Urban housing affordability in Kenya A case study of the mortgage housing sector in Nairobi

303 Pages·2015·3.46 MB·English

by  Kieti, Raphael M

URBAN HOUSING AFFORDABILITY IN KENYA
A Case Study of the Mortgage Housing Sector in Nairobi

Kieti Raphael Mutisya
BA (Land Economics), M.A, MISK, R.V

A Thesis Submitted in Fulfillment of the Requirements for the Degree of Doctor of
Philosophy, Department of Real Estate and Construction Management, School of the Built
Environment, University of Nairobi, Kenya.

August, 2015
DECLARATION

I hereby declare that this thesis is my original work and has not been presented for a degree in
any other University

……………………………………………….
Raphael Mutisya Kieti

DECLARATION OF THE SUPERVISORS
This thesis has been submitted for examination with our approval as University Supervisors

............................. …………….. ………………
Dr. M. A. Swazuri Prof. S. Masu Dr. J. Murigu

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ACKNOWLEDGEMENTS
Iam grateful to many people who contributed immensely towards the completion of this
research thesis. Iam particularly indebted to my supervisors Dr. Muhammad Swazuri,
Professor Sylvester Masu and Dr. Jennifer Murigu for their critique, scrutiny and useful
guidance. Their unrelenting understanding, support and patience helped me continue with the
research work despite my other assignments at the Ministry of Lands. Iam grateful to
Professor Paul Syagga with whom I discussed my first research proposal at the time when I
was conceiving the research problem. I acknowledge with thanks his kind help and
encouragement. Iam also grateful to Dr. Margaret Gachuru for her guidance and
encouragement. Thanks also to Catherine Kariuki, Nicky Nzioki, Dr. Winnie Mwangi, Dr.
Mary Kimani, Dr. Konyimbih, Professor Robert Rukwaro and all the other staff members in
the Department of Real Estate and Construction Management at the University of Nairobi.

I appreciate with thanks the kind help extended by my research assistants, Seth Gikunda and
Royford Kinyua who assisted in data collection and analysis at various stages during the
preparation of the research thesis. Iam grateful to Martin Kimeu of the Ministry of Housing
for his help in data analysis and compilation of the final research report. My gratitude further
goes to all who in one way or another provided research materials. Special mention is due for
the help received from Peter Kimeu and Jacob Wambua both of Housing Finance Limited
who facilitated data availability and accessibility. Without their help this study would have
taken a much longer period to complete.

I cherish the friendship, inspiration and support of my colleagues in Valuation Section at the
Ministry of Lands, Housing and Urban Development, who have over the years persistently
encouraged and inspired me to complete my research study and aim higher. Iam particularly
grateful to the Government Chief Valuer, Mr. Anthony Itui who agreed to my request for a
transfer to Nairobi after a two year stay in Kajiado District. This enabled me to focus on my
research work and made possible regular consultation with my supervisors and access to
library and internet materials available at the Ministry headquarters in Nairobi. To all my
other colleaques- Nora Nyakora, Monica Obong’o, Eva Njoroge, Ruth Kiviu, Rose Karago,
Bernard Nzau, George Ruhara I say thank you very much.

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In the end, words will always be inadequate in thanking God for his blessings and for making
everything possible.

Raphael M. Kieti
University of Nairobi, Kenya

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DEDICATION

I dedicate this work to the victims of slums fire disasters all over the world and especially the
victims of the SINAI FIRE DISASTER that occurred in Nairobi, Kenya (September 12,
2011), whose lives would have been saved if decent housing was accessible and affordable to
all.

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ABSTRACT
Over 70 % of urban households in Kenya experience severe housing affordability challenges.
Affordability problems are manifested in the high levels of homelessness, poor human
settlement conditions, high price of housing relative to the incomes of households, mortgage
delinquencies, defaults and foreclosures. This study investigated factors affecting housing
affordability in Kenya. Previous studies on housing in Kenya have been descriptive in nature
and little or no emphasis has been made on empirical studies on factors affecting affordability
especially with regard to contribution of the factors to housing affordability. The result has
been a lack of knowledge on which factors are critical in explaining the affordability
problems of urban households in Kenya. The objectives of this research work were therefore
to: identify significant factors that affect housing affordability, determine the influence of the
significant factors and rank them with respect to contribution to housing affordability and,
suggest policies necessary to address the urban housing affordability problem in Kenya.
The research focused on affordability in the home-ownership mortgage housing sector in
Nairobi. The methodology was based on a questionnaire survey to households with mortgage
loans from Housing Finance Institutions and Banks. A total sample size of 390 households
was targeted for the study. However, 353 households responded to the survey yielding a
response rate of 90.5%. Information relating to social-economic characteristics of the
households, loan and property data as well as macroeconomic data was analyzed in order to
address the objectives of the study. The analyses were done using qualitative and quantitative
approaches with the aid of the Statistical Package for Social Sciences (SPSS) software. Three
statistical procedures, namely; descriptive statistics, correlation analysis and regression
analysis were performed on the data with the aim of identifying factors which are significant
predictors of housing affordability.
The research found that there is a significant linear relationship between housing affordability
and the factors: Interest on loan, Number of dependants (outside the nuclear family), Number
of family members with income, Construction cost, Size of the household, Loan-to-value
(LTV) ratio, Land value, Real gross domestic product (GDP) per capita, Job position/status of
the individual paying the mortgage, Type of mortgage instrument, Loan term, Loss of regular
employment income and the rate of inflation. The results indicated that the interest charged
on mortgage loan has the greatest influence on the affordability of the households. The
interest on loan which reflects the mortgage interest rate charged by the banks influence
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affordability because it determines the borrower’s monthly mortgage repayment amounts.
The results showed that an increase in the amount of interest charged on the loan increases
the monthly loan repayment placing a higher repayment burden on the households thus
affecting their affordability.
Applying Multiple Regression Analysis (MRA) to determine the contribution of the
significant factors and, therefore, rank them with respect to contribution to affordability, the
results showed that eight (8) factors namely; Interest on loan, Number of dependants (outside
the nuclear family), Loan-to- value (LTV) ratio, type of mortgage instrument, Number of
family members with income, Loan term, real GDP per capita and size of the household,
have a significant contribution to affordability and are therefore the most critical factors that
influence affordability in the home ownership (mortgage) housing sector in Kenya.
The regression model comprising of the eight critical factors has a correlation coefficient (R)
of 0.833 and a coefficient of determination (R2) of 0.693. The model has a significant F-
value of 97.127, indicating that the eight factors are significant predictors of housing
affordability. Among the eight factors, interest on loan is the most important factor
accounting for 52.8% of the variance in affordability, while the size of household is the least
important factor.
From the literature review and the results of the analyses performed in this study, it was
concluded that housing affordability is influenced by clusters of factors related to the
households’ social economic characteristics, loan characteristics, property attributes and
macro-economic factors. The households social economic characteristics among others
include; the Loss of regular employment income, Number of dependants, Number of family
members with income and Size of the household. The loan factors include the Interest
charged on loan, Loan-to-value (LTV) ratio, Loan term and the Type of mortgage instrument.
The property attributes are the Cost of construction, Land value, Developers profit and
Property transfer costs. The macro economic factors include the Rate of inflation, Real gross
domestic (GDP) per capita and Unemployment rate.
The results of the analyses showed that the social economic factors affect affordability
because they influence households’ income. The loan factors influence affordability because
they affect the price of housing and the monthly mortgage repayments of the households.The
property factors affect the price of housing and therefore the monthly loan repayments. The
macro economic factors affect both the income of households and housing price as well as
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mortgage interest rates charged by the banks and financial institutions. Policy measures have
been proposed to reduce or stabilize mortgage interest rates, reduce the price of housing, and
improve household’s income so as to enhance access to housing and improve affordability
among urban households in Kenya.
The research thesis is organized into six chapters. Chapter one covers the general background
to the study in the form of introduction, problem statement, study objectives and hypothesis
as well the significance and limitations of the study. At the end of the chapter, the
organization of the study is presented. Chapter two provides a general over view of the urban
housing problem with reference to developing countries. The purpose of the review is to
develop a frame work and lay a solid foundation necessary to contextualize the urban housing
affordability problem generally and in particular factors affecting affordability in Kenya.
Chapter three provides the theoretical and conceptual framework of the study. In particular,
the theories that explain the urban housing affordability problem in developing countries are
identified and explained. Review of theories in research studies is important because they
offer a theoretical basis for undertaking the research study. Theories explain the phenomenon
that is being studied and offers tentative theoretical answers or solutions to the problem that
is being investigated. The last section of the chapter reviews literature on the factors affecting
affordability and formulates a conceptual model of affordability and its determining factors.
Chapter four defines the research design and methodology adopted to address the research
questions and objectives of the study. The chapter begins with a brief description of the case
study area, Nairobi, its location in Kenya, population dynamics and the housing situation that
necessitates the need for policy interventions to address the affordability challenges of
households in the City and Kenya in general. The chapter then discusses the research design
adopted for the study by highlighting the sources and types of data used, the procedures
employed in deriving the research variables and a description of the relevant variables and
data used in the study. Chapter five identifies the factors that affect housing affordability in
the home ownership mortgage housing sector and ranks them with respect to contribution to
affordability. Chapter six provides a summary and discussion of the main research findings,
the conclusions drawn from the research findings as well as contribution to knowledge,
policy recommendations and suggested areas of further research.

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TABLE OF CONTENTS

Page
TITLE…………………………………………………………………………………… i
DECLARATION……………………………………………………………………….. ii
ACKNOWLEDGEMENTS……………………………………………………………. iii
DEDICATION……………………………………………………………………………..v
ABSTRACT …………………………………………………………………………… vi
TABLE OF CONTENTS……………………………………………………………..… ix
LIST OF TABLES …………………………………………………………………….. xii
LIST OF FIGURES ………………………………………………………………..... xiii
LIST OF ABBREVIATIONS………………………………………………...……… xiii

CHAPTER 1: INTRODUCTION AND BACKGROUND TO THE STUDY..….…...1
1.0 Introduction ....................................................................................................................1
1.1 Problem Statement…………………………………………………………………… 4
1.2 Study Hypothesis…………………………………………………………………….10
1.3 Research Objectives .....................................................................................................11
1.4 Research Questions………………………………………………………………….. 11
1.5 Scope of the Study .......................................................................................................11
1.6 Significance of the Study ............................................................................................13
1.7 Limitations of the Study ……………………………………………………………. 13
1.8 Organization of the Study............................................................................................14
1.9 Summary……………………………………………………………………….…......15

CHAPTER 2: AN OVERVIEW OF THE URBAN HOUSING PROBLEM…....… 17
2.0 Introduction ..................................................................................................................17
2.1 Housing Deficits ..........................................................................................................18
2.2 Housing Conditions .....................................................................................................22
2.3 Housing Finance...........................................................................................................25
2. 3.1 Forms of Housing Finance…………………………………………………………27
2.3.1.1 Debt Finance...........................................................................................................27
2.3.1.2. Equity Finance.......................................................................................................27
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2.3.2 Sources of Housing Finance for Lenders..................................................................28
2.3.3. Housing Finance Markets in Developing Countries................................................31
2.4. Housing Affordability.................................................................................................38
2.4.1. Affordability Measures............................................................................................40
2.4.1.1. The Ratio Measures..............................................................................................41
2.4.1.2. Residual Measures................................................................................................43
2.4.1.3. Other Measures…………………………………………………….………....…44
2.4.2. Housing Affordability Problems in Developing Countries.....................................45
2.5 Summary .....................................................................................................................49

CHAPTER 3. HOUSING AFFORDABILITY- TOWARDS A THEORETICAL AND
CONCEPTUAL FRAMEWORK……………………………………51
3.0 Introduction ..................................................................................................................51
3.1 Theories of Housing Affordability...............................................................................52
3.1.1 Public Interest Economic Regulation Theory (PIERT) ............................................53
3.1.2 The Theory of Distributive Justice ...........................................................................56
3.2 Special Characteristics of Housing ..............................................................................59
3.3 State Intervention vs. Free- Market Debate in Housing Affordability ........................62
3.4. Factors Affecting Housing Affordability...................................................................64
3.4.1. Demand-Side Factors...............................................................................................68
3.4.2. Supply-Side Factors.................................................................................................71
3.5. A Conceptual Model of Factors Affecting Affordability..........................................72
3.6 Summary……………………………………………………………………………75

CHAPTER 4: RESEARCH DESIGN AND METHODOLOGY.…………....……..76
4.0 Introduction ................................................................................................................76
4.1 Over view of Nairobi City..……………………………...…………………………..76
4.2. Research Design..........................................................................................................78
4.2.1. Population, Sample Size and Sampling Techniques................................................80
4.2.2 Data Collection…………………………………………………………..….….….86
4.3 Variable Identification, Description and Measurement………………….……….….87
4.3.1. The Dependent Variable..........................................................................................88
4.3.2. Independent Variables.............................................................................................89
4.4 Method Used to Rate the Factors that Affect Housing Affordability……………..101
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