The Relationship Between House Prices and Real Estate Financing in Kenya

Abstract

In many countries, house price fluctuations which have been witnessed by the several booms and busts over the past two decades have been associated with financial instability. The degree to which such house price booms and busts have led to financial instability differs among countries because of the important differences in countries’ housing systems and the role that the government plays. The recent financial crisis has led to accelerated housing defaults in the U.S as well as in other countries, with millions of residential properties having negative equity mortgages with the outstanding loan balances being greater than the property value. Property prices in the Kenyan market have not been spared by the crisis being experienced. The Hass property index has been tracking property prices in the ‘upper and middle’ sectors of the Kenyan property market and has seen the average price in this sector rise from Ksh 15 million in 2006 to Ksh 20 million in 2010. The objective of the study was to determine the relationship between house prices and real estate financing in Kenya. Causal study design was employed in this research. Purposive sampling technique was used to select the sample. The study purposively selected a total of 20 respondents who formed the sample size of this study. The researcher administered a survey questionnaire to each member of the target population. Secondary data was collected for this study. Quantitative data collected was analyzed by the use of descriptive statistics using SPSS latest version (20.0). Regression analysis was done to establish the relationship between growth in Real Estate financing and house prices. The study found that the changes in housing prices are positively and significantly related to the long-term evolution of real estate financing. This result suggests that the evolution of housing prices is not triggered by bank real estate lending and that banks just accommodate real estate financing to the evolution of house prices. Though the study shows a bi-directional causality it concludes that the real estate market does not really affect housing price changes rather changes in housing prices do affect the amount of real estate financing.