Personal Finance

How to predict the real estate market

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Kenya’s real estate market is well into the expansion phase. FILE PHOTO | NMG

In Kenya, the real estate industry is a free market in that the price of housing is driven by supply and demand. The higher the demand, the higher the prices with the inverse also applying.

Over the last couple of years, the Kenyan economy has witnessed exponential growth of the middle-class. What this means is that as the disposable incomes of more Kenyans increase, many people are able to construct their own homes and are also able to get mortgages to buy houses. This, in turn, fuels the real estate sector.

As the real estate industry appears to be more lucrative and with limited supply, speculators come in, further driving the prices higher.

A housing bubble comes about when the market prices reach unsustainable levels and naturally decline. According to the International Monetary Fund (IMF), the bubble is a temporary event which may last up to several years.

The property sector exists in relation with other sectors and one can predict the trend of real estate with other factors in the economy. With these, you can identity a housing bubble. But how can one predict the markets? How can one differentiate the realistic price rise from the bubbles?

In this article, we will make an attempt to explain some of the metrics that can allow the investors to do so.

INTEREST RATES

Taking into account the current number of houses matching the demand can help an investor identify which stage of the cycle the market is currently in. The number of unsold homes in a market is an indicator of how the units are moving and if there is a need to add more.

Keeping track of the housing inventory helps developers predict how many units are required for a certain market and avoiding hyper-supply. An excess is brought about by many units available but few willing buyers. As a result, the landowners’ revenues decreases due to low occupancy and lower rents.

Low interest rates translate to an excess of money in supply which can fuel the rate of home ownership as loans become cheaper. Be wary of a property market driven by interest rates because of the volatility. Increased rates reduce mortgage borrowing, putting home ownership out of reach for many buyers. The housing bubble that was facilitated by the low interest rates bursts under the higher rates as supply exceeds demand, reducing real estate prices.

Other factors, like unemployment, decreased consumption and decreased company investments can drive down demand.

RENT VS VALUE OF HOMES

Comparison of the cost of renting a unit and buying is a good way of predicting a housing bubble. The prices of the two change simultaneously when subjected to economic factors. An investor can easily predict the value of a home depending on the rent charged on a similar property.

Disparity between the two values where the capital value is considerably higher than the rental one is brought about by speculators valuing the property higher to make more profit.

This is a sure indicator of housing bubble.

WAGES VS CAPITAL VALUE

Demand in a property market is driven by the financial ability of the consumers and analysing their wages can help an investor determine a trend. Comparing the wages of a person and the value of homes in an area can a paint picture of how long it would take for one to fully buy a house there.

Five to 10 years is ideal, showing that the houses are affordable to the market. But if the average number of years for one to own property is 20 years, then that’s a bubble.

Kenya’s real estate market is well into the expansion phase and trends become predictable as you become more seasoned in the sector.

The writer is Head of Sales and Marketing, Centum Real Estate.