How house price index is evaluated
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
10 October 2021
Bill Lidjoh was not satisfied with the numbers I quoted in my article on
how to estimate house prices two weeks ago. He asserts that they were
very misleading and wonders where I got them from. To illustrate his
point, he gives the example of an
incomplete main house in Umoja estate, Nairobi, saying that it used to
go for about one million shillings in 2018 and, today, the asking price
is Sh4M. He adds that a Servant’s Quarter (SQ) in Kileleshwa used to
rent for Sh13,000 per month two years ago and today it is Sh18,000.
Let me start with the
source of my data. As clearly indicated in that article, the figures
were from the Kenya Bankers Association Housing Price Index report of
March 2021. The KBA uses actual prices that have been negotiated between
buyers and sellers and financed by the banks in Kenya. The mean values
of all the contracts are evaluated and converted into an index.
Of course, there will
be many deals above the mean and an equal number below. Indeed, I
suspect highly that none of the houses are sold at the average price!
Furthermore, Bill is using the price of an incomplete house to support
his case yet the KBA index considers complete houses. That’s a different
product altogether.
In addition, one of
the leading real estate dealers also publishes a housing price index
which is based on actual contracts signed through their office. Even
though their data is not as wide as that of the bankers, it also follows
a similar trend. I did not use this source lest I be accused of
favouritism.
A strange thing is
happening in Westlands, Parklands, Kileleshwa and Kilimani
neighbourhoods. Developers are buying single dwelling houses,
demolishing them and building high-rise apartment blocks on the plots.
For this reason, there is a big demand for single-dwellings and their
prices have shot up.
On the other hand,
the supply of apartments has increased greatly and their prices have
declined. The question is, how does this affect the average house
prices? The typical single-dwelling on a half-acre plot can fetch about
Sh150M in these neighbourhoods.
The developer will
bring it down and replace it with about 100 apartments each going for
about Sh10M to Sh15M; an average of Sh12.5M. Could this be the reason
for the observed drop in house prices?
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