The high demand for formal housing in Kenya is fuelling price hikes, locking out potential buyers and denying the sector funds to reinvest in order to increase supply.

Real estate analysts and economists are warning that house prices will continue to rise as lenders shy away from the business, worsening a crippling housing crisis.

A new report by the African Development Bank (AfDB), notes that high prices have locked Kenya’s housing sector out of faster growth.

With only a handful of private developers in the country who can afford to invest in medium to large scale developments of 200 units and above, targeting the middle to low income segments, the AfDB is warning of worsening supply gaps.

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According to the Centre for Affordable Housing Finance in Africa, the annual increase in the demand for housing in Kenya is 206,000 units, of which 82,000 are in urban areas.

Skills gap

Faltering capacity among private developers to execute well-done projects at a reasonable cost, is emerging a big concern not only in Kenya, but the entire East African region.

With the exception of Zambia and to some extent Tanzania, many developers lack experience, according to AfDB. In Uganda, they tend to have no more than three years of experience; whereas in Kenya where they average 5.5 years, developers are able to put up large developments of 200 to 250 units.

The average size of a home loan in Kenya has risen to Ksh6.4 million ($75,294) over the past two years, from around Ksh5 million ($58,823), latest data from the Central Bank of Kenya shows. But while the average formal house is cheaper in Kenya than in South Africa, Uganda and Zambia, the lack of innovative financing options and high interest on mortgages remain a challenge.

“At prevailing interest rates on mortgages, affordability remains a key constraint,” said Yannis Arvanitis, a research economist at the AfDB and author of the report, African Housing Dynamics: Lessons from the Kenyan Market. Interest rates on home loans currently oscillate between 11 per cent and 25 per cent. This means that the borrower of say a Ksh6.4 million ($75,294) 15-year house loan at 18 per cent, will end up paying Ksh17.3 million ($203,520).

While about 80 per cent of new houses target high and upper middle income earners, the AfDB report shows the greatest demand, estimated at 83 per cent, is among low and lower middle income earners.

According to property firm HassConsult, this state of affairs has meant that 80 per cent of Kenyans living in urban areas do not live in their own houses.

The bigger challenge comes in when the 80 per cent of urban dwellers living in rented houses have to contend with fast rising rent. Since 2001, rent in major urban centres has increased 2.99 times. It means that a house that fetched say Ksh10,000 ($117) in 2001, now costs Ksh30,000 ($352) per month in rent. In the past one year alone to April 2013, rents rose by 12.6 per cent, according to Hass Consult.

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Mr Arvanitis said the problems facing the Kenya housing sector are multi dimensional and require a holistic approach if the majority of urban dwellers are to afford houses.

“The market needs to be educated to accept different building solutions that are more cost-effective,” he said. “For instance, prefabricated houses are cheaper and can drastically reduce construction time.”

According to the National Housing Fund (NHC), pre-fabricated houses will save one up to 50 per cent of the time needed for construction, and more than 30 per cent of the cost.

Another challenge identified in Kenya is that there is a lack of local government support, especially through the development of trunk infrastructure, water and sanitation. The market estimates that the cost of infrastructure adds an additional 20-30 per cent to the price of homes in Kenya.

As per the long term financing challenges, Mr Arvanitis said alternatives could be deployed.

“Schemes such as ‘lease-to-own’ arrangements in partnership with local financial institutions can be deployed,” said Mr Arvanitis.

Central Bank of Kenya Governor, Njuguna Ndung’u said the solution to affordable mortgages lies in deepening the capital market and use of pension funds for guaranteeing members’ mortgages. While the latter has happened in Kenya, use of pension to secure mortgages is yet to peak.

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Carol Kariuki of real estate firm Mortgage Company said: “We need to get cheap long-term funds directed towards mortgage financing to enable us to move towards single digit interest rates.”

Research by The Mortgage Company released in the second quarter of this year showed that mortgage-financed houses were making losses even when they were rented out.

Losing money

“Those who buy-to-let are losing money,” said Ms Kariuki. “Those who buy-to-live-in are losing money. And while all these owners will eventually make gains, as the exacerbated shortages push house prices up further, the entry point will continue to be out of reach for the vast majority of Kenyan families and wage earners.”

The lack of innovative mortgage financing solutions means that even companies that specialise in developing cheaper houses require their clients to source financing independently.

A recent initiative by Habitat for Humanity International in partnership with the MasterCard Foundation to help build the capacity of three local financial institutions to allow them to come up with new innovative housing microfinance products for the poor could ease the problem.

“Clients will be required to find financing and build incrementally, at their own pace,” said Habitat’s housing microfinance project manager, Christopher Musoke.