Impact of Global Financial Crisis on Real Estate Market in Kenya

Topics: Subprime mortgage crisis, Financial crisis, Real estate Pages: 22 (7584 words) Published: May 1, 2013
IMPACT OF 2007-2008 GLOBAL FINANCIAL CRISIS ON KENYA’S REAL ESTATE MARKET; A CASE STUDY OF NAIROBI CHAPTER 1: INTRODUCTION
1.1 Background
Real estate sector is one of the critical pillars in a country’s economic growth and development. Property makes up 5.3% of Kenya’s GDP and has shown positive growth since 2001 (Keeler, 2009).  It spurs investment in both Formal and informal sectors. The sector provides employment to a big percentage of Kenyans in mortgage companies, consultant firms, construction firms, and brokerage firms. Real Estate refers to fixed real property such as land, buildings, minerals etc. It includes piece of land, the air above it, the ground below it, any buildings or structures on it and its natural assets (Brueggeman W. & Fisher J., 2008).             Real estate market is an over the counter market that deals with buy and sell of real estate, financing for real estate acquisition and renting of office spaces, apartments, houses and land. It is also concerned with leases.  The situation of real estate market is determined by fundamental variables of the market. These variables are: (1) House prices, house inventories and sales of new and old houses (2) rents, and vacancy rates (3) mortgage amounts, mortgage Interest rates and mortgage default rates. The term financial crisis is applied to a broad variety of situation in which some financial institutions or assets loose a large part of their value, thus causing an economic meltdown (Read, 1959). It is a collapse of the world financial system, where there is a widespread failure of financial institutions or freezing up of capital markets that can substantially reduce the supply of capital to the real economy (Acharya V., Philippon T., Richardson M., and Roubini N.,  2009). The United States of America recently experienced this crises; “The global financial crises of 2007-2009.”  There is almost universal agreement that the fundamental cause of the crisis was the combination of a credit boom and a housing bubble (Acharya V. et al. 2009). This led to a wave of defaults, world over, with many more expected to come, in the mortgage sector (Acharya V. et al. 2009). Its effects were felt all over the world. While developed countries are experiencing some of the sharpest contractions, households in developing countries are much more vulnerable and likely to experience acute negative consequences in the short- and long-term (Cord L. et al.). Louise C., Marijn V., Blomquist C., and Rijkers  argue that declining growth rates combined with high levels of initial poverty leave many households in developing countries highly exposed to the crisis. This means that vulnerability is heightened if, at the same time, governments are constrained in cushioning the impacts due limited institutional capacity and fiscal resources.  Kenya’s economy is characterized by recovery from post election crises, political instability and global economic recession. This makes the real estate market in Kenya to be more vulnerable.  

1.2 Problem Statement
   This paper will study the impact of Global financial crisis real estate market in Nairobi. The commercial real property market is a critical sector to the economy and its performance is directly and indirectly affected by the prevailing economic, political and social conditions of the country (Regent management ltd market research report, 2010). Vulnerability is heightened if, at the same time, governments are constrained in cushioning the impacts due limited institutional capacity and fiscal resources (Louise C., Marijn V., Blomquist C., & Rijkers B.). Kenya’s economy is characterized by recovery from post election crises, political instability and global economic recession. This makes the real estate market in Kenya to be more vulnerable.             A number of studies have been done on Kenya’s real estate market and also how it is impacted by the global financial crisis. The study by Kaptich (2008)...

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