Effect of money market factors on formal housing Growth in Kenya

Abstract

With high formal housing shortages across the globe, money market factors such as interest rates have been found to influence formal housing development in advanced economic regions such as USA, South America and Europe. While annual demand for formal houses is estimated at 250,000 units and only 50,000 being provided, there exists an annual deficit of 200,000 units and several studies attempting to explain factors affecting formal housing growth have mainly focussed on spatial factors and overall macroeconomic variables such as Gross Domestic Product, rental income, public debt, money supply and unemployment yet formal housing deficit continue to widen. Thus, inadequate attention has been given to financial money market factors that include exchange rates, savings interest rates, investment interest rates and inflation rates which are critical to any investment. Hence this study sought to analyse the effect of money market factors on formal housing growth in Kenya. The specific objectives of the study were to; examine the effect of exchange rates on formal housing growth; establish the effect of savings interest rates on formal housing growth; examine the effect of investment interest rates on formal housing growth and finally establish the effect of inflation rates on formal housing growth in Kenya. This study was anchored on the Solow Neoclassical Growth theory which uses the Cobb-Douglas approach suitable to specify a housing growth function. This study adopted a correlation research design. A correlation analysis and regression were adopted respectively to necessitate the determination of association and effect. The study used a time series secondary data for the period 1970-2014; the period under which most post-independence housing policies in Kenya were implemented. Tests for Autocorrelation, multicollinearity, stationarity, heteroscedasticity and cointegration were undertaken. Data was sourced from annual economic surveys and analysed using Ordinary Least Squares approach at 5% level of significance. The study findings established that exchange rates and investment rates were significant with and respectively in influencing formal housing growth. A 1% increase in exchange rate in previous two years decreases current housing growth by 0.59% while a 1% increase in investment interest rates decreases housing growth by 0.48%. Inflation and savings interest rates were however insignificant. With an F-statistic of 3.618852 it was concluded that Money market factors were significant in influencing formal housing growth and accounted to 20.75% of formal housing growth variation. In order to boost formal housing growth in Kenya, the study recommends for strengthening of the Kenyan Shilling and lowering of investment interest rates. The study is useful to housing practitioners, government and investors in formal housing.