Effect of mortgage financing on performance of the residential real estate industry in Kenya

Abstract

In housing investment, the mortgage loans, and real estate financing issue is of great importance as it plays a vital role in ensuring a transaction is possible and profitable. African economies are waking up to the fact that mortgages are becoming an attainable reality for transformational potential home ownership. Home ownership has become a significant measure of economic health in USA and Australia with almost 63% and 45% of homeowners acquiring their homes through “mortgages respectively. This is adequate attestation of the significance mortgage financing plays in developing the real estate sector to be a productive contributor to the national income. The objective of this research was to determine the effect of mortgage financing on the performance of the residential real estate industry in Kenya. It also aimed at reviewing the increasing body of theoretical and empirical studies that have endeavoured to examine the range of magnitude and relations between financing and real estate performance. The target population was all the 42 licensed commercial banks and the sole licensed mortgage housing company. Secondary sources of data were employed. Longitudinal data was utilized, data was collected over a varying time periods the macro-economic phenomena of mortgage financing and performance of the residential real estate industry. The research employed inferential statistics, which included correlation analysis and multiple linear regression analysis so as to establish the effect of mortgage financing on performance of the residential real estate industry. Mortgage financing was disaggregated into the various drivers of mortgage financing which entailed; number of mortgage loan accounts, outstanding mortgage loans amounts, mortgage interest rates, and mortgage risks. The study findings were that only the non-performing mortgages ratio has a significant association with the performance of residential real estate. They have a significant negative association. Additional findings were that mortgage financing does not significantly impact on performance of the residential real estate sector and thus it cannot be utilized to significantly predict performance of the residential real estate sector. Final findings were that no components of mortgage financing had” a significant effect on performance of the residential real estate sector. Policy recommendations were made to the National Treasury and the Ministry of Housing and Urban Development to formulate other strategies and policies to enhance the government’s affordable housing component of the Big 4 agenda with minimal consideration of mortgage financing. Further recommendations were made to the treasury to regulate the mortgage interest rates so as to enhance the residential real estate performance. Recommendations were made to the real estate practitioners not to concentrate on mortgage financing as the sole financing solution to customers. Recommendations were also made to the commercial bank and mortgage providers not to rely on solely on mortgage financing as the main product offering because other sources of finance are being sought to develop the industry and optimal earnings are not likely to be earned from the product offering. Final recommendations were made to the residential real estate developers to scale up their operations when the mortgage interest rates are low because they are more likely to make more sales.