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The Housing Bubble in Kenya will Burst very soon....
Rank: Member Joined: 11/6/2006 Posts: 276
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@bwenyenye- i think the share of buy-to-let and owner occupier.. is 50-50 at list from some projects whose records i have..
the ratio could be 25%-75% as you go upmarket.. but on a project of around 4M per unit the ratios are reversed..
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Rank: Member Joined: 1/24/2011 Posts: 407 Location: Nairobi,Kenya
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The thought that the housing bubble in Kenya will burst soon is not realistic.You mean to say that a house in Langata currently selling at 13.5M will reduce to 8.5M.  ,I highly doubt...Probably the rate at which prices are increasing will reduce. Hope is not a strategy
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Rank: Member Joined: 11/6/2006 Posts: 276
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there are so many housing projects.. no one would overprice their property in the face of stiff competition..
and no.. the developers did not go for a conference and agree.. 'let us all overprice our houses'.. no memo either has been sent around..
the sale price of a house it determined by the cost of inputs..
- land cost
- construction cost
- cost of borrowing
- other misc cost...
the land costs have been growing in only one direction
the cost of construction is largely determined by crude oil... which also grows in one direction..
for the risk of undertaking the project.. the developers have to charge an amount to compensate the opportunity cost of funds.. otherwise they should have sold their plot and invested the money in the equity markets..
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Rank: Elder Joined: 6/19/2008 Posts: 4,268
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fantony wrote:there are so many housing projects.. no one would overprice their property in the face of stiff competition..
and no.. the developers did not go for a conference and agree.. 'let us all overprice our houses'.. no memo either has been sent around..
the sale price of a house it determined by the cost of inputs..
- land cost
- construction cost
- cost of borrowing
- other misc cost...
the land costs have been growing in only one direction
the cost of construction is largely determined by crude oil... which also grows in one direction..
for the risk of undertaking the project.. the developers have to charge an amount to compensate the opportunity cost of funds.. otherwise they should have sold their plot and invested the money in the equity markets..
but am sure you agree that over 100% profit margin is unrealistic..... I really would want to believe all those who think that the cost of houses in Kenya is realistic.... with its poor finishing and prices from jupiter.... check out houses in other countries and compare with what you are being offered... then you will know you are being ripped off... A colleague of mine moved to Harare last month... the house she got is a 4 bedroomed house, with a two bedroom guest house, swimming pool, electric gate, up market, stand alone house... - owner asking US$80K - sale!!!! rent is US$1K per month.... where in kenya would you get that! The sell copper... not oil. If you said tax factor raises the cost, it would make abit of sense..... check out SA houses..... see the amenities available, see the finishing and compare that with the cost.... an 8m house in SA is jaw dropping... and here? an old house tacked in Imara daima if you are lucky!
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Rank: Member Joined: 9/25/2007 Posts: 96
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@Wendz Can your friend get me a similar house? I would like to buy one. Email: Global_v1@yahoo.com.
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Rank: New-farer Joined: 6/3/2010 Posts: 96
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[/quote]
but am sure you agree that over 100% profit margin is unrealistic.....
I really would want to believe all those who think that the cost of houses in Kenya is realistic.... with its poor finishing and prices from jupiter.... check out houses in other countries and compare with what you are being offered... then you will know you are being ripped off...
A colleague of mine moved to Harare last month... the house she got is a 4 bedroomed house, with a two bedroom guest house, swimming pool, electric gate, up market, stand alone house... - owner asking US$80K - sale!!!! rent is US$1K per month.... where in kenya would you get that! The sell copper... not oil. If you said tax factor raises the cost, it would make abit of sense..... check out SA houses..... see the amenities available, see the finishing and compare that with the cost.... an 8m house in SA is jaw dropping... and here? an old house tacked in Imara daima if you are lucky!
[/quote]
Wendz, the difference between Kenya and SA is the infrastructure available...because of the good roads and proper urban planning, not everyone is clamouring to live in the same neighbourhoods as nairobi...jorburg with roughly same population as nrb has expansive surburbs covering areas as large as kitengala to thika with all those people commuting because of the excellent road networks
because of this, the choice available is incredible, developed land is very cheap...qtr an acre with tarmac frontage is nothing special..costs like 50k rands which is half an million, and the equivalent in nairobi which would be Thika road fronting highway costs 3-4m just because of the limited choice.
In case proper infrastructure was available all across nairobi not just in the west of uhuru highway then housing would not be that expensive...
as long as infrastructure remains a challenge (think of the fact that upto now, no single metre of tarmac exists in syokimau) then choices of prime land will be limited = high land prices + relatively higher housing cost driven by limited supply in decently serviced areas
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Rank: Member Joined: 11/6/2006 Posts: 276
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@wendz - 100%... where..
let us first be clear... since you are neither bill gates nor william kabogo you are not going to buy a house in a day.. you will consume a house for a lifetime.. why do you want to buy it in a shopping basket like you would with bread..
i'll refer to the half acre plot in kilimani or kile or westi or parklands
that goes for 50M - blame the market...
that plot will legally fit in 16 apartments of 180 sq metres each
the construction cost of that is 16 x 180 x39,000 = 112,320,000
add professional fees of 10% (Arch, QS, civil/struc eng, mech/elec eng) = 11,232,000
new total = 123,552,000
the developer will probably borrow 70% of this i.e. debt = 74,131,200 at 14% interest hence new cost 10,378,368
new total = 133,930,368
add the land value 50,000,000
approx project cost = 183,930,368
cost per flat = 11,495,648 add 25% for a profit.. project will probably take 2 year hence this is a yield of 12.5% p.a.
a flat minimum sale price of 14,369,560.
and that is how syokimau, kamulu and kitengela were concieved
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Rank: Veteran Joined: 4/16/2010 Posts: 906 Location: Nairobi
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@wendz I think that is the appropriate view of things. The basic issue is that people are just not getting their money's worth when buying these houses, and will eventually stop paying over the top for low value.
You wonder sometimes what people are buying with these crazy valuations. Security? No. My friend just came out of treatment for a skull injury sustained when accosted by thugs close to his Westlands home, and my friends who live in Runda and Karen always tell me to drive like the wind when coming out of their place late. Access to job opportunities? No, Kenya is not structured like USA or SA where just living in a certain area opens up opportunities. Beauty Rates? I can't think of any spectacular landscapes in the high-end areas, but I could be wrong. Point is, these hefty valuations seem based on hype more than value, so there's every chance the pricing is just wrong to begin with
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Rank: Hello Joined: 3/5/2011 Posts: 1
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The current housing market in kenya seems to following the suit of USA housing markets.I feel buyers are not getting the value of money for the house they buy.Think prices will go down further.
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Rank: Member Joined: 4/7/2010 Posts: 130
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Interesting discussion. Sadly, most of this is mere speculation. Those clued in the industry know what's going on.....a bubble is 20years away!!
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Rank: New-farer Joined: 9/6/2010 Posts: 97 Location: nairobi, kenya
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erifloss wrote:Vj wrote:I got in to the property development businees when things were still calm (around 7 years ago). From the way i understand the market a housing crash in the next five years is unlikely (though we may get a slight downward correction), the only situation i fear is a political crisis which can erode confidence. My reasons are as follows:
1) Kenyan banks are quite strict when it comes to lending
2) Quite a number of buyers are paying full cash for their homes (around 40% of my customers
have not taken loans)
3) The middle class i.e proffesionals are increasing rapidly.
4) The culture of buying rather then renting is increasing.
5) There is alot of money coming from abroad
However i must say things are reaching an equilibrium. There was a time i sold entire projects on the blue prints, nowadays it is difficult to acheive that but 90% are sold before completion. The correction i anticipate is around 15-20%, i feel this is necessary to weed out some of the developers who have no clue about what they are doing and overally this will be better for the market. @Vj,just to correct you a bit. Most guys buying cash are not buying for their personal and family housing but for commercial purposes. Most of these guys either rent them out or sell them to secondary buyers. The bubble will actually burst coz of these secondary buyers who buy from the cash buyers. Remember that the first buyers are in it for investment purposes and when reality hits home with the secondary buyers on what they can make as first buyers and affordable mortgage is out there in the market then prices will be downhill coz of oversupply. Your argument does make sense, however the key issue is the availability of cheap mortgages, under the current circumstances i don't see cheap and freely available mortgages rolling out soon, and if they do the prices will rise even further in the short run due to excess demand from the mortgage buyers. Those using the western real estate market to make predictions of our local market are off track because of two fundamental reasons i.e mortgages and infrastructure. I feel our market is similar to the Indian market a couple of years ago(on a way smaller level though)as we are a growing economy with a weak infrastructure and limited expensive mortgages. The lack of infrastructure limits the areas where we can live hence creating sustained demand (at least for the next few years) for particular areas. The expensive and strict mortgages will ensure that most of the buyers have the ability to afford the house they are living in (You won't find the western scenario of a McDonald's employee flipping burgers for a living yet buying a $500,000 home in Kenya) The reason why quality homes in this country are expensive is because most of the finishes are imported from abroad. In one of my projects, i initially had to buy a toilet set for 75,000 from a local supplier, i sourced the same toilet from abroad and it cost about 25,000 but its cost increased to about 45,000 by the time it reached the project site. So if you want quality in this country you have to pay for it. Those saying that developers are making 100% profit are also in their own world, yes at some point we did but this is because we were holding land that was cheaply bought and the land prices went up suddenly. Usually profits are about 30% but can go upto 50-60% for high end projects (which require huge investment and very selected choosy clients) @Property i'll drop you an e.mail. Before you can be be old and wise, you must first be young and stupid.
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Rank: Member Joined: 10/26/2008 Posts: 380
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Vj wrote:erifloss wrote:Vj wrote:I got in to the property development businees when things were still calm (around 7 years ago). From the way i understand the market a housing crash in the next five years is unlikely (though we may get a slight downward correction), the only situation i fear is a political crisis which can erode confidence. My reasons are as follows:
1) Kenyan banks are quite strict when it comes to lending
2) Quite a number of buyers are paying full cash for their homes (around 40% of my customers
have not taken loans)
3) The middle class i.e proffesionals are increasing rapidly.
4) The culture of buying rather then renting is increasing.
5) There is alot of money coming from abroad
However i must say things are reaching an equilibrium. There was a time i sold entire projects on the blue prints, nowadays it is difficult to acheive that but 90% are sold before completion. The correction i anticipate is around 15-20%, i feel this is necessary to weed out some of the developers who have no clue about what they are doing and overally this will be better for the market. @Vj,just to correct you a bit. Most guys buying cash are not buying for their personal and family housing but for commercial purposes. Most of these guys either rent them out or sell them to secondary buyers. The bubble will actually burst coz of these secondary buyers who buy from the cash buyers. Remember that the first buyers are in it for investment purposes and when reality hits home with the secondary buyers on what they can make as first buyers and affordable mortgage is out there in the market then prices will be downhill coz of oversupply. Your argument does make sense, however the key issue is the availability of cheap mortgages, under the current circumstances i don't see cheap and freely available mortgages rolling out soon, and if they do the prices will rise even further in the short run due to excess demand from the mortgage buyers. Those using the western real estate market to make predictions of our local market are off track because of two fundamental reasons i.e mortgages and infrastructure. I feel our market is similar to the Indian market a couple of years ago(on a way smaller level though)as we are a growing economy with a weak infrastructure and limited expensive mortgages. The lack of infrastructure limits the areas where we can live hence creating sustained demand (at least for the next few years) for particular areas. The expensive and strict mortgages will ensure that most of the buyers have the ability to afford the house they are living in (You won't find the western scenario of a McDonald's employee flipping burgers for a living yet buying a $500,000 home in Kenya) The reason why quality homes in this country are expensive is because most of the finishes are imported from abroad. In one of my projects, i initially had to buy a toilet set for 75,000 from a local supplier, i sourced the same toilet from abroad and it cost about 25,000 but its cost increased to about 45,000 by the time it reached the project site. So if you want quality in this country you have to pay for it. Those saying that developers are making 100% profit are also in their own world, yes at some point we did but this is because we were holding land that was cheaply bought and the land prices went up suddenly. Usually profits are about 30% but can go upto 50-60% for high end projects (which require huge investment and very selected choosy clients) @Property i'll drop you an e.mail. @Vj.. drop me an mail @ nditika at gmail.com.. Looking for something in the market.
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Rank: Elder Joined: 2/10/2007 Posts: 1,587
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I think we may still have to wait until before we have demand and supply matching before we can think of bubble burst. Currently demand far outstrips supply. There is also strong fanatical diaspora attachment to property in the country. This will keep up prices. Moreover, in the counrty two issues will continue to conteibute to the high property prices; one is the increasing middle class as the economy grows, the second is the rural urban migration.
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Rank: Veteran Joined: 1/7/2010 Posts: 1,279 Location: nbi
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Once you start seeing pure land costing Ksh250m, you know there is a bubble. This means even the diaspora can't afford these prices. Ma friends, even the Chinese are pushing the bubble hard because they know the damage it can do to the wider economy. If the general erection passes off with no drama, we'll be having a proper property bubble in Nai and Mombasa by 2014... The Governor of Nyeri - 2017
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Rank: Member Joined: 11/12/2010 Posts: 111 Location: MOMBASA
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Where is Mheshimiwas Mr.T? We need Ur comments on this one.
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Rank: New-farer Joined: 2/14/2011 Posts: 5
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@ Wendz,
You cited the example of a friend who moved to Harare where you claimed she had cheaper housing. There are reasons behind these that can not be compared to the situation here.
Firstly, Zimbabwe is one of the least favourable countries to live in across Africa let alone the world. Property right are not enforced with the governement having the ability to forcefully procure any parcel of land no matter who the actual owner is. (happened to a friend from uni whose family owned a ranch in bulawayo, another city in Zimbabwe. Govt people cam and forcefully re-possesed the parcel of land.) As such housing is chepaer there as the lack of propoerty rights enforcement, insecurity of loosing your property drives down the value of housing.
The biggest factor why house prices are high is because of the use of stones in our houses.x
In North America, most houses are built using timber. This makes the houses chepaer, as logically one would assume wood is cheaper than stones. A house built using wood would take less time to build as compared to a house built with stone, ie. less man hours used, less interest occurred if a portion of the exepnse in constructing the house was financed etc. therefore cheaper housing.
Even in high rise blocks in the US, only the outer shell and structure is made of steel and concrete. All interior walls are made of gypsum block boards.
For a developer to even convince a buyer to buy a pre-fabricated house especially to those wananchi who are a little less literate than the rest is quite a task. Else I think prefabricated housing is much more secure as the walling also contian re-inforced steel in them and make the pre=fab houses more sturdy even though the walls appear thinner than the kawaida stone walls.
Just a few reasons I thought as to why prices are cheaper in harare for instance, and why they are higher here in comparison to other places.
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Rank: Veteran Joined: 12/23/2010 Posts: 1,229
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@ Fred8, great insight on the relationship between property prices and the protection of the right to private property. Good example is road expansion initiatives here. There was a time in many areas where having a plot smack next to the road was as prime as it could get and people would pay premium prices for those. Now in some areas, its safer not to be that close to the road.
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Rank: Hello Joined: 1/24/2011 Posts: 1 Location: Nairobi
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Timber construction is more expensive than stone fyi not to mention scarcity and environmental issues, and gypsum is way expensive than stone and plaster.so that point doesnt add up..prefabs come in various types,as far as reinforced concrete prefab is concerned, it is more expensive thn our stone and mortar..actually house done in this type of prefab are more expensive in Kenya, see superior home's house in athi river
the market is benig pushed by forces of demand and supply,and i dont thnk this market is overpriced..only that we were used to cheap stuff and now when we start getting better hses we want to stick to our old prices
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Rank: Veteran Joined: 7/8/2008 Posts: 947
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peterdc wrote:Timber construction is more expensive than stone fyi not to mention scarcity and environmental issues, and gypsum is way expensive than stone and plaster.so that point doesnt add up..prefabs come in various types,as far as reinforced concrete prefab is concerned, it is more expensive thn our stone and mortar..actually house done in this type of prefab are more expensive in Kenya, see superior home's house in athi river
the market is benig pushed by forces of demand and supply,and i dont thnk this market is overpriced..only that we were used to cheap stuff and now when we start getting better hses we want to stick to our old prices I think fred8 also mentioned time. Timber houses will take shorter time and labour costs in western countries do not compare to Kenya. Timber houses are also much easier to insulate hence reducing cost as oposd to concrete houss that have to have an inner wall where the insulation is packed. But despite expensive wood it brings down the cost of construction compared to concrete. This applies to the west. This is not a bubble and with the weakening shilling the diaspora (Who include the Somali pirates across the border) can now get more land for less dollars!!
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Rank: New-farer Joined: 2/14/2011 Posts: 5
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@peterdc
The scarcity and environmental issues for timber have an easy solution. On my travels up and down Kenya, I have seen people have bought parcels of land on which they have grow trees, which provide teak wood. If people cut down the trees in a block by block manner while replanting the trees in the bolcks they cut off, you have a constant supply of wood however not more than 20% of the land parcel will have trees that are cut down.
Off course gypsum is expensive, its used in ceilings but as compared to a concrete ceiling slab it is cheaper (I made an error in my previous post, as gypsum is used in the ceiling)
For the wall foam is compressed between two blockboards, this is what constitutes the internal wall. Again logic would steer us in thinking fooam and two blockboards is cheaper than stone wall and plaster.
As for there being a housing bubble that will burst, i do not think it is so.
In general, Economic Development is driven by a couple key things such as Govt investment in Infrastucture, Political Stability, enforcement of propertty rights etc.
The infrastrucutre development in terms of road networks ( especially the road networks) as well as development of communications infrastructure (i.e fibre optic internet cables, while they may take another 2-4 years to be fully rolled out within the greater nairobi area) are the biggest components driving the real estate development growth. They are the base for the increase in value of property.
However, the prices are inflated to a small extent thanks to speculators. As such we may see a price correction and stabilization in the future so that prices are closer to the actual values of the properties.
The key is political stability. If as wananchi we can be pro-active and work to a peaceful pre and post election period, Kenya may see decent economic situations. the Road networks ie. Thika super highway, the by-passes etc will have been completed and we will have lots of economic opportunities in the years to come. If there is political stability it encourages an influx of Foriegn investment.
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The Housing Bubble in Kenya will Burst very soon....
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