A bubble is an occurrence that takes place when there is a rapid rise in the price of an asset grade above its intrinsic value. This may happen if there is a rapid rise in housing and land prices to a point that properties retail at several times their worth. Bubble bursting happens when there is a lower demand of property, therefore prices decline tremendously. For instance, if an investor acquires a property on paid mortgage at Sh60,000 and then rents it out at Sh100,000. In the case that there is an economic downturn the tenants will be unable to afford it, thus affecting both the buyers and bank.
A report by Cytonn Investment Firm revealed that the real estate sector consistently generated returns of between 25 percent and 30 percent while incurring minimal losses in 2016. The real estate sector accounts for about 9 percent of Kenya’s GDP. The increase in returns has attracted both developers and long-term investors to Kenya’s property market. However, some investment analysts indicated that the continued increase in property might be the sign of a bubble burst that might happen soon. Cytonn Investments rejected the reports that there is a real estate bubble in the country. In addition, the head of development at real estate firm Hass Consult Sakina Hassanali, said that Kenya is not in any risk of bubble bursting but on an economic slowdown.
In February, Suileiman Bashir, a property lawyer told a local paper that there is no bubble in the Kenyan market but a normal real estate cycle of rising demand, falling market and rising market. In the Hass Index, apartments rentals obtained an increase of 0.4 percent led by asking rents in Langata at 2.5 percent which recorded the highest increase. Athi River had the best property market with apartment prices increasing by 2.8 percent in 2019. A segment of low returns and rising prices may occur in the real estate market, but this does not indicate bubble bursting. For such to occur, a number of key factors need to synergize. Such factors might include relaxed lending standards, high demand, increase in house prices and low-interest rates. Although Kenya is not in any risk of bubble bursting, a real estate bubble occurs in five stages.
- Displacement: Displacement happens as a result of incredibly low-interest rates. A bubble may occur if the interest rates hit 5 percent. This will allow many prospective homeowners to qualify for mortgages that they may be unable to payback, while investors might take construction loans to construct houses that are not financially within reach. Most of kenyan homes are financed through personal savings, unlike where markets have experienced bubble bursts most home ownerships are financed using mortgage.
- Boom: Many people will cash in on the property sector after displacement has occurred because of its perceived high returns. As more join in, the prices of real estate will rise at an increasingly high rate. A case study of the boom took place in Ruaka, Kiambu county. The land cost doubled in 2016 with an acre of land priced at Sh 18 million from Sh 8 million. The price increase was attributed to fundamental issues such as improved infrastructures, change in regulations and market forces.
- Euphoria: A bubble market enters a state of euphoria that is sustained by the returns accumulated in the bottom phase.The euphoria stage is driven by over-speculation. In this case, some investors sell other assets like retail business and equities in order to invest in real estate. After investing without caring whether the property is overvalued with the confidence to earn profit, the bubble eventually bursts when they fail to get buyers.
- Return-Taking: Return-taking is where a few smart investors cash out their investments after sensing a bubble. Most of the media content reveal that real estate businesses have intensified the marketing of houses and land. However, this might not be the case as some of the land sellers and developers are servicing loans for their investments.
- Painful Burst: Once the bubble bursts you can not inflate it again. In Angola the real estate market was fuelled to a large extent by the petroleum industry when a bubble burst. The real estate prices increased when the global price of oil skyrocketed in Angola, this was because of the boom experienced in the country as a result of oil mining. The real estate prices fell when the oil prices plummeted.
- Market Correction: The real estate in Kenya is experiencing a phenomenon known as a market correction. It occurs during periods where there is a temporal oversupply of real estate and it might take time for the demand to meet the supply. It will take a period of time to develop the capacity to handle the shortage of housing and meet the demand of property.
With the support of the above article, i can therefore say that the Kenyan real estate sector is not showing any symptoms or experiencing a bubble burst.