The effect of interest rates on property prices in the Kenyan real estate market
Otwoma, Fredrick B K
MetadataShow full item record
The real estate market in Kenya has experienced rising property prices which have brought about an escalation in housing affordability problem with few Kenyans able to afford their own homes. This study seeks to establish the effect of interest rates on property prices in real estate market in Kenya. The effect of interest rates on property prices is analysed based on price movements from December 2000 to June 2013 on a monthly basis. Regression analysis is adopted to analyse the effect of interest rates during periods of high and low interest rates while Chow test is employed to test whether the impact of interest rates is the same both for the period used to estimate the model and for any subsequent periods. Findings from this study indicate that property prices displayed a high inverse relationship with interest rates in the period December 2000 to May 2003 and November 2011 to June 2013 when interest rates were high. This inverse relationship reverses in the period June 2003 to October 2011, a period when interest rates were relatively low and stable. The inconsistency observed can be attributable to buyers‟ expectations about the movement in interest rate. When interest rates are low, any increase in interest rates will result in an increase in demand as buyers rush to lock in low interest rates with the expectation that interest rate will rise further hence increasing property prices. On the other hand, during periods of high interest rates, demand for housing increases when interest rates fall as buyers take advantage of the reduced rates hence pushing up prices.