The Effect of Interest Rates on the Growth of Real Estate Markets in Kenya

Abstract

The main aim of the study was to establish the effect of interest rates on the growth of real estate in Kenya. Theories the study was anchored on include classical, liquidity Preference and loanable funds theories. The study was conducted using correlation study design to show the nature of relationship between changes in interest rates and growth of real estates in Kenya. The study used secondary data that included mortgage interest rates, inflation, GDP growth and real estate growth as captured by montage value of the commercial banks that offer mortgages. Data was collected quarterly for a period of 11 years from the year 2007 to the year 2017. The secondary data was obtained from Kenya commercial banks that offer mortgages and Kenya National Bureau of Statistics. The study also conducted trend analysis which showed that there have been unsteady fluctuations in GDP growth in Kenya, real estate growth, inflation and interest rate volatility in the study period. The inferential findings from the correlation and regression analysis showed that inflation has a negative and significant effect on real estate growth in Kenya which implies that an increase in inflation rate leads to a significant decrease in real estate growth in Kenya. The findings also indicated that mortgage interest rate volatility has a negative and significant effect on real estate growth in Kenya which shows that an increase in mortgage interest rate volatility leads to a significant decrease in real estate growth and that GDP growth has a positive but not significant effect on real estate growth in Kenya. The study also concludes that the stability of the interest on mortgages is important if the real estate in Kenya was to grow. High volatility affects the growth of real estate negatively and significantly. To the real estate investors, the study recommends that there is a need to be cautious of the inflation rate and the mortgage interest rates fluctuations when making investment decisions. Similarly, to the real estate developers, there need to be a caution when making real estate investment decision since an increase in GDP does not necessarily mean an increase in demand of housing.