Real estate prices in Kenya : is there a bubble?

Abstract

This study focuses on the determinants of the prices of residential houses in Nairobi City County, Kenya. It uses correlation analysis to determine relationships that exist between the prices and selected independent variables. Cointegration tests are used to further analyse the long term relationships between the prices and the independent variables with a view to concluding on the existence of a house price bubble. Granger causality tests are performed to triangulate the results as the causal relationships are examined. The study finds the housing prices to have strong positive relationships with GDP, diaspora remittances, lending rates, loans to real estate sector and cost of construction. A weak negative relationship exists between the house prices and inflation. Further, results of the cointegration tests indicate the existence of stable long run relationships between house prices and each of GDP and NSE Index while unstable long run relationships are reported for diaspora remittances and building costs. This means the study is indifferent about the existence of a house price bubble. Granger causality tests indicate there are no causal relationships between house prices and diaspora remittances. However, there are two way causalities between house prices and each of GDP, building costs and NSE Index. This negates the existence of a house price bubble.