“A market in which prices provide accurate signals for resource allocation [and] always ‘fully reflect’ available information is called ‘efficient’”~ Fama E.F.

“You can never go wrong with a property. Property and land always appreciate.” Such is the vibe that characterizes conversations of Kenyans who are endlessly stockpiling and speculating on property and land assets. What goes up must come down is also a reality in real estate. It is a reality that no-one wants to hear about. The question is, however, by how much have property prices risen or fallen? What might trigger such inevitable fluctuations in the property market place?

If you are an investor, a buyer or seller, then these questions should inform the investment decisions that you make at any one point in time. Banks in Kenya keen on financing construction and mortgage loans are particularly keen on such information. In fact, they have launched a Housing Price Index (HPI) for Kenya’s real estate market. Critically thinking, the information is tilted towards working in favour of financiers. They are as worried as you are in case the interest rates rise. In such a hypothetical case, for example, banks will always scrutinize your ability as a borrower to afford loan repayments occasioned by a sharp rise in interest rates.

It is for this reason that the Kenya Bankers Association (KBA) conceptualized and launched a house pricing index for Kenya.

What is Housing Price Index (HPI)?

A price index is basically a ratio or a percentage that can tell you the extent to which the price of something has changed in a given place within a given time. If the price of a tomato in Nairobi between October and December 2014 was averaging 10/-, and the same tomato is going to cost an average of 7/- between January and march 2015, then the price will have dropped by 30% or by 0.3. The benchmark, in this case, is the October-December 2014 period. Essentially, there must be a geographic place/location, then there must be the price at given points over the given period.

From the above, therefore, the HPI is a quarterly assessment of the price levels and movements of houses in a given market. Such an index could focus on a geographic region or a given type of housing or property. The HPI is basically an indicator. It indicates the performance of two critical things: the housing market and the overall economy. In the Kenya Bankers Association’s context, the HPI will initially focus on Nairobi. Should they roll out this instrument in every county, then the HPI for different places will be useful in helping to project or forecast house prices. When these HPIs are put side by side, you will be able to compare prices of houses in the different locations.

Every index has a ‘name’ that uniquely identifies it. In this case, the index is referred to as the Kenya Bankers Association Housing Pricing Index (KBA-HPI).

In short we can say that the whole process of collecting, analysing and presenting this kind of data was taught in those Statistics classes and lectures that you missed.


KBA-HPI Calculations Snippet

A Snippet of the KBA-HPI Calculations before you dropped out of statistics class [Source: KBA]

Why this index should concern you

I disliked watching business news when I was in primary school. But nowadays the numbers that never made sense back then are the object of our investment attention. Has the price gone up or down? Should I sell or should I hold? In case these prices have risen, what are they likely to be in the next 5 years?

The HPI will enable you to understand the current demand for housing in the region that interests you. It will guide you in making a decision on how to deal with your property in periods when inflation or deflation rules. It will help you make a sound decision when house prices are very volatile. It is, arguably, going to be the best indicator of whether there is a property boom or a property bust – that the property bubble that everyone is talking about without figures. The housing price index (HPI) is now acting as an indicator and a guide in making an investment decision.

By serving as a guide, the HPI may not give you data on a small market segment of your interest. That is, it will cover the price trend taken by the overall market in the given region rather than focus on, say, the 1 bedroom apartment market’ that might be of interest to you. Usually, the information on such indices is obtained from transactions databases in various regions. You and I know how KRA, the big brother, watches every cash flow and property transaction.

Why the bankers came up with KBA-HPI index

This is the part where it becomes important to mention that as long as you are relying on banks to finance a loan or mortgage then the HPI and the endless graphs, charts and numbers should be your ally. Let us hope that KBA will simplify and make their quarterly reports easily accessible in the interest of the public.

Banks are very keen on price volatility in the housing sector – especially when prices are highly volatile. Let me explain. Prices change and they always will. Sometimes the prices of housing will change gradually, almost smoothly and almost predictable. There are times, however, these prices will change so dramatically that the value of the house may be affected.

It is at this point of price volatility where bankers will start assessing you as a borrower. In a simple manner, in case you are giving one of your houses as collateral or security for a loan, how is the market for such property like? What are the interest rates in the market and will you be able to finance that loan? Will that property that you are using to secure funding be adequate to cushion the banks from the risks associated with defaulting?

The KBA Housing Price Index will help banks track mortgages issued to the demand side of the market. How many people are able to service their mortgages? How many are defaulting? The banks will make their decisions based on these changes in prices. Additionally, any change in interest rates will be used alongside such information and trends to determine how they will finance the project.

To you as a buyer, you should be keen in using the same index to determine where houses are more affordable.

For you as a developer, especially if you have plans to put up the house in the market, you should be able to know what features and facilities are critical to have and that will determine the price of the property.

KBA Factors Affecting Sale Price of a Property

KBA Factors Affecting Sale Price of a Property [Source: KBA]

In our opinion, the introduction of this new index should be welcome to all. There have been limited sources of information on property in Kenya. The index will hopefully help improve efficiency within Kenya’s property marketplace, taking into account the operational issues that make property transactions dynamic. Secondly the index should also seek to improve the accuracy of property valuations in the market. And finally, the reports should enable financial and lending institutions share the information they will rely on in financing property development or purchases.

In the same breath, the financial institutions should help address matters regarding transparency in property transactions especially in the financial aspect. You should be aware of the concerns raised by the International Monetary Fund (IMF) and Moody’s regarding non-performing loans and how they are likely to impact on the Kenyan banks’ loan books with respect to risk.

The other indices

The bankers’ association has set up one of the few housing indices available in Kenya today. Don’t you think that such an index would be more accurate if it was prepared by real estate valuers and agents professionals who are engaged and involved daily in the property transactions? It would be better if their professional bodies and institutions also worked on a national level index. Such as index, like the KBA-HPI, would inform the demand side of the housing market. On the other hand, quantity surveyors could also come up with and index that would inform the public and other stakeholders how the market looks like on the supply side of the market.