HOW TO PREDICT THE REAL ESTATE MARKET
In Kenya, the real estate industry is a free market where the price of housing is driven by supply and demand. The higher the demand, the higher the prices and inverse apply as well. Over the last couple of years, the Kenyan economy has witnessed an exponential growth of the middle-class.
The growth of the middle class means more Kenyans have access to disposable income thus they can construct their own homes or acquire mortgages to buy houses. This, in turn, fuels the real estate sector. As the real estate industry appears 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), a bubble is a temporary event that may last up to several years.
The property sector exists in relation to sectors and one can predict the trend of real estate with other factors in the economy.
A NUMBER OF UNSOLD HOUSES
In order to identify which shape of the cycle the market is in, the investor would need to consider whether the current number of homes matches the demand. 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 to avoid having an over or undersupply of housing units.
Low-interest rates translate to an excess of money in supply which can fuel the rate of homeownership has loans become cheaper. An investor should be wary of a property market driven by interest rates because of its volatility. Increased rates reduce mortgage borrowing making homeownership out of reach for many buyers. The housing bubble facilitated by low-interest rates bursts as supply exceeds demand reducing real estate prices.
THE RENT VS THE VALUE OF HOMES
A comparison of the cost of renting a unit versus buying is a good guide to predict a housing bubble. The prices of two changes 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. The disparity between the two values where the capital value is brought about by speculators valuing the property higher to make more profit. This is a sure indicator of a housing bubble.
WAGES VS CAPITAL VALUE
Demand in a property market is driven by the financial ability of the consumers and analyzing their wages can help an investor determine a trend. Comparing the wages of a person and the value of homes in an area can paint a picture of how long it would take for one to fully buy a house in an area.
5 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.
Today, Kenya’s real estate market, just like most in the world is well into the expansion phase and trends become predictable as you become more seasoned in the sector.
By Gitonga Muriithi, Head of Sales and Marketing