held in 19,177 accounts at the end of December 2012 or an average of Sh6.4 million each up from Sh5.6 million at end of 2011 and Sh4.1 million in mid-2010.

“The increase may be partly attributed to the continued rise in property prices,” the CBK said in its annual banking survey.

A borrower has to pay Sh98,771 a month over a period of 20 years to settle a loan of Sh6.4 million at the prevailing average interest rate of 18 per cent.

Last year, a survey by Hass Consult— a property management firm — showed that the average house prices in Nairobi’s Komarock estate rose to Sh4.1 million from Sh3.6 million a year earlier. Sh6.4 million is the average price of a house in Nairobi’s Imara Daima and Ongata Rongai estates.

High interest rates were also a turn-off to the property market last year — the home loans having priced at between 11 and 25 per cent. This high cost of lending saw the value of non-performing home loans rise to Sh6.9 billion from Sh3.6 billion a year earlier on the back of a rise in the number of accounts in default also rose from 764 accounts to 969 during the same period.

The borrower of a Sh6.4 million loan at the rate of 18 per cent will have paid the lender a total of Sh17.3 million at the conclusion of the loan tenor.

The CBK survey identified lack of long term funds, high interest rates and low incomes as major impediments to the growth of the mortgage industry.

Caroline Kariuki, the CEO of The Mortgage Company (TMC), said Kenya needs to develop a well-organised securitisation programme that allows lenders to access the long-term funds through the capital markets.

“While REITs will be great for developers and long-term investors in commercial properties, we need to address the more important aspect of allowing the flow of pension funds, saccos and insurance funds into the mortgage market,” she said.

Property prices have risen rapidly in the past 10 years with most of the transactions settled in cash, causing speculation about the source of the money.

To grow the mortgage market, the CBK has recommended the digitisation of the Lands ministry so as to reduce the time taken in processing the transfer of properties, development of property index to guide the public on property prices and initiate measures to oversee valuation of property to avoid arbitrary pricing.

“Reduction of stamp duty particularly for first time home buyers is important,” the CBK says.

The Treasury in 2009 allowed the use of pension contributions as collateral for mortgage loans to increase uptake.

The CBK further points to the fact that the decision by most banks to charge mortgages at variable rates, allowing them to review the rates in line with macro-economic changes, remains a big discouragement to potential borrowers.

“About 85.6 per cent of mortgage loans were on variable interest rates compared to 90 per cent in 2011. The tendency for financial institutions to grant mortgage loans on variable interest rate may be contributing to slow growth in residential mortgage market,” said CBK.

Fixed rates

Variable rates remove the aspect of stability and predictability in repayment of the loan. In 2011 mortgage loan borrowers were shocked by the sudden rise in monthly instalments following a steep rise in interest rates.

Housing Finance, which raised capital from a long term bond is one of the two lenders that are disbursing home loans at fixed rates. Barclays Bank has recently introduced a fixed mortgage rate of 15.9 per cent for three years.

Home developers also want the government to improve infrastructure around residential areas to help them cut costs.

The CBK is, however, optimistic that the mortgage market will be more active this year following reduction in interest rates, peaceful general election and implementation of the devolved system of government.

KCB, Housing Finance, Standard Chartered, CFC Stanbic and Co-operative Bank were the main players in mortgage lending.

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