Download 4th yr Project - Department of Real Estate and Construction

UNIVERSITY OF NAIROBI
AN INVESTIGATIVE STUDY ON THE FACTORS CAUSING PRICE CHANGES OF
RESIDENTIAL HOUSES IN NAIROBI OVER THE PERIOD 2008-2012
A CASE STUDY OF LAVINGTON
BY
MURUNGI ROYFORD KINYUA
B04/37058/2010
A RESEARCH PROJECT PRESENTED IN PART FULFILLMENT OF THE AWARD OF A
BACHELOR’S DEGREE IN REAL ESTATE AT THE UNIVERSITY OF NAIROBI,
DEPARTMENT OF REAL ESTATE AND CONSTRUCTION MANAGEMENT
MAY 2014
DECLARATION
Candidate’s Declaration:
I, MURUNGI ROYFORD KINYUA, do hereby declare that this project is my original work
and has not been presented in any other University for the award of a degree.
Signature……………....................................................... Date…………………………
Supervisor’s Declaration:
The project has been submitted for examination with my approval as the University
Supervisor.
Signature……………........................................................ Date………………………..
Dr. W. Ojiambo Oundo
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ACKNOWLEDGEMENTS
It is with great appreciation that I acknowledge the assistance and contribution of various parties
in the preparation of this report.
First, I would like to give special thanks to my supervisor, Dr. Ojiambo Oundo for guiding me
through the project. Your advice, support and patience gave me morale and determination to
complete my project.
Heartfelt thanks to all lecturers of the School of the Built Environment and Department of Real
Estate and Construction Management for their unlimited assistance they offered to me.
Sincere thanks to my fellow students for the much assistance they accorded me.
I also offer thanks to the Almighty God through whom all things have been made possible.
Finally, I would like to thank my family and friends who stood by my side throughout my
studies.
God bless you all.
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DEDICATION
To my dear parents, Mr. & Mrs. Murungi for the much support they have provided
throughout my studies.
To my siblings: Robert, Martin, Clinton and Eric for their greatest encouragement
throughout my life.
iv
APPENDICES
1. Introduction letter
2. Questionnaire to the estate agents, valuers and contractors
3. Research permit
v
LIST OF ABBREVIATIONS AND ACRONYMS
B.A……………….Bachelor of Arts Degree
K.P.L.C…………..Kenya Power & Lighting Company
M…………………Million
N.C.C …………....Nairobi City County
N.C.W.S.C…….....Nairobi City Water and Sewerage Company
N.H.C…………… National Housing Corporation
RLA……..……….Registered Land Act
ITPA…….………..Indian Transfer of Property Act
GDP……………….Gross Domestic Product
vi
TABLE OF CONTENTS
DECLARATION....................................................................................................................... ii
ACKNOWLEDGEMENTS ..................................................................................................... iii
DEDICATION ......................................................................................................................... iv
APPENDICES ........................................................................................................................... v
LIST OF ABBREVIATIONS AND ACRONYMS .................................................................. vi
List of Charts ............................................................................................................................. x
List of Figures............................................................................................................................ x
List of Tables ............................................................................................................................ xi
ABSTRACT ............................................................................................................................ xii
CHAPTER ONE ....................................................................................................................... 1
1.1
INTRODUCTION ............................................................................................... 1
1.2
Problem Statement ............................................................................................... 3
1.3
Research Questions .............................................................................................. 6
1.4
Objectives of the Study ........................................................................................ 6
1.5
Significance of the Study ..................................................................................... 6
1.6
Scope of the Study ............................................................................................... 7
CHAPTER TWO ...................................................................................................................... 8
LITERATURE REVIEW .................................................................................................... 8
2.1 Introduction ................................................................................................................... 8
2.2 The Concept of Real Estate............................................................................................ 8
2.2.1 Physical Identity .................................................................................................... 8
2.2.2 Legal Perspective................................................................................................... 9
2.2.3 Economic Identity ................................................................................................11
2.3.1 The Concept of Price ............................................................................................11
2.3.2 Importance of Pricing ...........................................................................................12
2.3.3 Objectives of Pricing ............................................................................................12
2.3.4 Pricing Strategy ....................................................................................................13
2.3.5 Factors Influencing Demand and Supply of Residential Houses ............................15
2.5 Factors Influencing Residential Property Prices…………...……………………………21
2.4.1 Direct Factors that Influence Residential Property Prices ......................................18
2.4.2. Indirect Factors that Influence Residential Property Prices ...................................21
2.5 Concept of Real Estate Boom and Burst .......................................................................21
2.5.1. Causes of Real Estate Bubble ...............................................................................22
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2.5.2. Preventing Real Estate Bubble ............................................................................ 23
2.6 Conceptual Framework ................................................................................................ 24
CHAPTER THREE................................................................................................................. 27
STUDY AREA AND RESEARCH METHODOLOGY..................................................... 27
3.1 Introduction ................................................................................................................. 27
3.2 Description of the Study Area ...................................................................................... 27
3.3 Research Methodology ................................................................................................ 29
3.3.1 Research Design .................................................................................................. 29
3.3.2 Target Population................................................................................................. 30
3.3.3 Sampling Design .................................................................................................. 30
3.3.4 Data Collection .................................................................................................... 33
3.3.5 Data Presentation ................................................................................................. 34
3.3.6 Ethical Issues of the Study ................................................................................... 34
CHAPTER FOUR ................................................................................................................... 35
DATA ANALYSIS AND PRESENTATION .................................................................... 35
4.1 Introduction ................................................................................................................. 35
4.2 Analysis of the Questionnaire Responses ..................................................................... 35
4.3 Analysis of the Responses ............................................................................................ 36
4.3.1 Analysis on the Extent Prices of Residential Houses have Changed Between the Years
2008 to 2012 ................................................................................................................ 36
4.3.2 Analysis on Whether the Current Property Prices Reflect Market Value ............... 37
4.3.3 Analysis on the extent supply has affected Prices of Residential Houses ............... 38
4.3.4 Analysis on the Trend of Demand of Residential Houses over the Last Four Years39
4.3.5 Analysis on the extent Demand has affected Prices of Residential Houses ............ 40
4.3.6 Analysis on Whether Cost of Acquiring Land Had Positively Influenced Prices of
Residential Houses ....................................................................................................... 41
4.3.7 Analysis on Whether Construction Cost Influence Prices of Residential Houses ... 42
4.3.8 Analysis on the extent Construction Cost has Influenced Prices of Residential Houses
..................................................................................................................................... 43
4.3.9 Analysis on whether Geographical Location of the study area Influenced Prices of
Residential Houses ....................................................................................................... 44
4.2.10. Analysis on Subsidies offered By national and County Government to private
Developers ................................................................................................................... 45
4.3.11 Analysis on the Extent subsidies have reduced property prices ........................... 46
4.3.12 Analysis on if Interest Charged on Mortgages has Effect on Property Prices ....... 47
4.3.13 Analysis on extent interest rate charged on mortgages affected property prices ... 48
4.3.14 Analysis on effect of Escalating Prices to Marketability of Residential houses .... 49
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4.3.15 Analysis on the effect of Development of Residential Property on Land Values ..50
4.3.16 Analysis on effecs Increased Property Prices had Lend To Speculative Buying ...52
4.3.17 Analysis on the effect of Speculative Buying to Property Prices ..........................52
4.3.18 Analysis on the effect of Improved Economic Performance on the Demand for Housing
.....................................................................................................................................54
CHAPTER FIVE..................................................................................................................... 56
CONCLUSIONS AND RECOMMENDATIONS...............................................................56
5.0.
Introduction ........................................................................................................56
5.1.
Conclusion..........................................................................................................56
5.2.
Recommendations ...............................................................................................58
5.3.
Limitations of the study ......................................................................................60
5.4.
Areas of Further Research ...................................................................................61
BIBLIOGRAPHY ................................................................................................................... 62
APPENDICES ......................................................................................................................... 67
APPENDIX I ........................................................................................................................... 67
APPENDIX II.......................................................................................................................... 68
APPENDIX III ........................................................................................................................ 72
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LIST OF CHARTS, FIGURES AND TABLES
List of Charts
Chart 4.1 Respondent’s profession ......................................................................... 36
Chart 4.2: Extent of Price Change of Residential Houses........................................ 37
Chart 4.3: Effect of Supply to Prices of Residential Houses .................................... 39
Chart 4.4: Trend of Demand of Residential Houses over the Last Four Years ......... 40
Chart 4.5: Extent Demand has Affected Prices of Residential Houses .................... 41
Chart 4.6: Construction Cost Influence Prices of Residential Houses ..................... 42
Chart 4.7: Extent Construction Cost Influence Prices of Residential Houses ........... 44
Chart 4.8: Analysis on Geographical Location to Prices of Residential Houses ...... 45
Chart 4.9: Extent subsidies have reduced property prices ....................................... 47
Chart 4.10: Interest Charged on Mortgages has Effect on Property Prices ............... 48
Chart 4.11: Extent interest rate charged on mortgages has affected property prices . 49
Chart 4.12: Effect of Escalating Prices to Marketability of Residential Property ..... 50
Chart 4.13: Effect of Development of Residential Property on Land Values ........... 51
Chart 4.14: Increased Property Prices Has Lend To Speculative Buying ................ 52
Chart 4.15: Effect of Speculative Buying To Property Prices .................................. 53
Chart 4.16: GDP Growth Trend for the Year 2009-2013 ........................................ 54
Chart 4.17: Effects of Improved Economic Performance on Prices of Houses ........ 55
List of Figures
Figure 2.1: demand and supply curve for real estate industry .................................. 12
Figure 2.2: Direct Factors That Influence Residential Property Prices .................... 20
Figure 2.3: Indirect factors that influence Residential Property prices ..................... 21
Figure 2.4: Conceptual Framework Developed for the Study .................................. 25
Figure 3.1: Satellite image showing the position of Lavington in Nairobi County ... 28
Figure 3.2: Google map showing aerial view of showing Lavington ....................... 28
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List of Tables
Table 4.1: Rate of Response from the Questioners Admitted .................................. 35
Table 4.2: Does the Current Property Prices Reflect Market Value ......................... 37
Table 4.3: Extent supply has Affected Prices of Residential Houses ....................... 38
Table 4.4: Extent Demand has Affected Prices of Residential Houses..................... 40
Table 4.5: Does Cost for Buying Land Positively Influenced Prices of Residential Houses
............................................................................................................................... 41
Table 4.6: Construction Cost Influence Prices of Residential Houses ...................... 43
Table 4.7: Views on National and County Government Offering Subsidies to Private
Developers ............................................................................................................. 45
Table 4.8: Extent subsidies have reduced property prices ....................................... 46
Table 4.9: Extent Interest Rate Charged On Mortgages Affect Property Prices ....... 49
Table 4.10: Effect of Development of Residential Property on Land Values ........... 51
Table 4.11: Effect of Speculative Buying To Property Prices .................................. 53
xi
ABSTRACT
Real estate industry has been recognized globally for taking a vital role in economic, political
and social development. The residential housing sector is very important in any country
because it provide shelter which is one of the basic needs. The overall demand for housing in
Kenya according to UN Habitat survey and Kenya Vision 2030 is 150,000 housing units per
year as compared to 35,000 housing units that are delivered in the market annually. The
supply shortage has left private developers focusing on highest return on the housing market.
The study’s main goal was to determine the factors causing the price changes of residential
houses in Nairobi County over the period 2008-2012. The study population included valuers,
property managers, real estate agents and real estate contractors practicing in Nairobi County.
The sample was selected by stratified random and purposively sampling.
The main findings of the study are that the price changes of residential houses in Nairobi
County have been caused by the ever increased demand of residential houses. It has also been
noted that easy of access to and availability of mortgages has contributed to increased prices
of residential houses in Nairobi County over the last four years. Additionally, improved
performance of the Kenya economy has also contributed to increased prices of residential
houses because of increased pay to public servants. The study identified the ever increasing
price of land and construction cost to have also contributed highly in price changes of
residential houses in the study area. Lastly, the study found that increased prices of residential
houses had contributed to reduction in marketability of the houses.
The study recommends government intervention through the enactment of policies, rules and
regulations to guide on pricing of residential houses so as to maintain affordability to all.
The national government and county government should offer subsidies to the construction
sector by providing finance at subsidized interest to property developers or offer tax waivers
to the buyers.
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CHA1PTER ONE
1.1 INTRODUCTION
According to Mwaura (2006) Kenya has been urbanizing at 7 to 8 percent annually.
According to GOK (2007) the proportion of the Kenyans living in urban areas is
estimated to reach 60 per cent by the year 2030. Over the period 1979-1999 Nairobi City
experienced high population growth rates that ranged between 4.8 and 5.0 percent
(Mwaura, 2006). From the latest national population census (2009), Nairobi population
stands at 3,138,369 people with a growth rate of 4.1 per cent annually. The City of
Nairobi, like other cities in the developing world, is experiencing high growth rate. The
main challenges felt every day are unplanned and inadequate infrastructure,
uncoordinated urban growth, and worsening of the urban environment, increasing poverty
and inadequate housing. The problem of high prices on real estate sector has also been
one of the main problems Kenya has been facing. This problem has highly contributed to
development of several slums such as Kibera and Mathare slums among others (Mutisya
et.al, 2011).
Real estate can be defined as land, as well as the air above it and the ground underneath it
including any kind of structures that are erected on it (Syagga, 1994). Murangi (2013)
indicates that prices of real estate can be affected by factors such as property location,
neighborhood, the level of accessibility and distance or proximity to facilities. Real estate
prices can also be determined by the level of technology available, level of demand and
supply, the existing economy of a country, employment level and accessibility of finance
by both investors and buyers (Chiller, 2005).
Residential properties constitute the largest land use in the urban areas. These properties
can be termed as property containing either a single family or a multifamily structure,
available for occupation for dwelling purposes but not for business purposes (Oloke et.al,
2010). The Rent Restriction Act Cap 296 Section 3(d) defines dwelling houses as any
house or part of a house or room used as a dwelling or place of residence and includes the
site of the house and the garden and other lands and buildings let therewith and not as a
separate entity or source of profit. Korir (2009) categorizes residential houses to include
1
flats, maisonnetes, bungalows and town houses. In Kenya, residential houses are provided
by the government, private public partnerships or by the private sector (Mungai, 2011).
The residential real estate sector contributes highly to employment, to the development of
capital markets and development of financial sector. Most importantly, it increases the
well-being of households by providing shelter and helping establish personal wealth that
can be used in creation of more wealth (Taylor, 2004). Mbugua (2006) argues that the
development of the housing sector relies on the following measures:
1) Defined property rights and the ability to transfer title or ownership of real estate.
2) There should be a legal system that supports the enforcement of contracts as well
as uphold the ability of lenders to foreclose on defaulted mortgages and efficiently
confiscate and resell properties which were used as collateral.
3) There should be stable macroeconomic environment that is favorable to long term
real estate development and also mortgage market.
Syagga (1994) identified two principal factors that affect the prices of residential
property. These factors are accommodation facilities and location. A willing buyer will
always consider the available space or accommodation offered, the neighborhood of the
property, distance to his or her working place and proximity to schools.
Miller (2010) argues that increased property prices reduce the marketability of real estate
because few peoples will be willing and able to acquire property. A change in real estate
price is also said to have a direct effect on wealth of households because it contributes to
increased or reduction in returns on property investment to the investors. Increased prices
of residential buildings have contributed to development of new slums and expansion of
the existing slums (Mutisya et.al, 2011). Chiller (2005) holds the view that an increase in
existing prices of real estate leads to increase in money spent on rents and purchases
hence reducing savings by households.
The increasing population and rural to urban migration in Kenya can be termed as the
major cause of rise in prices of the residential houses in most urban areas. The Kenyan
population is anticipated to increase to about 73 million people by the year 2030 and
more than 60% of these peoples are expected to be living in urban areas hence creating a
huge demand for residential housing units (GOK, 2007). The quantity of residential
2
houses needed has risen from 150,000 units every year to 200,000 units per year, with
only 35,000 units produced, of which only 20 per cent is targeted at the low-income
group (GOK, 2007). Kenya’s construction sector recorded a growth of 8.3 percent in
2008 compared to 6.9 percent in 2007 (GOK, 2009). This increasing investment in the
residential houses is expected to solve the escalating prices of the residential houses as it
will increase the supply in the economy hence reducing the prices.
Over the last few years, a large number of Kenyans have been in a rush to own property
which has contributed highly to a major boom in the residential property market (Korir,
2009). Majtenyi (2010) argues that increase in demand for residential property in Kenya
has resulted to doubling and even to an extent of tripling of residential property prices in
the past few years.
1.2 Problem Statement
In recent years, the population and the rate of rural to urban migration have been on an
upward trend and this has highly increased the population of Nairobi city. It should be
noted that all these people need shelter as one of the basic commodities, thus causing the
housing sector to boom and contribute to growth of the economy (Nuri & Frank, 2002).
Despite the fact that real estate business in Kenya has been performing well for the last
few years, it has faced challenges such as social, economic, cultural, legal and personal
factors. According to an article on Standard Newspaper (May 15th 2013), there has been a
high speculative property market and elevated demand for housing in Nairobi. This has
largely contributed to the escalating price of residential property over the last 12 years
especially on the rentals and on the market value.
Otieno (2012) explains that despite the high competition in the market, the large economy
supports real estate investment. When the yields of residential properties are low, their
prices are high. This means that the cost of buying a house is high compared to the cost of
renting a house which force many potential buyers to prefer to be renters instead of being
buyers thus reducing sale prices of residential property.
From the common forms of advertisement in Kenya, (print media and the electronic
media), it is evident that prices of residential properties in Nairobi have been increasing
beyond the economic parameters that regulate the prices (the demand and supply
3
relationship). This is because many residents of Nairobi are rushing to own residential
houses which have resulted to increased demand. This has raised property prices
tremendously causing the real estate market to enjoy major booms over the last few years.
The property agents in the real estate sector have termed this as the coming of age for
Kenya’s property market.
Okeyo (2013) explains that the demand for residential property in Nairobi has grown over
the last years. The high demand has pushed up rent in most estates. Okeyo (2013)
continues to explain that two years ago, a tenant used to pay about Kshs. 3,000.00 a
month for a single self-contained house in high-end neighborhoods such as Westlands,
Kileleshwa and Kilimani but as of January 2013 the rent had doubled. Rent for a onebedroom house in these areas costs up to Kshs. 14,000.00 while those renting a threebedroom house in a gated community pay more than Kshs. 22,000.00. Land, on the other
hand, is no longer available closer to town. A 50ft by 100ft plot in an estate like Pipeline
is sold between Kshs. 600,000.00 and Kshs. 800,000.00 compared to Kshs. 300,000.00
early last year (Okeyo, 2013).
Kariuki (2012) explains that since the year 2002 Kenyan real estate sector has been
experiencing a boom, hence confusing many buyers in the region. While other property
markets in the world sank, the Kenyan situation remained strong. The latest findings by
the research groups such as Knight Frank and Citi Private Wealth seem to anticipate
better times ahead. Kenya’s high economic growth and a dynamic business regime are
some of the reasons being given for this drive (Julie, 2012). As the other top world cities
are experiencing low prices on residential property, Kenya seems to be faced by very high
prices on residential property thus attracting a lot of international investors (Kariuki,
2012).
Mwongela (2010) believes the rise in real estate sector is an indication that Nairobi’s
property market has finally matured. Mwongela (2010) gave an example of a three
bedroom flat in Kilimani or Hurlingham which was sold at a price of Kshs. 3.5m to Kshs.
4.0m four years ago. In the year 2010, the same property sold at between Kshs. 7.0m to
Kshs. 8.5m, while an acre of serviced land in Hurlingham area rose from Kshs. 18.0m to
Kshs. 40.0m over the last four years. In Nairobi’s South B and South C areas, houses that
were selling for Kshs. 4.0m in 2004 are now selling at Kshs. 7.5m. An acre of land in the
4
city centre is currently priced at Kshs. 280.0m to Kshs. 300.0m. Four or five years ago,
the same parcel of land cost only Kshs. 160.0m.
Knight Frank Residential Index 1st quarter (2012) indicates that the major residential
property prices in Kenya's capital remained unaffected between December 2011 and
March 2012. The high-end segment, however, recorded double-digit growth in the six
months to March at 11.6 per cent. The global report states that the price of prime property
in the world's major cities fell by 0.4 per cent in the first quarter of 2012, the first
quarterly fall of the index since the depths of the global recession. But this was not the
case in Nairobi as the Nairobi prime residential market topped global cities with doubledigit growth over a 12-month period alongside Jakarta, Miami and London. The report
also ranked Kenya’s luxury homes market in Nairobi and the Coast region as the best
performing prime residential property markets in the world in 2011. This was supported
by The Wealth Report (2012).
Hass Property Index 2 nd quarter (2013) indicates that the average price of a stand-alone
house in Nairobi currently stands at about Kshs. 32.6 million, up from the existing Kshs.
8.8 million in December 2000. The standard price of a townhouse, on the other hand, is
Kshs. 19.1 million up from Kshs.6.5 million in December 2000. In the year 2001, an
apartment unit was going for about Kshs. 5.3 million. That figure has risen to about Kshs.
11.7 million in 2013.
All the above studies have been touching on the escalating prices of the residential
houses in Nairobi. Indeed, it is astonishing to find that the major actors in the real estate
sector have been ignoring this issue of escalating prices of residential property, which has
been contributing highly in emergence of slums and poor living conditions of Nairobi
residents (Mwaura, 2006). This study, therefore, focuses on the factors contributing or
leading to changes in price of the residential property in Nairobi, using a case study of
Lavington residential estate.
5
1.3 Research Questions
1. To what extent have prices of the residential properties in Lavington estate in
Nairobi changed between the years 2008 to 2012?
2. What factors have caused changes in price of residential property in Lavington
estate in Nairobi between the years 2008 to 2012?
3. What are the effects of high prices of residential houses to their marketability?
1.4 Objectives of the Study
1. To examine the changes of prices of residential properties in Lavington estate in
Nairobi between the years 2008 to 2012.
2. To investigate the factors causing changes of prices of residential property in
Lavington estate in Nairobi between the years 2008 to 2012.
3. To assess the effects of the high prices to the marketability of residential property.
1.5 Significance of the Study
The findings of the study will make the following contributions:
1) Provide relevant information and knowledge that will help the real estate industry
in identifying factors that are contributing to high price on residential property in
Nairobi.
2) Provide an understanding of the relationship between high prices of residential
houses in Nairobi and their demand.
3) Provide the investors with information on whether there might be a bubble burst
soon for the booming real estate business.
4) This study will reveal the effects of high prices on residential houses to both the
investors in the real estate industry and the government.
5) The study will offer potential investors room to analyze benefits that can be
derived from investing in Real Estate industry.
6
1.6 Scope of the Study
The study mainly focused on causes, effects and solutions of the escalating prices of the
residential houses in Lavington. The study will target all registered real estate agency
firms in Nairobi County. Mungai (2011) states that there are more than 50 registered real
estate agents companies operating in Nairobi.
The study will mainly focus on the escalating prices of residential houses in Nairobi,
where Lavington residential estate was chose as the case study. Lavington residential
estate was chosen for reasons that rent and prices of most of the residential properties in
the Lavington area have been in an increasing trend for the last few years. The study
targeted more than 50 registered real estate agency firms operating in Nairobi because
they are involved in the sale of property hence they had the required information on
prices. The researcher also targeted all the registered real estate developers in Nairobi
because they had information on the prices they sell or lease properties at. The researcher
also targeted the owners of residential property as they are the buyers of the property
produced by developers, hence they have the information require.
7
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter looks at the various forms of real estate. In particular, it emphasizes on
residential property in the economic aspect of real estate market in general. It also
explains the role played by the agents in the residential properties and the concept of
pricing and marketing. It further looks at the major causes of increase in property prices
and its effects on the economy of a country.
2.2 The Concept of Real Estate
Real estate (or immovable property) is often considered synonymous with real property. It
encompasses soil and everything below it to the centre of gravity and everything above it
to the sky and anything that is permanently fixed to soil (Syagga, 1994). Anything that is
not real property is said to be personal property and it is anything that is not nailed down,
dug into or built onto the land.
Real estate is said to consist of the following main characteristics that distinguish it from
other forms of assets and also affects its value. These characteristics include:
2.2.1 Physical Identity
The physical characteristics of land represent its indestructible nature, immobility and
non-homogeneity (McGiveron, 2007).
Indestructible nature of land: The indestructibility of land simply means that it is
durable and cannot be destroyed. It can be damaged by storms and other disasters,
but it remains and weathers the changing times and will always be there. This is a
main reason why land is talked about as being a sound investment.
Immobility of land: Land cannot be moved and it is, therefore, immobile. Even
when soil is torn from the ground, the part of the Earth's surface will always
remain. Immobility of land is the main reason why real estate laws and markets
are local in nature.
8
Non-homogeneity: This characteristic shows that no two parcels of land are the
same. Two pieces of land may be very similar, but every single parcel is different
geographically because of the difference in location. It is important to remember
that parcels are created by subdividing large pieces of land, with each individual
lot becomes its own separate piece of land.
2.2.2 Legal Perspective
Real estate is characterized by certain rights that are enforceable by law. These rights are
the ones that identify the extent of freedom to use a certain property. Interests in land are
generally created for a defined period of time. These interests are the ones that people
enjoy in ownership of real property. According to The Land Act No.6 of 2012, there are
two main types of interests:
Freehold- Freehold means the unlimited right to use and dispose of land in
perpetuity subject to the rights of others and regulatory powers of the national
government, county government and other relevant state organs (GOK, 2012).
This is the greatest interest in land any person can have.
Leasehold- Leasehold means the grant, with or without consideration, by the
owner of land of the right to the exclusive control of his or her land, and includes
the right so granted and the instrument granting it, and also includes a sublease but
does not include an agreement for lease (GOK, 2012).
Meggary (2001) stated that property rights can be broadly categorized as follows:
A. Estates
This type of property rights express the time over which rights in land can be held
(Powell, 1992). In common law, an estate is the totality of the legal obligations, right,
entitlements and interest. The type of estate held by a land owner is generally determined
by the language of grant by which the land owner acquired land. This concept of estate is
the most important concept in regard to land or property rights (Gray, 1993).
9
B. Servitudes
Section 3 of Registered Land Act (RLA) defines easements as a right attached to a parcel
of land which allows the proprietor either to use the land of another in a particular extent
but does not include profit. They arise when law confers power someone else’s estate for
benefit of another holder of property.
The common types of servitudes include:
 License- according to section 3 of RLA, license means a permission given by the
owner of land or a lease which allows the licensee to do some act in relation to the
land or the land comprised in the lease which would otherwise be a trespass, but
does not include an easement or a profit.
 Easements- means a non-possessory interest in another’s land that allows the
holder to use the land to a particular extent, to require the proprietor to undertake
an act relating to the land, or to restrict the proprietor’s use to a particular extent,
and shall not include a profit (Land Act No. 6 of 2012).
 Restrictive covenants- These are often referred to as negative easements to the
extent that they control the activities of the registered proprietor as to what he can
possibly do within his land.
C. Encumbrances
These are alieno solo rights enjoyed in the land of another person other than the one
entitled to enjoy such rights. These are burdens upon the property for the benefit of the
owner of the property.
The common types of encumbrances are:
a) Charges- Section 2 of Land Registration Act No.3 defines charges as an interest
in land or a lease securing the payment of money or money’s worth or the
fulfillment of any condition and includes a sub charged and the instrument
creating a charge.
b) Mortgage- Section 58 of Indian Transfer of Property Act of 1882 (ITPA) defines
mortgage as a transfer of security in immovable property for the purpose of
10
securing payment of money advanced by way of a loan in existing of a future date
or the performance of an engagement which may give rise to a pecuniary liability.
2.2.3 Economic Identity
The economic characteristics that influence land values are scarcity, improvements,
permanence and area preference (Mc Giveron, 2007).
Scarcity: Scarcity is simply demonstrated by the fact that the supply of land is
limited and cannot be produced more than what exists today. Scarcity of land can
be termed as one major characteristic that affect the supply of land hence affecting
its value.
Permanence: Permanence deals with the level of infrastructure in an area.
Structures attached to land such as buildings, houses or other structures can be
demolished, but infrastructure, such as sewers, drainage, electricity, and water
remain intact. In-case one buys a piece of land in an area with no utilities,
drainage or tarmac roads, it will most likely be worth less than a parcel of land
that has this infrastructure intact and developed.
2.3 Pricing of Real Estate Products
2.3.1 The Concept of Price
Price is one of the four major dilemma elements of the marketing (Banks et.al, 2010).
Pricing is important because it does not only have a direct effect to demand of other
products and services, but also to real estate industry. In addition, pricing affects the
marketing for other elements such as product features, channel decisions and promotion.
Price for real property is fixed at the level where the demand for houses today is equal to
the stock available today (Nickell, 2008). Figure 2.1 below is a demand curve (D) and
supply curve (S) showing equilibrium price and quantity demanded in real estate industry.
11
Figure 2.1: Demand and Supply Curve for Real Estate Industry
Price
S
Pe
D
Qe
Quantity
Source: Karl (2008)
2.3.2 Importance of Pricing
Oakes (2013) identifies three main importance of pricing:
Pricing can be used by customers in decision making on quantity and quality of
product or service to purchase. This is because different quantities of a commodity
are sold at different prices. This also applies in different quality of products.
It is used by the sellers to establish how much their target market is willing to pay
for the products or services being offered.
It shows the sellers how sensitive customers are to changes in price of products
and services being offered.
2.3.3 Objectives of Pricing
According to Venkatesh et al. (2009) the following pricing objectives must be identified
in order to determine the optimal pricing. Common objectives include the following:
The first objective of pricing is maximization of profit. Pricing of products seeks to
maximize current profit by taking into account revenue and costs incurred (Starkey,
2006). Current profit maximization may not be the best objective if it results in lower
12
long-term profits. Secondly, pricing aims at revenue maximization. It seeks to maximize
current revenue with no regard to profit margins. The primary objective is to maximize
long-term profits by lowering costs and increasing market share.
The other objective of pricing is to maximize quantity. Pricing seeks to maximize the
number of customers served or number of units sold in order to decrease long-term costs
as predicted by the experience curve. The forth objective of pricing is maximization of
profit margin. Product pricing attempts to maximize the profit margin of each unit,
recognizing that quantities sold may be low (Giertz et al., 2013).
Quality leadership is the other objective of pricing. Producers use price to indicate high
quality in an attempt to position the product as the quality leader (Dorothy et al., 2007).
The higher the quality of a product the higher the price producers attach to the product.
The sixth objective of product pricing is for survival purpose. In situations such as market
decline and overcapacity, the main goal may be to select a price that will permit the firm
to remain in the market and cover costs. In this case, survival may take a priority over
profits, thus this objective is considered temporary.
2.3.4 Pricing Strategy
After selecting a pricing objective the next step is determination of pricing strategy. This
will assist when time to actually price the products comes. As with the pricing objectives,
various pricing methods are available from which to choose. Oakes (2013) identifies
pricing strategies to include:
Competitive pricing strategy involves pricing of products based on the prices of
competitors in case they produce same or similar products. This pricing strategy can be
useful when it is difficult to differentiate products from other products (Holden, 2010).
This approach of competitive pricing can be used when the pricing objective is either
survival or status quo.
Good, better, best pricing is a pricing strategy that charges more for products that have
received more attention (for example, in packaging or sorting). The same product is
13
offered in different forms, with the price for each level rising above that of the previous
level.
Optional product pricing is used to attempt to get customers to spend a little extra on
the product by purchasing options or extra features. The purchase of each of these options
adds value to the service that the producer is receiving (Smith, 2011). With this strategy,
it is important that the extra fee for the option(s) is reasonable.
Loss leader pricing model refers to products having low prices placed on them in an
attempt to lure customers to the business and to make further purchases. The goal of using
a loss leader pricing strategy is to attract customers to ones business with a low price on
one product with the expectation that the customer will purchase other products with
larger profit margins (Mills, 2002).
Product line pricing is form of pricing strategy used when a range of products or
services complement each other and can be packaged together to reflect increasing value.
This pricing strategy is similar to the multiple pricing strategies.
Multiple pricing strategy seeks to get customers to purchase a product in greater
quantities by offering a small discount on a larger quantity. In the display of prices, a
price for the purchase of just one item is displayed along with the price for a larger
quantity. This is the price one would typically charge if he or she is not employing a
multiple pricing strategy.
Product bundle pricing is a pricing strategy used to group a number of items together
for sale. Holden (2010) termed it as an important pricing strategy for complementary,
overstock or older products. Customers buy the product they really want, but for a little
extra they also receive one or more additional items. The main importance of this pricing
approach is the ability to clear overstocked items. On the other hand, those customers
who don not need extra items may settle on not purchasing the bundle. This approach is
comparable to product line pricing, except that the items being grouped together do not
need to be complementary.
14
Penetration pricing is used to gain entry into a new market. The objective for employing
penetration pricing is to attract and grow market share. Once desired levels for these
objectives are reached, product prices are typically increased. Penetration prices will not
garner the profit that you may want. Consequently, this pricing strategy must be used
strategically.
Premium pricing is a pricing strategy employed when the product you are selling is
unique and of very high quality, but you only expect to sell a small amount. These
attributes demand a high, or premium, price be attached to the product. Buyers of these
products normally view them as luxuries and have little or no price sensitivity (Morris,
1990). The benefit of this pricing approach is that one can price his or her products high
to recoup a large profit to make up for low quantity of items being sold (Mills, 2002).
Skim pricing is the last form of pricing strategy. This pricing approach is similar to
premium pricing. It calls for a high price to be placed on the products one is selling
(Baker, 2010). However, with this approach the price of the products will be lower as
competitors enter the market. This approach is mostly used on new products and those
with few or direct competitors when entering the market for the first time.
2.3.5 Factors Influencing Demand and Supply of Residential Houses
A. Factors Influencing Demand of Residential Houses
Demand for goods or services is the amount of goods and services that a market would
choose to buy, for every market price of goods or services (Steven et al., 2003). Demand
for residential houses is the willingness and ability of buyers to pay a price to acquire
residential houses. The level of demand for residential houses in Kenya is highly driven
by a growing population and high urbanization rate (Kanyiri, 2013). Growing world’s
economy has increased the demand for larger and better quality housing (Baker, 2013).
Mankiw et al. (1998) suggest the following factors influence demand of residential
houses:
15
(i) Growth of Economy
Demand for residential housing is dependent on the income level (Pettinger, 2013). With
higher economic growth and increasing income level, people are able to spend more on
housing which leads to increased demand and increased prices of buildings. Similarly, in
a collapse of the economy, falling incomes means that consumers cannot afford to buy
houses and consumers who lose their jobs may be unable to payback mortgages and end
up with their house being repossessed (Iman, 2006).
(ii) Unemployment
Unemployment is related to economic growth. When the unemployment rate is high,
fewer people are able to afford descent houses which reduce demand level of such
residential houses (Guerra, 2007).
(iii) Interest rates
Interest rates charged on mortgage affect the mortgages monthly payments (Follain,
2013). Periods of high interest rates attracts high cost of mortgage payments and leads to
lower demand for buying residential houses. On the other hand, high interest rates make
renting more attractive to buying thus contributing to a decrease in demand for houses for
purchase.
(iv) Confidence of consumers
Consumer confidence is very important in determining whether consumers will take the
risk of taking getting a mortgage from banks (Baker, 2013). This means that the higher
the level of confidence of consumers, the higher the availability of money to consumers
hence increased demand.
(v) Mortgage availability
The ease of acquiring a mortgage means higher demand for housing because more people
are able to buy. Most banks have tightened their mortgage lending requiring by ensuring
that only peoples with bigger deposit can acquire mortgages (Duenwald, 2013). This has
reduced the availability of mortgages which has contributed to lower demand for houses.
16
(vi) Laws and Regulations
The local and regional laws influence the demand for both buying and investing in
property (Grayson, 2012). Favorable laws will increase the demand level of residential
houses while unfavorable laws and regulations will lead to reduced demand on residential
houses.
B. Factors Influencing Supply of Residential Houses
Supply of residential houses is the amount of residential houses that producers are willing
to sell at a given price if all other factors are kept constant (Mankiw et al., 1998).
Economic theorists believe that when there is increased supply of a given commodity,
such as housing, prices of that commodity will decrease (Iman, 2002). On the other hand,
if supply of commodity like housing is restricted, prices for housing will increase. Steven
et al. (2003) identifies several factors that influence demand of residential houses.
One of the factors that affect supply of residential houses is the existing government
policies. The government is a huge force that affects supply of residential houses in
Kenya. It enforces taxes on real estate based on the incomes which sometimes irritate the
interested and the existing investors (Colander et al., 2008). The government, being a
regulatory body, has laws that real estate businesses must adhere to such as planning
regulations, permits for land use, titles deeds for land ownership and rules that businesses
adhere to such as registration of the business. Goodwin et al. (2009) concludes that
favorable government policies will increase supply of housing.
Availability of finance is another factor that influences supply of residential houses. The
ease of acquiring a mortgage by property developers means higher supply for housing
because developers have adequate capital to build houses. Dawkins (2011) notes that
most banks have tightened their mortgage lending requiring by ensuring that only peoples
with bigger deposit can acquire mortgages. This has reduced the availability of mortgages
which has contributed to lower level of investment in the real estate industry.
The third factor that influences supply of residential houses is the existing property prices.
The total number of properties supplied in the market affects the prices and this can either
17
discourage or motivate property investors (Nance, 2003). According to the theory of
demand and supply, prices increase as the number of properties reduces (Guerra, 2007).
Increased prices lead to increase in supply of housing as many investors will be willing to
invest in the sector due to increased returns.
Finally, official standards on building materials services and infrastructure also affect the
supply level of residential houses. The set standards on building materials by the local
and the national government have a direct effect on supply of houses (Starkey, 2006). Set
building standards may specify some construction materials which are expensive thus
increasing construction cost. Incase investors lack enough capital to finance the project it
leads to decreased supply of housing.
2.4 Factors Influencing Residential Property Prices
Marija et al., (2011) identifies the factors that influence residential property prices to
include the following:
(i) Direct factors
(ii) Indirect factors
2.4.1 Direct Factors that Influence Residential Property Prices
Robert et al. (2012) conceptualizes security as the level of resistance to, or protection from
harm. It applies to any vulnerable and valuable asset, such as a person, dwelling,
community, nation or organization. The average number of crimes in an area gives details
on how safe a place is (Pettinger, 2013). A place where signs of vandalism and suspicious
locations are noticed within the neighbourhood is considered to be unsafe (Marija et al.,
2011). Every person prefers residing in safe places hence shying away from residing in
unsafe residential areas (Kamau, 2011). This reduces the demand for residential houses in
such areas thus affecting the residential values negatively. On other hard, there will be
higher demand on the residential houses which are located in safe areas.
Physical characteristics of a property are another factor that affects its price. Physical
characteristics refer to appearance and quality of an estate in respect to its design,
structure itself and layout (Mavrodiy, 2005). Real estate developments are characterised
by long physical life which calls for better structure, layout and design due to changing
18
technology in the real estate sector (Iman, 2006). Properties of better design, good layout
and structure will affect higher demand as people will be willing to purchase them hence
increasing competition to such properties. This leads to high prices on such properties and
vice versa to the poorly laid and designed structure.
The third factor that affects prices of residential properties is convenience and
accessibility of the property. The level of conveniency and accessibility of a place or
particular land is determined by how far the property is located from the place of work,
shopping centres or any other place that one needs to visit regularly (Lahoz, 2007). The
main determinant of how convenient and accessible a place are traffic, road network and
road conditions (Mankiw et al., 1998). Most people prefer to reside in highly convenient
and accessible areas, the demand of the residential houses in these areas increases. The
increased level of demand of residential houses then contributes to increase in prices of
residential houses. Poorly accessible and inconvenient areas attract few peoples and
therefore, low demand on residential property thus low prices.
Proximity to facilities and amenities is fourth factor that influence residential property
prices. Properties that are situated near facilities such as hospitals, gym, supermarket,
education centres and other fundamental facilities attract higher demand to the residents
because most people like residing at places where it is convenient access these facilities
(Duenwald, 2000). This high demand contributes to competition on the subject property
thus leading to a higher price. These amenities help meet people’s basic needs (Nance,
2003). For instance, if one has kids who he or she intends to enrol to a school which is
close to home, he or she would acquire a property with a school within a convenient
distance. This makes such properties more expensive due to high level of competition.
Neighbourhood of a property also has a direct affect on the price of a residential property.
Hilbers et al. (2001) explains that people living around an area will affect comfort level a
person can derive when residing in that area. Friendly neighbours are a sign of a healthy
and friendly community and this increases demand for property while unfriendly
neighbours are a sign of unfriendly community thus decreases the demand of residential
property in those areas (Seth, 2012). Places of friendly neighbourhood will attract more
competition which in turn leads to increased prices of residential property.
19
The last factor that directly influences prices of residential houses is the location of the
property. Properties physical location refers to the geographical area where the subject
property is situated (Pagliara et al., 2010). This affects the prices of residential houses
because different areas will attract different prices (Mavrodiy, 2005). Properties located at
places such as towns will attract higher prices while similar properties located in rural
areas will attract lower prices.
Figure 2.2 below shows conceptual framework of direct factors that influence prices of
residential properties.
Figure 2.2: Direct Factors that Influence Residential Property Prices
Proximity to Facilities
Physical Characteristics
and Amenities
Neighbourhood
Residential
Property Prices
Convenience and
Accessibility
Security
Property Location
Source: Marija et al. (2011)
20
2.4.2 Indirect Factors that Influence Residential Property Prices
Prices of residential houses can be influenced by several in direct factors. Lahoz (2007)
termed indirect factors that influence residential property prices to include growth of
investment fund, availability of new technology, fall in inflation rate and supporting
monetary policy. Figure 2.3 below represents a framework of indirect factors that
influence prices of residential houses.
Figure 2.3: Indirect factors that influence Residential Property Prices
Cultural and political
changes beneficial to
business success
New information
technologies
Investment fund growth
Supporting monetary
policy
Capitalist explosion
and property right
society
Residential property
Prices
Falling inflation and
money illusion effect
Effects of sudden
increase/decrease in
birth rates noticed in the
market
Development of
business news in
mass media
Optimistic forecast by
analysts
Higher trade value:
brokers, day traders, 24hour trade
Increasing opportunities
for gambling
Development of fixed
rate pension plans
Source: Schiller (2005)
2.5 Concept of Real Estate Boom and Burst
A bubble is defined as a steady continuous rise in prices of commodities without any
basics supporting it (Duenwald, 2000). Smith (2010) notes that real estate market has
been characterized by almost unpredictable cycles of booms and bursts. The real estate
boom refers to the period when the prices of the real estate market are high, they are then
followed by real estate burst which are periods when the prices are low (McKibbin et al.
2009). The people who have great knowledge in the field of the real estate property
markets have reached at a point where they can reliably tell when their might be a boom
21
and bust in the market. When prices are very low, these investors purchase property and
later sell it during the subsequent and virtually inevitable boom, making abnormal profit
(Smith 2010).
2.5.1 Causes of Real Estate Bubble
Merriam (2009) postulates that real estate bubble is caused by several factors namely band
lending practice, low interest rates, buying for speculation instead of shelter and
residential real estate as a safe harbor.
Band lending practice is one of the causes of real estate bubble. This happens when loans
or mortgages are given to real estate consumers who should not or do not meet the
minimum set qualifications (Hardaway, 2011). Due to the fact that the peoples awarded
these loans did not have down payments, reserved funds and good income, thus making
the loans carry low interest rates. This increases the level of demand for real estate
property which leads to high prices of the available properties.
The other cause of real estate bubble is low interest rates charged on mortgages. Interest
rates set by the mortgage lending institutions are major contributors of real estate bubble
(Roberts, 2008). Low interest rate increases the level of borrowing thus increasing the
funds available for purchase of real estate (Thomsett et al., 2007). Increased level of
money flowing in the economy increases the demand level of real estate thus leading to
sudden rise in prices.
Buying residential houses for speculation purpose instead of shelter has been termed as
another factor that causes real estate bubble. Most real estate consumers purchase or buy
property when property prices are low and later sell them when property prices increase
(Mundial et al., 1995). Vohwinkle (2012) stated that holding of property reduces the
available property for sale in the market thus leading to increase in prices.
Lastly, residential real estate is viewed as a safe harbor by most people. Most people see
real estate as the safest place to invest their money (Powell et al., 2011). This attracts more
peoples hence increasing the level of demand of real estate which leads to increased
competition thus increasing price level of such property.
22
2.5.2 Preventing Real Estate Bubble
Real estate bubble poses serious challenges to the investors and the entire market.
Consequently, it has become necessary to adopt strategies in order to avoid or prevent
occurrence of real estate bubble.
Real estate properties should be acquired for the right reasons. The real estate consumers
should not go by the fact that everyone’s dream is to own a home and not renting because
it is a waste of money (Vohwinkle, 2013). If a person is not ready to buy a home, there is
no need to rush in buying a house. By doing this, it leads to a reduction of demand of real
estate which in turn reduces prices of the existing properties.
There should be adoption of fair lending practices by the lending institutions. This
happens when the available lending institutions give loans or mortgages to real estate
consumers who meet the minimum set qualifications (Hardaway, 2011). Due to the fact
that the people awarded these loans meet the minimum set qualifications means they are
able to pay down payments, reserved funds and good income, thus allowing banks to
charge normal interest rates. This reduces the level of demand for real estate property
which leads to lower prices of the available properties.
Property prices should rise as high as buyers are able and willing to bid. Loans awarded
are based on collateral and should be limited to amounts that can be supported by localarea incomes (Roberts, 2008). This ensures reduction in amount of loan that can be
awarded to borrowers hence a reduction in amount available to acquire property.
Avoid government actions that allow low interest rates on mortgages. The government
should be one of the major players in avoiding real estate bubble. This is by avoiding any
form of activities such as subsidies or policies that may reduce, allow or lead to reduction
in interest rate charged on mortgages (Rabanal et al., 2011). By doing this, the borrowers
will be discouraged from getting loans from banks hence low demand on residential
property thus reducing probability of a housing bubble.
2.5.3 Effects of Real Estate Bubble
Bursting of real estate bubble has a higher effect than bursting of stock exchange bubble
(McKibbin et al. 2009). In times of real estate boom, resources are misallocated and most
23
people spend a lot of money on luxury items. A real estate bubble has many effects to a
county’s economy.
Holt (2009) notes that bursting of real estate bubble would have a negative effect on the
economy of a country for two reasons. Firstly, construction of houses is an important
economic activity, and decline in building of houses would lead to reduction in gross
domestic product (GDP) of a country. Secondly, the decrease in real estate prices would
reduce domestic consumption because of the wealth effect.
Real estate bubble leads to collapse of property values. When a real estate bubble exists,
the prices of the properties increase tremendously. When the existing real estate bubble
busts, it leads to fall in prices of houses which means decreased value of the existing
property (William, 2011).
Real estate bubble also has a direct effect to the wealth of individuals and even a country
as a whole. When real estate values increase, households are expected to spend more than
they would have spent when property values are low (Quigley, 2008). The amount spend
would be withdrawn from equity on assets or by reduced savings. Similarly, when real
estate values fall, it may cause consumer spending contraction which encourages the
savings by the consumers.
Lastly, real estate bubble has a direct effect on the income levels of households. This
happens when the existing real estate sales decline or starts to drop, the economy
experience a decline in expenditure level which leads to a reduced income and
employment levels (McKibbin, 2008). This occurs because less sales of existing homes
means that building inspectors, appraisers, brokers, home appliance firms, mortgage
lenders, and other actors in the real estate sector face a decline in demand hence
experiencing a direct loss of income.
2.6 Conceptual Framework
For this research, the dependent variable is the changes in price of residential houses in
Nairobi, while the independent variables are the factors which include direct factors and
the indirect factors. The direct factors include the physical characteristics of a property,
24
neighborhood, property location, security and the level of accessibility of the property.
Indirect factors that cause change in property prices are availability of new technology,
growth of investment fund, better economic performance and increase in population.
Figure 2.4 below is a representation of the conceptual framework developed for this
research.
Figure 2.4: Conceptual Framework Developed for the Study
Direct factors
Indirect factors
Physical
characteristics of a
property
Neighborhood
Property location
Availability of
new technology
Changes in
Price of
Residential
Houses
Growth of
investment fund
Better economic
performance
Security
Increase in population
Accessibility of
the property
Source: Authors Construct (2014)
Direct factors have an effect on prices of residential houses because they affect the level
of demand of houses in a given area. Consumers are willing to acquire properties that can
be accessed easily, which are located in a favorable neighborhood and which are located
in a secure place. Properties bearing such characteristics are exposed to higher demand
compared to properties that do not have such characteristics. Increased demand of such
properties contributes to an increase in residential property prices while a reduction in
demand causes a decrease in property prices.
25
The indirect factors have an effect on prices of residential properties because the affect the
supply of residential properties. Availability of new technology, growth of investment
funds and better economic performance of a country contributes to increased supply of
residential houses. Increase in supply of residential houses contributes to a decrease in
property prices. Decrease in supply of residential property leads to increased prices of
residential properties.
26
CHAPTER THREE
STUDY AREA AND RESEARCH METHODOLOGY
3.1 Introduction
This chapter gives a brief description of the study area and the research methodology
used by the researcher. The research methodology part highlights the methodology
which was used in data collection, analysis and presentation. It also depicts the
research design, sampling design, target population, delimitations and limitations of
the study, ethical issues consideration and the expected outcome of the study.
3.2 Description of the Study Area
Lavington estate is one of the residential estates in Nairobi County found in
Westlands constituency, Westlands District. Lavington is located within coordinates
1°16'48"S 36°46'12"E. The estate stands at 1670 meters above sea level and is 3 hours
ahead of GMT. It is a middle to high income residential suburb situated about 7 km
north west of Nairobi’s City centre. Lavington lies between Westlands and Kilimani,
and neighbours Kileleshwa to the east. Its feeder roads feed to James Gichuru Road.
The area is home to many large villa residences and beautiful gardens. Most trees
have been untouched even as the area has developed, giving the suburb a country
touch in a modern setting. It was originally the St. Austins Mission established by the
French Holy Ghost Fathers. This explains the numerous Catholic mission centers and
Catholic-sponsored institutions in the area.
Lavington is low population density area located within the Westlands Constituency
and Westlands district. Figure 3.1 is a satellite image showing location of Lavington
estate in Nairobi County while figure 3.2 is a Google map showing aerial view of
Lavington estate
27
Figure 3.1: Satellite image showing the position of Lavington in Nairobi County
Source: Google maps, accessed 30/01/2014
Figure 3.2: Google map showing aerial view of Lavington
Source: Google maps, accessed on 30/01/2014
28
Lavington estate is within zone 5(b) of Nairobi City County planning zones. The allowed
development is single dwelling residential houses with no flats or apartments are allowed.
Offices, bars restaurants and residential hotels are not permitted outside the designated
commercial zone. The minimum area that can be approved for sub division is 0.1
hectares.
Lavington is characterized by good road network which makes it easily accessible by the
residents. James Gichuru Road is the main road that bisects Lavington. It connects the
estate with neighboring estates such as Kilimani and Westlands. There are other smaller
roads such as Mugomo Road which links Lavington to neighbouring Kileleshwa. The
estate is easily accessible from the city centre either through Hurlingham or through
Westlands.
The area is also supplied with mains water and is connected to the main sewer line.
Lavington is also well covered with electricity which is supplied by the Kenya Power &
Lighting Company (K.P.L.C).
3.3 Research Methodology
Methodology is purely an operational framework within which certain facts are placed, so
that their meaning may be seen more clearly (Leeds, 1996). This section describes in
details how the research process was conducted and highlights the data collection
procedures, measurement, analysis and presentation. The research methodology also
depicts the research design, target population, sampling design, ethical issues
consideration and the expected outcome of the study.
3.3.1 Research Design
Leeds (1996) defines research design as the visualization of data and the problem
associated with the employment of data in the entire research study. This required the
researcher to have some structural concept, some idea of the manner in which the data
was to be secured and how data had to be interpreted so that the principal problem in the
research can be resolved.
The design adopted in this study was survey research design. Sekaran (2003) opines that
the goal of a survey research design is to offer the researcher a profile to explain relevant
29
aspects of the phenomena of interest from an individual or industry oriented perspective.
This study was not only restricted to fact finding but also resulted to formulation of
knowledge and solutions to the problem under consideration.
The researcher chose to use survey research design due to the following reasons:
1. The people studied are unaware so they act natural as they normally do in
everyday situation.
2. Surveys can be administered in many modes, such as email surveys, online
surveys, social media surveys, mobile surveys, paper surveys, and face-to-face
interview surveys hence highly flexible.
3. It is less costly and time consuming than quantitative research.
4. It can identify further areas of study.
5. It is used to describe and not make any conclusion hence it is easier to start the
research with.
3.3.2 Target Population
Mugenda & Mugenda (1999) describes the target population as the complete set of
individual cases or objects with some common characteristics to which the researcher
wants to generalize the results of the study. Researchers are unable to study the whole
population hence the need for sampling (Marczyk, 2005). The study targeted all licensed
real estate agency firms, real estate consultants, valuers and developers operating in
Nairobi County. For each operator, four respondents were interviewed i.e., senior officer,
assistant manager, director and senior manager.
3.3.3 Sampling Design
3.3.3.1 Sample
The researcher has chosen Lavington, for reasons that rent and prices of most of the
residential properties in Lavington area have been in an upward trend over the last few
years (Korir, 2009). A sample of real estate valuation and agency companies operating in
Nairobi were selected from the available real estate companies registered by the
Institution of Surveyors of Kenya. Out of these companies, the senior and middle level
management were selected as the key respondents since they are best knowledgeable
concerning the price trends in the residential house sector in Nairobi. Further information
30
was gathered from government officials from the Ministry of Lands, Housing and Urban
Development as well as the Nairobi City County Council.
3.3.3.2 Sampling Techniques
The target population consisted of all the registered estate agents, valuers and contractors
practicing in Nairobi. According to the Institution of Surveyors of Kenya database and the
Kenya Gazette (2013), the registered and practicing valuers in Nairobi were 184 while
estate agents were 121. According to Nairobi Telephone Directory (2013) there were a
total of 52 contractors operating in Nairobi city.
In determining the sample size, the researcher adopted a confidence level of 95% and the
response received from the sample was within positive and negative 5% of true state of
population. The researcher adopted the following formulae (Mason et al., 1999) to derive
the target sample.
Where N=population size
n= sample population estimated to have characteristics being measured, assuming
a 95% confidence level.
p=the proportion in the target population estimated to have the characteristics
being measured (confidence level)
q= 1-p
e= acceptable error (e=0.05, since the estimated error of this research is ± 5% of
the true value.
Z= the standard normal deviate at the required confidence level of 1.96
(i) Valuers
According to the Institution of Surveyors of Kenya, there are 184 registered valuers
operating in Nairobi County.
Therefore,
31
n= 50.34
Hence, say n=50
(ii) Estate agents
According to the Institution of Surveyors of Kenya, there are 121 registered estate agents
operating in Nairobi County.
Therefore,
n= 45.76
Hence, say n=46
(iii) Building contractors
According to Nairobi telephone directory (2013), there are 52 registered building
contractors operating in Nairobi County.
Therefore,
n= 30.62
Hence, say n=31
Both stratified random sampling and purposive sampling technique were performed.
King’oriah (2004) opines that stratified sampling can be said to involve making use of
known characteristics of the parent population as a guide in the selection. Purposive
sampling can be termed as a sampling technique that allows the researcher to use cases
that have the required information in respect to the objectives of the study (Mugenda and
Mugenda, 1999). The researcher adopted stratified random sampling in selection of the
32
valuers and estate agents while building contractors were selected via purposive sampling
technique.
3.3.4 Data Collection
3.3.4.1 Data Source
This study comprised of both primary and secondary data.
Primary Data
The primary data was collected from the selected real estate agency companies using the
process of interviews, informal discussions, questionnaires both in the offices and on site
and taking photographs where necessary.
Secondary Data
The secondary data was gathered from the Ministry of Lands, Housing and Urban
Development and Nairobi City County Council registry, where the researcher obtained
data relevant to the number of residential house transaction that has taken place within the
last four years and their market prices.
3.3.4.2 Data Collection Instruments
Data of this study was collected using questionnaires and interviews. The use of
questionnaire was preferred since it enables coverage of population with little time,
personnel and cost effective. The respondents were not allowed to indicate their names on
the questionnaires. This facilitated them to be honest with their responses, thus avoiding
bias due to characteristics of interviews. Questionnaire contained structured questions,
which were easy for the targeted respondents to answer and helped the researcher to form
an opinion and a conclusion. The questionnaires also contained unstructured questions
that offered room for the respondents to give more information and clarify other aspects
of their answers.
3.3.4.3 Research Procedures
The researcher dropped and collected the questionnaires from the respondents. This was
facilitated by the fact that the chosen area of study is characterized by good road network
33
hence easily accessible by the researcher. In order to make sure that the respondents were
able to fill in the questionnaires, the researcher used simple language and assured
confidentiality.
3.3.4.5 Data Analysis Techniques
The researcher used Microsoft word and Microsoft Excel to analyze the data. The reason
for choosing this software was because they are user friendly, they can easily be used to
answer multi-response questions and the fact that they can relate two or more sets of
variables. The software can also be used alongside Microsoft PowerPoint for graphical
presentations.
3.3.5 Data Presentation
The data was presented by use of frequency tables, graphs and charts which facilitated
easy interpretation and understanding of the information by the users.
3.3.6 Ethical Issues of the Study
In order to ensure that research ethics is observed, the researcher prepared confidentiality
agreements to be signed by the respondents to satisfy their informed consent. In addition,
authority will be sought and obtained in advance from the respective institutions which
will be included in the sturdy in order to authorize for undertaking of the survey.
34
CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION
4.1 Introduction
Robson (2002) refers a case study as a strategy for doing research which involves an
empirical investigation of a particular contemporary phenomenon within its real life
context using multiple source of evidence. The field survey set out to investigate factors
that contribute to price changes of residential houses in Lavington.
4.2 Analysis of the Questionnaire Responses
Table 4.1 Rate of Response from the Questioners Admitted
Stakeholders
Questionnaire
Questionnaire
Percentage
administered
received
received
Estate agents
33
24
72%
Valuers
39
31
79%
Contractors
22
17
77%
Total
94
72
76%
Source: Field Survey, 2014
Out of the 94 questionnaires issued, 39 questionnaires were issued to valuers, 33 to estate
agents and 22 to contractors practicing in Nairobi. The respodense rate was 76% which is
more than the recommended response rate of 50% (Mugenda and Mugenda, 1999). This
is shown in the Table 4.1 above where 24 out of 33 (72%) questionnaires administered to
the real estate agents were received back, 31 out of 39 (79%) questionnaires administered
to the property valuers were received back and 17 out of 22 (77%) questionnaires
administered to the contractors were received back.
Out of the 72 questionnaires received, 24% of questionnaires were collected from
contractors, 33% were collected from real estate agents while 43% were collected from
interviewed property valuers. This indicates that valuers had a higher representation rate
followed by estate agents while real estate contractors were the least represented.
35
Chart 4.1 Respondent’s profession
Respondent's profession
Contractor
24%
Estate agents
33%
Valuers
43%
Source: Field Survey, 2014
4.3 Analysis of the Responses
4.3.1 Analysis on the Extent Prices of Residential Houses have Changed Between the
Years 2008 to 2012
13% of the respondents were of the opinion that prices of residential houses had changed
insignificantly over the years 2008 to 2012. 17% of the respondents were of the opinion
that there had been a slightly significant change in prices of residential houses in the
study area. 43% of the respondents stated that during the years 2008 to 2012, there had
been a significant change in prices of residential houses 27% of the respondents were of
the opinion that prices of residential houses have changed by a very significant extent. All
the respondents indicated that prices of residential houses in the study area had increased
between years 2008 to 2012.
36
Chart 4.2: Extent of Price Change of Residential Houses
Extent of Price Change of Residential Houses
13%
27%
17%
Insignificant
Slightly significant
Significant
Very significant
43%
4.3.2 Analysis on Whether the Current Property Prices Reflect Market Value
Out of the 72 respondents whose questionnaires were received, only (32%) of the
respondents agreed that the existing residential property prices in Lavington reflected
their market price while (68%) of the respondents stated that the existing prices on
residential property does not reflect their market values.
Table 4.2 Responses on Whether the Current Property Prices Reflect Market Value
Frequency
Percentages
NO
23
32%
YES
49
68%
TOTAL
72
100
Source: Field Survey, 2014
According to the respondents who said ‘yes’ (68% of the respondents), the demand of
residential buildings in the study area had increased over the last five years. This had been
caused by increase in number of people who are willing to acquire residential property in
Lavington estate. Many of the respondents who agreed that property prices reflected
37
actual market price stated that the increased in property price was caused by increased
demand for residential houses in the study area. Other respondents stated that existing
property prices reflect market price as the increase in property prices was caused by the
positive growth of Kenyan economy over the last few years. The growth in economy has
contributed to increased disposable income on the residents thus leading to high demand
on property thus contributing to higher prices of residential property.
4.3.3 Analysis on the extent supply has affected Prices of Residential Houses
24 (33%) respondents stated that supply of residential buildings has no effect on property
values in the study area. 48 (67%) respondents stated that the level of supply of
residential houses has positively affected the prices of residential houses in the study area.
All the respondents were of the opinion the increase in prices of residential houses in the
study area had been caused by low supply of houses while the demand level remained
high.
Table 4.3 Extent supply had affected Prices of Residential Houses
Frequency
Percentage
No effect
24
33%
Positively (led to higher prices)
48
67%
Negatively (led to decline in prices)
0
0%
Total
72
100%
Source: Field Survey, 2014
38
Chart 4.3: Effect of Supply to Prices of Residential Houses
Analysis on Effect of Supply to Prices of Residential Houses
0%
33%
No effect
Positively (led to higher prices)
67%
Negatively (led to decline in
prices)
Source: Field Survey, 2014
4.3.4 Analysis on the Trend of Demand of Residential Houses over the Last Four
Years
Out of the 72 respondents whose questionnaires were received, none (0%) stated that
demand of residential houses in the study area has been falling or decreasing over the last
four years. 71% of the respondents stated that demand of residential houses has been
increasing over the last four years, 8% of the respondents stated that demand has been
fluctuating while 21% of the respondents stated that demand of residential houses in the
study area has been stable over the last four years.
39
Chart 4.4: Trend of Demand of Residential Houses over the Last Four Years
Analysis of Trend of Demand of Residential Houses over the Last
Four Years
0%
21%
Increasing
Fluctuating
8%
Stable
Falling
71%
Source: Field Survey, 2014
4.3.5 Analysis on the extent Demand has affected Prices of Residential Houses
36% of the respondents stated that the level of demand for residential buildings did not
affect the values of residential houses in the study area. 47 (64%) of the respondents
stated that the level of demand of residential houses had positively affected the prices of
residential houses in the study area over the last four years.
Table 4.4: Extent Demand has affected Prices of Residential Houses
Frequency
Percentage
No effect
26
36%
Positively (led to higher prices)
46
64%
Negatively (led to decline in prices)
0
0%
Total
72
100%
Source: Field Survey, 2014
40
Chart 4.5: Extent Demand had affected Prices of Residential Houses
Extent Demand has Affected Prices of Residential Houses
0%
36%
No effect
Positively (led to higher prices)
64%
Negatively (led to decline in
prices)
Source: Field Survey, 2014
4.3.6 Analysis on Whether Cost of Acquiring Land Had Positively Influenced Prices
of Residential Houses
46% of the respondents stated that the cost of acquiring land had positively influenced
property values in the study area over the last four years. Most of them said that cost is
directly passed to the buyer by including in the sales price of the property. 54% of the
respondents stated that the cost of acquiring land hah no effect on property prices. Their
reasoning was that there are times when land price remains constant while property prices
increased.
Table 4.5 Does Cost for Buying Land Positively Influenced Prices of Residential
Houses
Frequency
Percentage
No
39
54%
Yes
33
46%
Total
72
100%
Source: Field Survey, 2014
41
4.3.7 Analysis on Whether Construction Cost Influence Prices of Residential Houses
Out of the questionnaires received, 88% of the respondents agreed that the cost of
constructing a house had a direct effect on prices of residential houses. Differences in
construction cost incurred during property development arose due to use of building
materials of different qualities. The better the quality of construction material used by
property developer the higher the price a property developer will be willing to accept in
order to sell the property. Other respondents stated that the higher the construction cost
incurred the higher the quality of the building which means the buyer will be willing to
offer more money in order to acquire the property.
The rest stated that property
developers always pass all the cost incurred in developing property to the buyers because
the aim at earning high profit instead of incurring loss. Only 12% of the respondents
stated that construction cost has no effect on prices of residential houses. They stated that
there are sometimes when construction cost increases but prices of residential buildings
remain constant. They associated escalating prices of residential houses in the study area
to be caused by other factors rather than construction cost.
Chart 4.6: Construction Cost Influence Prices of Residential House
Views on if Construction Cost Influence Prices of Residential Houses
12%
No
Yes
88%
Source: Field Survey, 2014
42
4.3.8 Analysis on the extent Construction Cost has Influenced Prices of Residential
Houses
63 respondents stated that the cost incurred in constructing residential houses has a direct
effect on prices of residential houses. Out of the 63 respondents, 13% of the respondents
were of the opinion that construction cost affected prices of residential houses
insignificantly. They stated that most times, a change in construction cost had an
insignificant effect on property prices because it takes long time for buyers and sellers to
adopt the change. 17% of the respondents were of the opinion that construction cost has
affected prices of residential buildings in a slightly significant extent. 43% of the
respondents stated that construction cost influenced residential prices to significant extent
while 27% of the respondents were of the opinion that construction cost has affected the
prices of residential houses to a very significant extent. They stated that buyers will not
accept to sell property at a price that does not meet the amount that was used to develop
the property because no seller will be willing to make a loss.
Table 4.6: Extent Construction Cost Influence Prices of Residential Houses
Frequency
Percentage
Insignificant
8
13%
Slightly significant
11
17%
Significant
27
43%
Very significant
17
27%
Total
63
100%
Source: Field Survey, 2014
43
Chart 4.7: Extent Construction Cost Influence Prices of Residential Houses
Views on Extent Construction Cost Influence Prices of Residential
Houses
30
27
25
20
17
15
11
10
8
5
0
Very significant
Significant
Slightly significant
Insignificant
Source: Field Survey, 2014
4.3.9 Analysis on whether Geographical Location of the study area Influenced Prices
of Residential Houses
65% of the respondents agreed that the geographical location of the study area affected
prices of residential property in the area. The respondents responded the study area is
located a few kilometers from Nairobi city and hence many people who work in the city
are willing to buy houses in Lavington. Others responded that the ease of access of the
study area from Nairobi city had contributed to the large number of Nairobi residents
willing to settle in the area. This had in form contributed to increased demand of
residential property thus increased price of residential properties in Lavington. 35% of the
respondents were of the opinion that geographical location of Lavington estate had not
influenced residential property prices. These respondents held the view that the large
number of residents using private cars to drive to the CBD of Nairobi demonstrated that
location is not a factor of consideration. They were of the opinion that geographical
location would only affect if the residents were to walk to their working places.
44
Chart 4.8: Analysis on effects of Geographical Location to Prices of Houses
Views on Whether Geographical Location Affect Prices of
Residential Houses
35%
No
65%
Yes
Source: Field Survey, 2014
4.2.10. Analysis on Subsidies offered By National and County Government to
private Developers
40% of the respondents were of the opinion that the national and the county governments
offer subsidies to private developers. They indicated that the most form of subsidies
available was in form of loans at low interest rates and tax relief during transfer of
property. The respondents also indicated that the subsidies offered by national and county
government targets housing for the poor. 60% of the respondents responded that there are
no subsidies offered by the national and the county government to private investors. They
stated that lack of subsidies in terms of subsidized loans forces the private investors to
shift back to loans which are offered at a high interest rate.
Table 4.7: Views on National and County Government Offering Subsidies to Private
Developers
Frequency
Percentage
No
32
60%
Yes
21
40%
Total
53
100%
Source: Field Survey, 2014
45
4.3.11 Analysis on the Extent subsidies have reduced property prices
34% of the respondents stated that subsidies had reduced property prices in a very
significant level. They stated that loans at low interest rates offered through subsidies
helps reduce construction cost which in return reduced the cost passed to buyers. 33% of
the respondents stated that subsidies had significantly reduced property price. 14% of the
respondents were of the opinion that subsidies had reduced property prices in a slightly
significant level while 29% of the respondents indicated that subsidies had reduced
property prices by insignificant level. They stated that most of the subsidies offered by
the national and the county government targets development of low income housing
which was not the case in Lavington estate as residential houses developed targets middle
and high income earners.
Table 4.8: Extent subsidies have reduced property prices
Frequency
Percentage
Insignificant
6
29%
Slightly significant
3
14%
Significant
7
33%
Very significant
5
24%
Total
21
100%
Source: Field Survey, 2014
46
Chart 4.9: Extent subsidies have reduced property prices
Analysis on Extent subsidies have reduce property prices
29%
24%
Very significant
14%
33%
Significant
Slightly significant
Insignificant
Source: Field Survey, 2014
4.3.12 Analysis on if Interest Charged on Mortgages has Effect on Property Prices
97% of the respondents stated that the interest rate charged on mortgages had effect on
property price. They responded that higher interest rate contributes to higher charges on
mortgage acquired. This increases the amount of money spent by property developers
who use mortgages to finance property which leads to increased prices of property. 3% of
the respondents were of the opinion that there is no effect on interest rate charged on
mortgages to property prices. They stated that there are sometimes when interest rates
charged on mortgages may change but prices of property remain constant because it takes
long for this effect to be reflected in the market.
47
Chart 4.10: Interest Rate Charged on Mortgages had effect on Property Prices
Views on Whether Interest Charged on Mortgages had effect on
Property Prices
3%
No
Yes
97%
Source: Field Survey, 2014
4.3.13 Analysis on the extent interest rate charged on mortgages had affected
property prices
69 of the respondents agreed that interest rate charged on mortgage had effect on property
prices. Out of these respondents, 19% of the respondents were of the opinion that interest
rate charged on mortgage had affected property prices by a very significant level. 37% of
the respondents stated that interest rate charged on mortgage had significantly affected
property prices. 35% of the respondents were of the opinion that interest rate charged on
mortgage had slightly significant effect on property prices while 6 (9%) of the
respondents indicated that interest rate charged on mortgage had insignificant effect on
residential property prices. They stated it takes long time before the real estate market can
respond to changes in interest rate charged by mortgage lenders.
48
Table 4.9: Extent Interest Rate Charged On Mortgages Affect Property Prices
Frequency
Percentage
Insignificant
6
9%
Slightly significant
24
35%
Significant
26
37%
Very significant
13
19%
Total
69
100%
Source: Field Survey, 2014
Chart 4.11: Extent interest rate charged on mortgages has affected property prices
Analysis on Extent interest rate charged on mortgages affect property
prices
30
26
24
25
20
15
13
10
5
6
0
Very
significant
Significant
Slightly
significant
Insignificant
Source: Field survey, 2014
4.3.14 Analysis on the effect of Escalating Prices to Marketability of Residential
Property
49% of the respondents stated that escalation in prices of residential property had a
positive effect in the marketability of residential property. They responded that most
property agents were willing to engage in selling property of higher price than of lower
prices. This is because the commission agents receive for sales of a property is computed
49
based on the sale price of the property. This means the higher the price a property is sold
at, the higher the commission charged. This motivates the agents to sell the property thus
increasing the marketability of residential property. 51% of the respondents were of the
opinion that increase of property prices had a negative effect on marketability of
residential houses. The respondents explained that there might be a large number property
agents who are willing to market the said properties, but reduced demand of property by
consumers due to high price being offered for the property. This means there will be
reduced sales of property which means the marketability of property has been affected
negatively.
Chart 4.12: Effect of Escalating Prices to Marketability of Residential Property
Analysis of Effect of Escalating Prices to Marketability of Residential
Property
49%
51%
Positive effect
Negative effect
Source: Field Survey, 2014
4.3.15 Analysis on the effect of Development of Residential Property on Land Values
The survey data indicated that 47% of the respondents were of the opinion that
development of residential buildings in the study area had a very significant effect on land
values. They responded that land values are a factor or are affected by neighborhood.
Development of residential property in an area are seen as better neighborhood which
promotes higher property values as more people will be willing to settle in the area. 39%
of the respondents stated that development of residential buildings had a significant effect
50
on land prices in the study area. 13% of the respondents were of the opinion that
development of residential properties in the study area had a slightly effect on land values
while only 1% of the respondents stated that property development had an insignificant
effect on land values.
Table 4.10: Effect of Development of Residential Property on Land Values
No. of Respondents
Percentage
Insignificant
1
1%
Slightly significant
9
13%
Significant
27
39%
Very significant
33
47%
Total
70
100%
Source: Field Survey, 2014
Chart 4.13: Effect of Development of Residential Property on Land Values
Analysis on effect of Development of Residential Property on Land
Values
1%
13%
Very significant
47%
Significant
Slightly significant
Insignificant
39%
Source: Field Survey, 2014
51
4.3.16 Analysis on Whether Increased Property Prices had Lend To Speculative
Buying
According to survey, 67% of the respondents responded that the increased property prices
over the last four years had contributed to speculative buying of property. These
respondents stated that most buyers were not buying the properties for purpose of
occupation only, but as a form of investment where they will sell the property later at a
higher price. 33% of the respondents were of the opinion that increased price on
residential houses in the study area had no effect or had not contributed to speculative
buying of property in the study area. They stated that increased property prices
discouraged speculative buying of property because most of the investors feared the real
estate bubble to burst any time before they dispose or sell the property.
Chart 4.14: Increased Property Prices had Lend to Speculative Buying
Analysis on Whether Increased Property Prices had Lend To
Speculative Buying
33%
No
Yes
67%
Source: Field Survey, 2014
4.3.17 Analysis on the effect of Speculative Buying to Property Prices
The survey data indicated that 63 respondents were for the opinion that escalation of
residential property prices over the last four years had contributed to speculative buying
of property. 18% of the respondents stated that escalating prices of residential houses had
a very significant effect on speculative buying of property in the study area. 44% of the
52
respondents were of opinion that escalating prices of residential houses had a significant
effect on speculative buying of property in the study area. 24% of the respondents were of
the opinion that escalating prices of residential houses had a significant effect on
speculative buying of property in the study area while 14% of the respondents stated that
escalating prices of residential houses had an insignificant effect on speculative property
buying.
Table 4.11: Effect of Speculative Buying To Property Prices
Frequency
Percentage
Insignificant
9
14%
Slightly significant
15
24%
Significant
28
44%
Very significant
11
18%
Total
63
100%
Source: Field survey, 2014
Chart 4.15: Effect of Speculative Buying To Property Prices
Analysis on effect of Speculative Buying to Property Prices
14%
18%
Very significant
Significant
Slightly significant
24%
Insignificant
44%
Source: Field Survey, 2014
53
4.3.18 Analysis on the effect of Improved Economic Performance on the Demand for
Housing
Gross domestic product (GDP) of a country is used to measure economic performance of
a country over a given period of time (Coyle et al., 2014). Kenya’s gross domestic
product had been in an increasing trend over the last few years. In the year 2009, Kenya
recorded a real GDP growth rate of 2.6%. There was an increase in real GDP in the year
2010, where Kenya recorded real GDP growth rate of 5.6%. There was a drop in real
GDP growth rate in the year 2011 which recorded growth rate of 5.2% which was
followed by real GDP growth rate of 5.2% recorded in the year 2012. In the year 2013,
Kenya recorded a real GDP growth rate of 5.7%. This implied that the economy of Kenya
had been increasing over years.
Chart 4.16: GDP Growth Trend for the Year 2009-2013
Real GDP Growt Rate
6
Real GDP Growth Rate
5
4
3
Real GDP Growt Rate
2
1
0
2009
2010
2011
2012
2013
Year
Source: Global Finance, 2014
57% of the respondents stated that improved economic performance of Kenya over the
last five years had positively influenced prices of residential houses in the study area.
They stated that economic growth contributed to better and higher income levels for
54
residents of a country hence had money to acquire property. This lead to increased
demand of property which contributed to increased prices of residential houses. 14% of
the respondents stated that improved economic growth of Kenya had no effect on prices
of residential houses in the study area. According to this group, there was high demand of
residential houses in the study area because of increased population of the country and not
caused by improved economic performance of Kenya. 14% of the respondents were of
opinion that improved economic performance of Kenya had negatively affected prices of
residential houses in the study area over the last four years. This group of respondents
stated that although there was economic growth of Kenya, it was doing so in a low
growth rate due to lack of investors’ turnout.
Chart 4.17: Effects of Improved Economic Performance on Prices of Residential
Houses
Analysis on effects of Improved Economic Performance on Prices
of Residential Houses
29%
57%
14%
Positive
No effect
Negative
Source: Field Survey, 2014
55
CHAPTER FIVE
CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
The purpose of the research was to investigate the factors causing price changes of
residential house in Nairobi County taking a case study of Lavington residential estate.
The chapter entails conclusions arrived at based on data obtained from the field study and
analyzed in chapter four.
The study aimed to achieve the following objective:
1. To examine the changes of prices of residential properties in Lavington estate in
Nairobi between the years 2008 to 2012.
2. To investigate the factors causing changes of prices of residential property in
Lavington estate in Nairobi between the years 2008 to 2012.
3. To assess the effects of the high prices to the marketability of residential property.
The research was guided by the following research questions:
1. To what extent have prices of the residential properties in Lavington estate in
Nairobi changed between the years 2008 to 2012?
2. What factors have caused changes in price of residential property in Lavington
estate in Nairobi between the years 2008 to 2012?
3. What are the effects of high prices of residential houses to their marketability?
5.2 Conclusion
The study concluded that residential property prices in the study area had changed
significantly between the years 2008 to 2012. From the data analyzed on change of
residential property prices, 13% of the respondents rated insignificant change, 17% rated
slightly significant, 43% rated significant while 27% of the respondents were of the
opinion that there was a very significant change in residential property prices. The study
identified the following factors to be the main cause of change in property prices in the
study area over the last four years;
56
It was observed that increased demand for land in the study area had contributed to high
prices of land. This had a direct effect to residential property prices because residential
property developers had passed all the cost incurred in acquiring land for development to
consumers thus contributing to higher property prices in the study area over the last four
years.
The study observed that despite the increased level of property development in the study
area, the level of property supply is still low. This was caused by the increasing
population density in the study area over the last few years. Increased population
contributed to higher demand for residential houses in the study area than the existing
supply, thus causing increase in prices of residential property.
Thirdly, the study concluded that construction cost had been one of the major causes of
price change of residential property between years 2008 to 2012. 88% of the respondents
associated price changes of residential houses to construction cost while 12% did not
agree that construction cost caused change in price of residential houses. The cost of
building materials and labor fees had been increasing at a very high rate over the last few
years. This cost had a direct effect on property prices because property developers aim at
maximizing profit hence they pass all development cost to property buyers thus selling
property at higher prices.
Another factor that had contributed to higher property prices in the study area over the
last four years was speculative buying of residential property. 67% of the respondents
stated that there existed speculative buying of property while 33% stated that there was no
speculative buying of residential house. Speculative buying of residential houses in the
study area had contributed to a significant change in prices of residential property prices.
44% of the residents were of the opinion that speculative buying contributed significantly
to change in prices, 18% stated that speculative buying had a very significant effect, 24%
stated that speculative buying had slightly significant effect while 14% stated speculative
buying had no significant effect on residential property prices. Many peoples in the study
area acquired residential property not for residential purposes, but to just wait for property
prices to increase and dispose of the property at a higher price. This had contributed to
less property available for sale hence higher demand thus contributing to increased
residential property prices.
57
Lastly, it was observed that the economic performance of the country over the last few
years had contributed to higher property prices. This is because consumers are able to
earn which increases their willingness to offer more money in order to acquire a certain
residential property. The increased earnings also mean more competition in acquiring
residential property because of higher affordability ratio. This led to increased prices of
residential property prices. The increased rate of inflation in the last few years had highly
contributed to increased property prices.
The study concluded that higher property prices had negatively influenced marketability
of residential property. 51% of the respondents were of the opinion that increased
property prices had a negative effect to marketability of residential property. This was
caused by increase in time spent by property agents to get a willing buyer who can buy
the said property. 49% of the respondents stated that increase in prices of residential
properties had a positive effect to marketability of property.
The study further observed that more agents were willing to market residential properties
at higher prices because commission was based on sales. It was also evident that increase
in property prices contributed to less property sales. An increase in property price led to
reduction in demand of residential property. This contributes to less property sales
because there were few peoples who were willing to buy residential properties at high
price.
5.3 Recommendations
Based on the findings and conclusions of the study, the study made following
recommendations:
Recommendation 1
Provision of subsidies by the government
Both county and national government should offer subsidies to private investors in order
to promote investment in real estate sector. Subsidies should not only target the low
income housing but should include the middle and high income housing projects. These
subsidies can be in form of financial subsidies, tax subsidies or supply of land for
development of residential property. Additionally, both the county and national
58
government should offer loans to private developers at lower rate than the rates charged
by mortgage lending institutions.
Recommendation 2
Enactment of regulations to guide real estate market
The government should formulate regulations that guide real estate market. These
regulations should be able to ensure that people do not buy residential houses for
speculation purposes but for consumption purposes only. These regulations should be
able to ensure that residential property developers do not overcharge the consumers by
selling the properties at a higher price than the market price. In addition, the set
regulations should be able to control the residential property prices.
Recommendation 3
Amendment of available planning regulations
The county government should amend the available planning laws in order to allow
construction of more buildings in the study area. This can be done by allowing
construction of flats in the area and also allowing construction of high-rise residential
buildings in order to meet the increased demand of residential property over limited
supply of land. The county government should also allow subdivision of land into smaller
pieces of land thus allowing more space for property development.
Recommendation 4
Start of research institutions
The Government of Kenya should start research institutions which should research on
cheaper construction materials that can be adopted in property development. These
building materials should be able to meet the set standards by the building codes and
byelaws. The established research institutions should also be able to advice investors on
best ways to finance real estate investments in order to avoid incurring high cost. The
59
research institutions should be able to promote adoption of modern technology in
provision of residential properties which can contribute to reduced property prices.
Recommendation 5
Provision of Housing by Government
The national and the county governments should increase the quantity of houses they
provide every year in order to ensure that there is reduced competition on the available
residential properties. The government can adopt both conventional and non conventional
housing approaches in provision of residential houses. This will increase the supply level
of residential houses thus reducing the prices of residential houses.
Recommendation 6
Flexible Mortgages
The mortgage lending institutions should be able to provide finance to every person in the
community regardless of whether they have pay slips or not. Flexible mortgages will
ensure that all the peoples such as business men and women who can be able to repay the
mortgage can borrow funds to meet the increased prices of residential properties. This
will help the economy to sustain the high prices of residential real estate hence reducing
chances of a real estate bubble burst happening soon.
5.4 Limitations of the study
Several challenges were encountered while understating the research. These limitations
encountered include:
a) Some questioners were not returned by the respondents.
b) Limitation of time necessary to conduct the survey.
c) Unavailability of the persons who were to be interviewed due to the tight schedule
of their daily duties.
d) The study was carried out under limited financial resources.
60
e) Some respondents were unable to provide accurate data on grounds that some of
data requested was confidential hence could not be disclosed.
5.5 Areas of Further Research
During the field study and literature review, the researcher identified the following areas
that call for further research:
Researching on affordability of different categories of houses, that is, bungalows,
maisonettes, flats and townhouses.
Determine the level of affordable housing price among the various income groups
in Kenya.
The effect of property attributes to sales price.
The effects of high residential property prices to economic performance of a
country.
The existence of boom and possibility of bust in the Kenyan real estate industry.
61
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Wiley.
APPENDICES
APPENDIX I: INTRODUCTION LETTER
TO WHOM IT MAY CONCERN
Dear Sir/ Madam,
AN
INVESTIGATIVE
STUDY
ON
THE
FACTORS
CAUSING
THE
ESCALATING PRICES OF RESIDENTIAL HOUSES IN NAIROBI OVER THE
PERIOD 2008-2012, A CASE STUDY OF LAVINGTON
I am an undergraduate student at the University of Nairobi pursuing a Bachelor of Real
estate degree program. I am carrying out research on “An investigative study on factors
causing the price changes of residential houses in Nairobi County over the period
2008-2012” taking a case study of Lavington residential estate.
Your organization has been selected for the purpose of the study and I would be grateful
if you would assist me by responding to all the items in the questionnaire. Your response
will be treated with utmost confidentiality. Please do not write or indicate your name or
name of the organization u represent in the questionnaire.
Your cooperation will be highly appreciated.
Thanking you in advance,
Yours faithfully,
Murungi Royford Kinyua
67
APPENDIX II
QUESTIONNAIRE TO THE ESTATE AGENTS, VALUERS AND
CONTRACTORS
1. To what extent have prices of the residential properties in Lavington estate in
Nairobi changed between the years 2008 to 2012?
Insignificant
Slightly significant
Significant
Very significant
2. In your opinion, are the existing market prices for residential houses in Nairobi
County a true reflection of their market values?
Yes
No
If ‘No’ above, briefly explain
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
3. To what extent has the supply of residential buildings influenced the prices of
residential buildings over the last four years?
No effect
Positively (led to higher prices)
Negatively (led to decline in prices)
4. How has the demand for residential buildings in the study area over the last four
years?
Falling
Increasing
Fluctuating
Stable
68
5. To what extent has the demand of residential buildings influenced the prices of
residential buildings over the last four years?
No effect
Positively (led to higher prices)
Negatively (led to decline in prices)
6. In your opinion, has the cost of acquiring land by private developers positively
influenced the prices of residential buildings in the study area, over the past four
years?
Yes
No
If ‘No’ please give a reason
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
……………………………………………………………………………………….
7. In your opinion, to what extent has the construction cost influenced the prices of
residential building in the study area over the last four years?
Insignificant
Slightly significant
Significant
Very significant
8. As an estate agent/valuer what effect has the escalation in prices of residential
houses to their marketability?
Negative effects
Positive effects
9. Are there any subsidies offered to private developers by the national and county
government?
Yes
No
69
10. If ‘Yes’ in (10) above, to what extent have reduced residential house prices in the
study area?
Insignificant
Slightly significant
Significant
Very significant
11. In your opinion, how has the trend in development of residential buildings affected
the land values in the study area?
Insignificant
Slightly significant
Significant
Very significant
12. In your opinion, has the increase prices of residential houses over the last four
years led to speculative buying of houses?
Yes
No
If ‘Yes’ above, to what extent has speculative buying influenced prices of
residential houses in the study area?
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
13. In your opinion, has the geographical location of the study area affected/influenced
prices of residential houses?
Yes
No
Give a reason for the answer above.
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
70
14. To what extent has the economic performance of Kenya influenced the property
prices in Nairobi County over the last four year?
Significant
Insignificant
Slightly significant
Very significant
15. In your opinion, what solution(s) would you recommend towards the escalating
prices of residential houses in Nairobi County?
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
71
APPENDIX III
RESEARCH PERMIT
72