Banks fight to take control of mortgage market

Lenders have developed a tool that they say will give a true picture of property prices in a move seen as a direct response to criticism of high interest rates by industry firms.

The banking industry has opened a new battlefront for the control of information in the lucrative property market by developing a tool that will see it start releasing a quarterly property price index.

To be launched in October, the formula seeks to have the banking sector take a lead in providing information on house prices and mortgage rates with the aim of crowding out the current index computed by HassConsult and the Mortgage Company.

In what may appear as a direct response to criticism of high interest rates by property firms, the lenders have developed a tool that they claim will give a true picture of property prices.

“We are developing this housing price index as an alternative to provide market players as well as policy makers with an improved analytical tool,” Kenya Bankers Association (KBA) boss Habil Olaka said at the third annual banking research conference.

HassConsult, in collaboration with the Mortgage Company, has been playing the leading role in presenting a property price index in the country for the past five years. The index often accuses banks of driving up property prices through high interest rates.


The bankers, through their industry lobby group, KBA, however reckon that the new price index will act as a risk management tool for mortgage providers and lenders who use property as collateral.

Both KBA and HassConsult have different approaches, which they both defend vehemently, to arriving at the movements of property prices.

The tool by bankers seeks to rely on information provided by the top five lenders controlling 70 per cent of the country’s mortgage accounts to predict price movements and their driving force.

The lenders are Housing Finance, Cooperative Bank, Standard Chartered Bank, Barclays Bank, and Kenya Commercial Bank.

HassConsult, on the other hand, relies on advertised property asking prices on billboards, property portals, and signboards to derive prices for different locations.

“KBA’s approach is good, but I am concerned about its scope considering the low number of mortgage accounts in the country which will make its price index narrow,” said HassConsult’s head of marketing and research, Ms Sakina Hassanali.


According to KBA, however, the model by HassConsult is based on the wrong assumption that property price changes are purely accounted for by price movements.

“This is unrealistic given that specific house characteristics are underpinning factors towards priced movements,” said Jared Osoro, KBA’s head of research.

Mr Osoro said the model by KBA factors in the qualitative characteristics of a house, which include number of floors, bathrooms, swimming pool, garage, and compound.

Other features to be considered are the house design, number of bedrooms, type of house, and availability of social amenities in the neighbourhood.

“Our model thus generates a quality-adjusted price index by taking into account the heterogeneous characteristics of houses,” Mr Osoro added.

The researcher points out that the model used by firms such as HassConsult is inefficient as it does not use the available selling prices, instead only using information on units that have sold more than once during the sample period.

Ms Hassanali, however, observes that their asking price-based approach gives a true reflection of property prices and demand in different locations as well as trends.

“With our approach, I can easily tell you the average price of property in any middle-income location to suburbs across the country,” she said.

HassConsult, said Ms Hassanali, collects property prices in all regions without focusing on transaction prices, which could be subject to under-declaration to avoid tax payment.


The latest price index by the property firm, for instance, showed that high interest rates and low incomes have locked a large number of Kenyans living in urban areas out of home loans market.

The index, released in April, said that out of the country’s 9 million households, only 2 million can afford a Sh1 million mortgage. The country has less than 20,000 mortgage accounts.

Pricing has been identified as the biggest obstacle to individuals accessing house loans, forcing them to live in rented units. Kenya has a high interest rates regime that has seen spreads stay at between 13.9 per cent and 19 per cent in the past 12 months.

The Kenya Bankers Association, on the other hand, through preliminary studies of data from mortgage lenders in 2010-2011, said property prices were influenced by the quality and characteristics of a house.

“From the results we find that the number of bedrooms, the type of the house, number of floors, presence of a garage and/or a swimming pool significantly positively influences the house prices,” Mr Osoro said.

Central Bank governor Njuguna Ndung’u expressed support of the KBA model, saying it is a better price tracking measure that can withstand the test of time.

“We need to move away from the thinking of a bubble in the market and especially property price driven on one hand by a supply-constrained market and on the other a transitioning demographic structure,” Prof Ndung’u said.


In an apparent vote of confidence for the banker’s model, the CBK governor said the price index by KBA shall be factored in the monetary policy going forward.

The Mortgage Company’s chief executive officer, Ms Caroline Kariuki, however, questioned the reliability of KBA’s index, considering that it will rely on mortgage accounts to generate a housing price index.

“It is a good step by bankers to be part of this, but mortgage accounts for only 1-2 per cent of the entire property market. It may not be adequately reliable,” she said on the telephone.

Speaking at the presentation of the KBA property pricing tool, Housing Finance managing director Frank Ireri suggested that KBA consider including data from the lands registry, where all land transactions are documented, to expand the scope of its findings.

“This is an alternative index and a more comprehensive one, but not a competitor to HassConsult’s,” Mr Ireri said, adding that it would form a tool to help banks determine how best to lend.

It remains to be seen how KBA, HassConsult, and The Mortgage Company will defend the credibility of their housing price indexes considering that they are players in the same market.

The country’s property market ranks poorly in terms of availability of information, a fact that has made it difficult for investors to make decisions.

The global Real Estate Transparency Composite Index, 2012, ranked Kenya 65th with 3.7 points as a semi-transparent market worldwide.

The market has for years relied on abstract figures released by different sources. For instance, it has been difficult for the market to establish a definite housing deficit in the country.