High interest rates lock most Kenyans out of home loans

More than 80 per cent of aspiring Kenyan homeowners are choosing to build own houses as opposed to buying fully developed units, a new survey of the real estate market shows.

The survey by the bankers’ lobby, the Kenya Bankers Association (KBA), found that four out of five homeowners construct own houses and less than half of the own homebuilders do not intend to borrow any cash for construction.

The KBA’s Housing Price Index (HPI) released Wednesday also found that 68 per cent of present homeowners in urban areas had constructed their own homes but had given mortgages a wide berth because of high interest rates and the lengthy period of financial commitment to the lenders.

The inaugural HPI survey found that only 17 per cent of present homeowners had bought fully developed units while the remaining 15 per cent had inherited their homes.

Researchers at the KBA said most Kenyans used their own savings to finance home construction.

“Many people do not want to have a long financial relationship with lenders and would rather not take mortgages to finance acquisition of homes,” said KBA director of research and policy Jared Osoro.

Mr Osoro said the freedom of choosing the number and shape of rooms, the finishes and other features was also influencing the decision to build own homes.

The index found that 54 per cent of houses were built using savings, construction loans (19 per cent), inheritance or gifts (18 per cent), savings and credit cooperative society (sacco) loans (11 per cent) and mixture of savings and loans (10 per cent).

Mortgages, sale of family assets such as land and chamaa financing together accounted for six per cent of the financing.

The index also found that 49 per cent of potential homeowners, in the next two years, plan to acquire houses without borrowing from banks. All have cited high interest rates as the reason for not borrowing.

Mortgage rates stood at between 12.3 per cent and 22 per cent last September, showing the banks were charging high premiums above the Kenya Banks Reference Rate (KBRR) which stood at 9.13 per cent.

The KBRR is the benchmark rate that is supposed to help banks to price loans and has since dropped to 8.54 per cent without any movements in the lending rates.

Banks say there is room for a further drop in the KBRR if the 91-Day Treasury bill (TB) rate drops. The desired decline in the TB rates is itself tied to the government reducing its appetite for local debt.

“It will come down further when the government cuts its borrowing from the domestic market,” said Housing Finance chief executive Frank Ireri.

The Hass Ownership Index that is prepared by HassConsult, a real estate firm, found that the average monthly repayment needed to buy an apartment in an upmarket Nairobi neighbourhood stands at Sh140,000 per month, a figure that is way above the salaries of most workers.

And in what may come as relief to the thousands of prospective homeowners, the KBA’s survey found that despite the persistence of high interest rates there were signs that prices of some housing units had begun to fall, making them more affordable.

The survey found that between the second quarters of 2013 and 2014 house prices rose by an average of three per cent. The mild price increase in asking prices was due to declining demand from high-income earners who are also choosing to build their own houses, according to the KBA researchers.

“If the changes in prices of town houses are sustained, there will be a softening of prices in this segment. Besides, there is a tendency for townhouse owners to build own-construction as opposed to buying completed units. This is an indication that the price-softening is a correction of the demand-supply mismatch, the former being the constraining factor,” Mr Osoro said

The KBA used data from commercial bank mortgages and the National Housing Corporation (NHC) to compile the index. The survey was conducted in 21 towns.

Banks plan to use the index to reduce the chances of lending to bad borrowers.

“It will be a useful risk management tool for the financial market players and banks in particular who not only finance home development and ownership but also take such property as collateral for other credit,” said KBA chief executive Habil Olaka.

The research firm Ipsos was also involved in generating data for the survey.

Banking data indicates that there are some 20,000 active mortgages in the market.

Mortgages as a percentage of Kenya’s GDP are estimated to be 2.51 per cent — the highest in the region. But Kenya lags behind markets such as South Africa with a 26.4 per cent rate.

More housing units are expected to come to the market as infrastructure development comes through and if the economy continues to grow, Mr Osoro said.