How to estimate the price of a house

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

26 September 2021

John Koros asks a brief question: “How much should I pay for a house whose rent is Sh75,000 per month?”. The straight answer is quite vague: the price depends on the market conditions. That is, how much you are willing to pay and how much the seller is asking for. The “correct price” is somewhere in between – not necessarily the mid-point!

Still, a casual observation of the Nairobi middle-income real estate market reveals that the price of a house is approximately 200 times the monthly rent. Thus, a unit that is renting for Sh75,000 would have a market value of about Sh15 million. However, this factor of 200 is not written in stone – it varies in space and time.

About 20 years ago, houses in South B/C, Nairobi West and Lang’ata areas were renting for between S15,000 and Sh20,000 per month depending size (number of bedrooms). The prices at the time ranged from Sh1.8 million to Sh2.5 million. This works to a price/rent ratio of about 120.

Clearly, over the last two decades, the house prices have appreciated faster than rents. In the Early 2000s, the average rate of return from rent was about 10 per cent per annum, while today, it is around 6 per cent. The question that investors in housing should really ask themselves is whether they are happy with this rate of return. Especially considering that banks are readily offering similar interest on deposits.

Now, the Kenya Bankers Association publishes a quarterly House Price Index which monitors the actual negotiated prices that are financed by the banks. The data runs back to the year 2013. It shows that, over the last 8 years, prices have increased by about 17 per cent – cumulatively.

That is to say, a house that was bought for Sh10 million in 2013 will probably be sold for about Sh11.7 million today – at best, Sh12 million. That doesn’t sound very good, does it? It is less than 2 per cent value appreciation per year. So, what’s going on?

A closer look at the index reveals that the prices peaked around 2018 and then started declining to the present levels. A casual observer will notice that there has been heightened activity in the construction of residential houses/apartments in the middle-income areas of Nairobi and, therefore, it is not surprising that prices appear to be on the decline.