Top factors affecting the real estate sector

In the year 2019, the real estate market in Kenya saw the sector taking a beat from the oversupply in the market and unfavourable economic climate. This was also followed by scuffle  in the larger economy of kenya. In a report by Kenya Bankers Association(KBA), the oversupply was prompting pressure on the  Kenya property prices. It is reported that most of the properties remained vacant during this period.

 

According to business today’ newspaper, there was a 41% increase in grade A and grade B uptake in the second  half of the year than in the first half where fewer but larger deals were  closed. This was as a result of flight  to standard properties and demand from co-working space operators.

 

Prime residential rents  like Kilimani decreased by 2.8%, which was much higher compared to the previous year with a 1.3% decrease. These declines started at varied rates in the second year of 2016, then took its peak in the second half of the  year 2019. The declines were mainly due to the cap on the interest rates which have now been nullified. In a report by the  central bank of kenya , there was an increase in the number of distressed properties in the year 2019 due to the defaults of non-performing mortgages increasing by 40%. This affected the residential properties intensively as the lenders focused on recovering the loans through collateral sales.

 

In 2020, we are expecting the prime residential rents to improve after the nullification of the additional interest rates,which contributed to the increased liquidity in the industry.

The law of supply and demand

Typically, the law of supply and demand states that the higher the demand for good or service, the higher the price while the lower the demand of the same good or service,the lower  its price. This means that if there’s a high supply of a  commodity but low demand ,the price will automatically decrease while there’s low supply of the same commodity but high demand,the price increases. 

 

This theory is a basic principle of economics which works against each other until the point of symmetry is achieved . At this point , the price will be equal to demand in the market.

 

Demand

The law of demand states that people will have low or no demand for a good or service that has a higher price. Lower price drives demand hence people will always demand for something that goes for a less price. 

 

Supply

The law of supply dictates that prices decrease when there is an increase of supply in the market while the price of the same service increases when the supply is low. This is because it costs more to produce and sell goods at a higher price.

 

2 prime factors affecting housing supply and demand

 

Due to the long period of time taken during construction of new properties, the real estate industry supply and demand can be challenging to tell. Also, it takes longer to buy and sell in the industry as compared to other sectors. Some of the factors that affect housing supply and demand in kenya include:

 

  1. Interest rates

As we all know, when the interest rates are low, almost everyone is interested in taking more loans. One may then decide to finance a property since the interest rate is not heavy. If more buyers flock the market, the prices will automatically rise. Also, if there is limited supply of house inventory, more people will want to purchase. This will cause inventory to increase since house supply is a constant  state of change. There will be then an increase in development and new construction ,adding to the existing inventory.

 

Housing inventory will decrease in times of disasters or when existing inventories are destroyed.  Land property is a finite resource hence development of new inventories will be limited.

 

  1. Housing market crash

A housing market crash is caused when a run-up in property prices is charged by demand, prediction, and buoyant spending to the point of crumble.This starts with an increase in demand, where there is limited supply  which takes a relatively long period to increase or even balance. Speculators will invest money in the market increasing the demand but at the same time the demand flattens or decreases resulting in a huge drop in prices. This will cause a market crash.

It’s not easy to balance the rate of supply and demand in the real estate industry but  understanding the law of supply and demand can help consumers decide on the right time to invest, buy and sell properties . This would help even the brokers and agents in the industry.