Determinants of Capital Formation in Kenya's Housing Sector

Abstract

This study undertook an investigation of the main determining factors for capital formation in the Kenya’s housing sector. The study was inspired by the fact that investment in capital equipment not only leads to increase in production; but also accelerates growth in employment opportunities, technical progress, economies of scale, market expansion and helps in removal of market imperfections and creating economic and social overheads capital, hence breaking the spiteful sphere of poverty both on the demand and supply side of housing. The study is national-based focusing on determinants of capital formation in the Kenya’s housing sector using a time series data. The study employed 35 observations of all the variables studied. The study period was 1980-2014. The period covered the period during which social indicators like housing were used while estimating economic growth in Kenya. The study’s dependent variable was the Gross Fixed Capital Formation in the housing sector while the independent variables examined were population growth rate, per capita GDP growth rate, Net national savings, interest rates, exchange rates, personal remittances and the net foreign direct investment. Using a Vector Error Correction Model, the study found that the 1st lags of Population growth rates, savings as a percent of GDP, exchange rates and remittances were statistically significant in explaining the changes in Kenya’s housing sector gross fixed capital formation. To the contrary, Per capita GDP growth rate was not found to be a significant factor in explaining the changes in gross fixed capital of housing. A short run test among the variables showed that there was a short run causality running from exchange rates, remittances and savings to gross fixed capital formation of housing in Kenya.