Housing price bubbles or an opportunity for investors?

In recent years, most African countries have witnessed an unswerving surge in the house prices which is actually a cause for concern in several quarters. For instance, the ABSA housing index in South Africa shows that the average price of small houses () have risen from R660 953 in 2011 Q1 to R777 343 in the fourth quarter of 2012. Meanwhile, in the so-called affordable segment (), the average price rose from R292 790 in 2009 to R345 388 in the last quarter of 2012. This represents a 17% increase in each case. Similarly, the Hassconsult, a leading property company in Nairobi, indicates that house price in Kenya has documented a 76.34% increase from 2008 Q1 to 2012 Q4, and the FNB’s house price index of Windhoek in Namibia reports an equally consistent upswing. The critical role of housing as a capital asset in an economy cannot be questioned.  From its contribution as a capital asset in production, savings, consumption, household income, employment, growth of other markets, social welfare, diversification and investment, to the simple fact that shelter is a basic need – we all need a house – housing is central in our economies. However, the main concern of monetary regulators and housing practitioners, with regard to such rapid price increases, sprouts from the fact that the high prices are likely to condemn many people to pertetual squalid living conditions because of the lack of affordability for the majority of citizens. In addition, high prices may not only trigger spiral inflation but also greatly affect the monetary policy through borrowing and erratic capital flows.

Perhaps, we should start by interrogating the housing market system to find out whether these upswings in the prices follow changes in the fundamental values of the assets. Or are these upswings just irrational bubbles that are characteristic of an inefficient market and which will soon burst, causing loss of wealth and livelihood?  In Kenya, for instance, the Central Bank and other practitioners are convinced that a price bubble is in the making and this bubble will inevitably burst soon, at least in the high-end/income segment of the market. (http://www.mwakilishi.com/content/blogs/2012/11/28/be-careful-the-kenya-real-estate-bubble-is-about-to-burst.html and http://property.n-soko.com/what-is-financing-kenyas-construction-boom/).

In financial terms, an irrational price rise is called a ‘bubble’. In the words of Kindleberger (1992), a bubble is “a sharp rise in price of an asset . . . in a continuous process, with the initial rise generating expectations of further rises and attracting new buyers, generally speculators, interested in profits from trading in the asset rather than its use of earning capacity. The rise is usually followed by a reversal of expectations and a sharp decline in price often resulting in financial crisis”. Ultimately, the burst of a bubble is manifest in a crash or massive market failures. In recent times, evidence indicates that Japan experienced a bubble around 1991. Alarmingly, Korea has experienced a massive price rise since 1985 which seems to have coincided with the most recent housing bubble in the US. The US crisis, which was instigated by subprime lending,  came to a head when the bubble busted in 2007.  This has had catastrophic consequences to the economy and investors. Evidently house values plummeted below the mortgage loan values causing widespread defaults at a point when foreclosures realized less than the outstanding loan.

The basic economic principles that govern markets state that when the demand of a good outstrips its supply, assuming all other factors to remain constant – ceteris paribus, the price is expected to go up. Could it be that the ballooning middle class, urban population growth, increase in mortgage finance, superior economic performance, increase in inflation rate, better management of exchange rates and increase in household incomes are the main drivers of the house price surge, as currently witnessed, and this is not actually irrational speculations?

A graphic look at these fundamental variables vis-a-vis the house prices in three African countries has convinced me that the price elevations are majorly fundamental – other than where, in the Kenyan case, a clear relationship with macroeconomic variables cannot be exposed graphically – especially in the luxury segment. However, a parsimonious statistical analysis would offer a more reliable view of the situation that this country is faced with in the short or long–term (look at the graphs attached). I submit that the expansion of the African economies and the rise of democratic leaders have been rather rapid since mid-2000s and these might have awoken the sleeping giants of Africa. Alternatively, if the prices are irrational, then the effect of the bubble burst will not only be disastrous to property holders but also cause extremely severe damage to our young housing markets in these countries, as investors will divert their funds to other regions for fear of losses.

Graph one Graph two



graph 3









Graphs: 1 and 2: South Africa; 3: Kenya (luxury segment)

If we hold that the price changes are fundamental (that is, price increases are part of a normal business cycle, or possibly a reaction to the expansion of these African economies), then we would not expect a sudden drop or crash of the markets.  Given this scenario, the investment of house owners will be safer, and more specifically, the housing investors should be having a field day. The fact is, the higher the house price, the higher the returns to investors: they will earn an extra yield from price appreciation and the net profit will be higher as the spread between total cost and total revenue will be higher. Therefore, it makes good business sense to ensure that housing investors are not deterred by the fear of a sudden price reversal in African markets without concrete evidence. Instead, a clear understanding of the local housing price movements and market’s future expectations can, and needs to be sought.

Of course, the global experience with recent bubbles in the US, Europe, and even East Asia, has made many believe that low-income, emerging markets are by nature “sub-prime”.  Unfortunately, our residential markets are poorly monitored.  Still, this is a chance for investors to tap into the growing African urban, middle class population before more competition eliminates the opportunities.  Shrewd investors should ascertain the facts on the ground rather than being skeptical.



Kindleberger, C. P. (1992) ‘Bubbles’, In Al, P. N. E. (ed) The New Palgrave Dictionary of Money and Finance. London, Macmillan.


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2 responses to “Housing price bubbles or an opportunity for investors?

  1. Michael Kihato on 5th March 2013 at 8:55 am

    Hi Allan, interesting. Quick question; the bubble is growing I presume more at the top end of the market, than the affordable segment, where we have consensus there is a shortage of supply. The big question then, why is it so difficult for affordable housing to be supplied in our economies? Is it s function of input materials into the housing product, or is it availability of finance. Second question; where on earth is the money fueling the bubble coming from, given that we have not seen a proportionate increase in mortgage off-take?

  2. Hallo Michael? Let me try to address the two issues you have raised. Well, I agree with you that the affordable market may be safe and secure from the bubbles in the luxurious segment of the Kenyan market; just as in most countries. However, as you rightly ask whether the low delivery of affordable housing an outcome of input or finance, I would say that both factors are so much intertwined that solving one may lead to addressing the other issue as well – after all cheaper materials will mean less finance and more affordable finance will also improve affordability of material. My take on why affordable segment is starved of finance, points to the very core factors that make investors to move into a market, that’s, risk and return. Whereas, return may still be high, if not higher, in this segment quantifying the size of risk is the most mind boggling issue. Unfortunately, housing market, especially the affordable segment in Africa is riddled with lack investment related information and this makes it hard to understand. A lot of efforts from stakeholders in various countries should work hard to bridge this gap; otherwise without enough investments into this segment, the government will be left with no option but produce housing to this segment as well. Sustainable of such government assisted housing program is anyone’s guess.