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Real Estate Prices in Kenya: Is There a Bubble?

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Real Estate Prices in Kenya: Is There a Bubble? Strathmore University SU+ @ Strathmore University Library Electronic Theses and Dissertations 2015 Real estate prices in Kenya: is there a bubble? Kibunyi Duncan Strathmore Business School Strathmore University Follow this and additional works at: https://su-plus.strathmore.edu/handle/11071/2474 Recommended Citation Kibunyi, D. (2015). Real estate prices in Kenya : is there a bubble? (Thesis). Strathmore University. Retrieved from http://su-plus.strathmore.edu/handle/11071/4721 This Thesis - Open Access is brought to you for free and open access by DSpace @Strathmore University. It has been accepted for inclusion in Electronic Theses and Dissertations by an authorized administrator of DSpace @Strathmore University. For more information, please contact [email protected] REAL ESTATE PRICES IN KENYA: IS THERE A BUBBLE? DUNCAN KIBUNYI MBA/2650/12 Submitted in partial fulfillment of the requirements for the Degree of Master in Business Administration at Strathmore University Strathmore Business School Strathmore University Nairobi, Kenya May, 2015 This thesis is available for Library use on the understanding that it is copyright material and that no quotation from the thesis may be published without proper acknowledgement. DECLARATION I declare that this work has not been previously submitted and approved for the award of a degree by this or any other University. To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made in the thesis itself. DUNCAN KIBUNYI May, 2015 Approval The Thesis of Duncan Kibunyi was reviewed and approved by the following: Dr. S. Wagura Ndiritu Lecturer Strathmore Business School Strathmore University Dr. George Njenga Dean, Strathmore Business School Prof. Ruth Kiraka Dean of Graduate Studies i ABSTRACT This study focuses on the determinants of the prices of residential houses in Nairobi City County, Kenya. It uses correlation analysis to determine relationships that exist between the prices and selected independent variables. Cointegration tests are used to further analyse the long term relationships between the prices and the independent variables with a view to concluding on the existence of a house price bubble. Granger causality tests are performed to triangulate the results as the causal relationships are examined. The study finds the housing prices to have strong positive relationships with GDP, diaspora remittances, lending rates, loans to real estate sector and cost of construction. A weak negative relationship exists between the house prices and inflation. Further, results of the cointegration tests indicate the existence of stable long run relationships between house prices and each of GDP and NSE Index while unstable long run relationships are reported for diaspora remittances and building costs. This means the study is indifferent about the existence of a house price bubble. Granger causality tests indicate there are no causal relationships between house prices and diaspora remittances. However, there are two way causalities between house prices and each of GDP, building costs and NSE Index. This negates the existence of a house price bubble. ii TABLE OF CONTENTS Declaration .......................................................................................................................................................... i ABSTRACT ....................................................................................................................................................... ii LIST OF TABLES ............................................................................................................................................ vi LIST OF ACCRONYMS ................................................................................................................................. vii Acknowledgements ......................................................................................................................................... viii DEDICATION .................................................................................................................................................. ix 1. INTRODUCTION................................................................................................................... 1 1.1 Background of the Study .................................................................................................... 1 1.2 Statement of the Problem ................................................................................................... 2 1.3 Research Objectives ............................................................................................................ 4 1.4 Research Questions ............................................................................................................. 4 1.5 Justification of the Study .................................................................................................... 4 1.6 Significance of the Study..................................................................................................... 5 1.7 Scope of the study ................................................................................................................ 6 1.8 Limitations of the Study ..................................................................................................... 7 2 LITERATURE REVIEW ...................................................................................................... 8 2.1 Real Estate definition and types ......................................................................................... 8 2.2 Theoretical Literature Review ........................................................................................... 9 2.2.1 Theoretical approaches ................................................................................................... 9 2.2.1.1 The Economic Theory of Demand and Supply.............................................................. 9 2.2.1.2 The Agency Theory ..................................................................................................... 10 2.2.2 Methods of detecting bubble ......................................................................................... 11 2.2.2.1 No Arbitrage Conditions for Fundamental Value ........................................................ 12 2.2.2.2 Models for Fundamental Value ................................................................................... 14 2.3 Empirical Literature Review............................................................................................ 14 2.3.1 Determinants of House Prices ......................................................................................... 14 2.3.2 House Bubbles ................................................................................................................. 16 2.3.3 Variables used.................................................................................................................. 17 2.4 The Conceptual Framework ............................................................................................ 18 2.4.1 Operationalization of the variables .................................................................................. 19 2.4.1.1 Gross Domestic Product (GDP) ................................................................................... 19 2.4.1.2 Inflation rate ................................................................................................................. 19 2.4.1.3 Lending interest rates ................................................................................................... 19 2.4.1.4 Diaspora Remittances .................................................................................................. 20 2.4.1.5 Real estate borrowings ................................................................................................. 20 2.4.1.6 Costs of construction.................................................................................................... 20 2.4.1.7 Nairobi Stock Exchange (NSE) Index ......................................................................... 21 2.4.1.8 House Price Index ........................................................................................................ 21 3 RESEARCH METHODOLOGY ........................................................................................ 23 iii 3.1 Research Design................................................................................................................. 23 3.2 Data and data Collection .................................................................................................. 23 3.3 Population and Sampling ................................................................................................. 24 3.4 Data Analysis Techniques and Presentation ................................................................... 24 4 RESEARCH FINDINGS ...................................................................................................... 26 4.1 The Data ............................................................................................................................. 26 4.2 Interactions between Housing Prices and Market Fundamentals ................................ 27 4.3 Granger Causalities........................................................................................................... 29 5 DISCUSSION .......................................................................................................................
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