Affordable Housing Institute : US

When a country explodes into violence, what we see are images of property destroyed:

 

From BBC Site: People walk around the charred remains of a market in Nairobi’s Kibera slum

 

…but the true damage is less visible, for whereas property can only be burned down, capital can flee – and it flees much, much faster than any government can stop it.  That’s because, in the dance between capital and property, property is the slowest asset, capital the quickest.  Capital is also smarter, since it is in effect the quantified judgments of millions of selfish individuals, each of whom is seeking an edge.

 

I’m just trying to improve my position

 

Although Kenya’s flirtation with civil war has ended not unhappily [Why the caution? – Ed.  Because a marriage of convenience is unstable – Auth.], the damage it has done to Kenya will endure for years, as demonstrated by this Nairobi Business Daily article from April:

 

The Housing Meltdown

 

Lending to the real estate industry dropped for the second consecutive year after peaking in 2006, signaling that the excess supply of houses in the market may have reached a tipping point.

 

If economic growth does not pick up pace to boost demand, house prices could start coming under pressure and falling.

 

Because there are a dozen ways to wreck a property market, a rising property market is one of the best indicators of a healthy society. 

 

In the last three months [January to March, 2008 – Ed.], the real estate market has suffered as both local demand and that from Kenyans abroad fell in a hostile political environment that kept most buyers at bay.

 

Here there are two capital dynamics at work:

 

New foreign capital flowing in (or not)

Domestic capital investing (or flowing out)

 

Keep it in circulation

 

Property is the ultimate trust asset, because without law, you cannot protect it from confiscation.  You can’t move it, and its value can be taken hostage (via squatters).  (In foreclosure actions, lenders want “to recover vacant possession” of the premises, without which nobody else can move in.)

 

Kenyans abroad have been major drivers of demand in the local housing market, but as easy money continued fuelling new housing developments and encouraged buyers to take up mortgages, demand from the diaspora has not kept pace with the excess supply.

 

Too little is researched on the powerful effect on expatriate capital being reinvested in the home country.  Remittances, capital’s underground river, are not just limited to low-income migrant workers.  For much of the global south, their greatest income-earning possibilities are in the global north.  They leave home to get an education, to start a career, to build specialized knowledge.  Some of them come home to start businesses.  Others send their money back, for relatives or in anticipation of one day returning. 

 

Mr Maina Mwangi, the head of property at Knight Frank, said that as the number of Kenyans in the diaspora and foreigners buying property increased in the recent past so has buying without relying on mortgage loans grown.

 

“Kenyans in the diaspora and foreigners move in and buy straight from their savings without applying for mortgages,” said Mr Mwangi.

 

Sending money home

 

Capital markets punish risk with higher costs of capital, and the results are quantifiable, and immediate.  As demonstrated a fascinating recent paper on the South’s Civil War chances of winning, calculated using the European market price of Confederate bonds, the Confederacy was initially perceived to have a 42% chance, falling to 15% after Vicksburg and Gettysburg:

 

We provide some quantitative evidence on this question by introducing a new methodology for estimating the probability of winning a civil war or revolution based on decisions in financial markets. Using a unique dataset of Confederate gold bonds in Amsterdam, we apply this methodology to estimate the probability of a Southern victory from the summer of 1863 until the end of the war. Our results suggest that European investors gave the Confederacy approximately a 42 percent chance of victory prior to the battle of Gettysburg/Vicksburg. News of the severity of the two rebel defeats led to a sell-off in Confederate bonds.

 

When Vicksburg fell, the South was cut in half along the Mississippi

 

Gettysburg: the costliest battle in American history

 

While international capital can divest, people who make their money inside a politically or socially unstable country tend to get their chips off the table as quickly as they can: by shipping it overseas, into a nice unattachable international bank account.  And when domestic capital is flowing out, to pour in international aid is no better than filling a sieve.

 

This out-turn has had the effect of tempering developers’ demand for loans and encouraged banks to be more vigilant about reckless lending in a hostile housing market.  

 

An entirely classical credit tightening spiral: with less money, developers can be more choosy, and banks can be equally choosy. 

 

Locally, land around urban centres has become expensive translating into largely un-affordable houses, especially for middle class families.

 

The value of urban land reflects the value of property that can be constructed.  For its importance to Kenya, downtown Nairobi is very small, and the traffic is insane (most of the east-west truck traffic highway from the Indian Ocean to the South Atlantic goes through one traffic circle in central Nairobi).  Proximity has scarcity value.

 

It creates a double-whammy: land prices rose just as demand fell off the table.

 

A one-two punch

 

Coupled with high pricing of houses, expensive bank loans and lengthy legal processes involved in buying a house, many Kenyans are turning to affordable financing options such as taking development loans from co-operatives.

 

Or consuming less housing.

 

Central Bank of Kenya’s latest year-to-year mortgage loan figures indicate that the value of real estate loans advanced by commercial banks dropped by four per cent from Sh23.9 billion last year to Sh22.9 billion by February 2008.

 

It’s evident that the slowdown was occurring even before the violence.  Markets are known to anticipate disruption.  Demand cooled after the November, 2005 rejection of the Constitutional referendum. 

 

Anti-Constitutional campaigner, 2005.

Because many voters are largely illiterate, the Yes votes used bananas as their symbol; the No side used oranges.

 

The highest mortgage loan advancements were recorded in 2006 when it stood at Sh27.2 billion down from Sh20.1 billion registered in 2004.

 

According to the statistics, the biggest drop was between 2006 and 2007 when the value of real estate loans by banks dropped by 15 per cent - a four year record - to stand at Sh23.9 billion down from Sh27.2 registered the previous year.

 

An economist at Central Bank told the Business Daily that the development was an indication that the number of people servicing their mortgages had overtaken the number of new investors taking up mortgage loans.

 

“For a net drop in lending to be witnessed it means that ‘less people are taking up new mortgages while more and more are struggling to service their mortgages,” he said.

 

All of which is both a cause of and a consequence of capital slowdown – all brought about by political uncertainty and instability.

 

Property experts said that the number of investors buying houses on an arrangement where one investor (normally a land owner) donates land and the other brings in capital for building materials - known as equity financing - is rising.

 

That’s a very interesting development, because both parties are routing around the money economy.  Work-arounds always signal that something else has failed. 

 

We had to accommodate a problem

 

Other players see the wait-and-see attitude adopted by a number of investors after the elections as the reason for the drop in the value of mortgage loans.

 

I’d absolutely wait – wouldn’t you?

 

I think something bad might happen

 

More recently, a number of mortgage companies have secretly classified certain areas and some economic activities as high risk.

 

That, gentle reader, is called red-lining, and in the United States it’s been illegal for 35 years – partly because it is economically comprehensible and quite possibly economically justifiable, if one is a pure cynic.  [Maybe you’ll post about that sometime? – Ed.] 

 

Okay in Monopoly, not okay in America

 

But then, in the United States we don’t have the risk of politically orchestrated violence.  It’s more defensible in a country where the rule of law can sometimes appear rickety, and usually appears to be provided on commission. 

 

From the guideline, land in areas which witnessed disputes and certain economic sectors such as tourism and agriculture are considered high risk due to the ability of violence to diminish their returns.

 

That doesn’t sound prejudiced, it sounds prudent. 

 

Not gonna lend there, wouldn’t be prudent

 

Mr David Harber, the managing director of Kenya Valuers and Real Estate Agents, said that skirmishes witnessed in late 2007 and early 2008 could have led to the drop in lending to real estate.

 

Did.

 

“The events just before and after elections must have had an effect on the number of people taking up loans to build or buy new houses,” said Mr Harber.

 

The evidence mounts from all sides: Kenya’s in a recession.

 

The number of building plans approved in Nairobi dropped from 312 in November last year to 216 in December 2007 and by mid January 2008 only 83 approvals had been made.

 

The Nairobi City Council’s development control section reported that the value of building plans submitted to the council dropped by Sh 13 billion in three months-from Sh 14 billion in November last year to Sh 1.21 billion in mid January 2008.

 

That’s the real number, and it’s a dimension of the cost.  Building permits are down by 91%.

 

Nine out of ten are already gone

 

Property experts are predicting that the trend may continue.

 

“As more investors leave the predominant investment targeting the middle income and focus on low-middle and upper income groups, such a trend will most probably continue,” said Maina.

 

Though a strong economy is usually thought of as benefiting the rich, in fact it’s always the poor who suffer first in a downturn or collapse.  As we’ve seen in Zimbabwe, with its slow genocide by bulldozer now accelerating into full-blown genocide by kleptocrat, it’s not just the violence but the utter economic collapse of what was once the breadbasket of Africa that is wreaking the most havoc.  And when North Korea collapses, it will be from starvation.

 

When the Constitutional settlement was announced, I posted Let that be your last battlefield.  Even if it is, Kenya will suffer economic casualties for at least half a decade. 

 

The tear gas has stopped, but not the damage

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