By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

12 April 2015

Last week, we looked at the case of a man who won Sh1,200 from 1955 and found that this was equivalent to winning Sh362,000 today. The discussion ended by asking what the money would be worth if it had been invested.

Looking at trends in bank deposit rates, it is unlikely that the man could have been paid anything above 5 per cent per annum during the entire 60-year period. If we generously allow this as a compounded rate, it turns out that the Sh1,200 would have accumulated more that 18 times over. Now that sounds like a lot but it works out to just Sh22,400!

That’s depressing, to say the least! Considering that the buying power of the Sh1,200 has been eroded significantly – commodities that cost Sh1,200 in 1955 are now going for Sh362,000! Clearly, keeping money in a bank account for a long time is not a very wise idea – not even in “fixed-deposit accounts”.

In fact, these days it is difficult to understand why people still keep their savings in bank accounts – there are much better [and probably safer] places to store it, but that’s a story for another day.

One of the most popular investments among Kenyans is land. For this reason, the cost of land in this country has been increasing at very high rates for a very long time. In deed, it is interesting that we don’t talk about “inflation” in reference to land; we prefer to call it “appreciation in value”.

The first question to ask is whether it is reasonable to expect that Sh1,200 could have bought a piece of land in 1955. We get the answer by asking whether Sh362,000 can buy land today. Of course the answer is yes! I have seen very many parcels advertised for much less.

It is difficult to say what size of land Sh1,200 could have bought in 1955 because that depends on the location. Nevertheless, the answer is immaterial since what we are interested in is the rate of appreciation.

I have observed that, as a general rule, the cost of a parcel of land in Kenya doubles every three to five years – depending on location. In some special cases it can shoot up dramatically as happened in Thika when the government announced that Thika road would be expanded to a 12-lane highway.

Doubling every three to five years translates to between 20 and 25 per cent increase per year. When you think about it: if you bought a piece of land for about Sh500,000, it  is reasonable to expect that you can sell it for between Sh600,000 and Sh750,000 after one year.

If we use a median case of doubling every four years, we find that if the man bought some land (any size, any where) with the whole Sh1,200 in 1955, the value would have gone to Sh2,400 by 1959, then to Sh3,600 in 1963 and so on. Continue this way, it turns out that the land should fetch about Sh40 million today!