Asset Price Bubbles: Causes, Concequences and Regulation Options for Kenya’s Real Estate Market

Abstract

Since the year 2006, it has been reported that property prices have more than quadrupled in all areas in Kenya and especially in and around Nairobi. So fast has been the escalation of the prices that by the end of last year, prices of prime residential areas in Nairobi had been ranked the second fastest growing in Africa, second only to Cape Town and 14th globally by the Knight Frank Prime Global Cities Index that tracks the cost of luxury houses. The rapid increase of land prices is based on speculative buyers who trust that the prices of property will continue to go up even though incomes are relatively unchanged since the 70s given inflation. People are thus borrowing more and more to afford the property. This speculative purchase of assets at inflated values is oftern commonly referred to as an Asset Price Bubble. This project addresses three themes. First, the project sets out to define the term Asset Price Bubble (or ‘Bubble’ in short) by reviewing key historical instances of asset price bubbles including the Tulipmania, the Mississippi and South Sea Bubbles and the Dot-Com Bubble. The project also explores the factors that make up or lead to a bubble including behavioural human patterns and the corresponding negative changes in commercial and economic activity that follow the crash and aftermath of bubbles. Secondly, using the results of the analysis above regarding the makeup of the fundamental factors that make up a Bubble, this project then analyses whether the Kenyan property market is in a Bubble by collecting primary data via questionnaires to check on investor attitudes of the Kenyan population. Finally, this project examines one of the most debated aspects of the asset-price bubbles and that is what, if anything, should policy makers do about them?