“(Housing bubbles typically begin) due to a restricted supply that takes a long time to replenish and increase. Market speculation raises demand by injecting additional capital into the market. At some point, demand declines or stagnates as supply rises, which causes prices to drop dramatically and the bubble to burst,” he says.
So in 2016 and 2017, industry leaders came out to forcefully deny any chances of a real estate bubble. A bubble burst in the US a decade before had left markets sensitive to the slightest signs of an impending bubble.
Knight Frank Kenya then said that a real estate bubble could only occur in well-established real estate markets.
“The Kenyan market is not experiencing a bubble but the normal real estate cycles of rising demand, peaking market, falling market then bottoming out and the rapid price increments witnessed are because the Kenyan real estate market is in the rising phase that is characterised by low supply, high demand leading to increased prices,” it said in a report.
HassConsult’s research and marketing manager Sakina Hassanali faulted those who were waiting to benefit from a burst, saying there was no bubble to burst in the first place.
“At such a time that mortgage repayments equal monthly rentals then people would rather buy than rent. Until such a moment, you will not see a bubble burst. Right now, there is no bubble because most of the purchases are cash based. A bubble only happens when there is cheap finance, which we do not have,” she was quoted by Property Savvy magazine.
The fears did not go away.
In 2020, as the Covid-19 pandemic ravaged the world, demand for residential houses again increased rapidly. Instead of the typical adoptive model of housing happening, in which houses should filter (trickle) down to the bottom of the pyramid and become more affordable, it was rent that trickled down.
When this happens, it causes high demand for the few available houses to the lowest levels of the pyramid and therefore an increase in rents, pushing people lower down the rungs until the very poor cannot afford decent shelter; their houses now attracting occupancies of way wealthier people. Everyone was looking for bigger shelter and, if possible, affordable houses to buy.
So what are the causative agents of the real estate bubble?
A real estate bubble occurs when property prices rise sharply due to increased demand, speculation, and the expectation that prices will continue to rise. Several factors can contribute to a real estate bubble, including:
- Low Interest Rates:When interest rates are low, borrowing money becomes cheaper, leading to increased demand for real estate. Buyers are more likely to take out mortgages and invest in property when interest rates are favorable.
- Speculation: Investors sometimes buy properties not for personal use but with the intention of selling them later at a higher price. This speculative buying can drive up prices unnaturally.
- Limited Housing Supply: If the supply of housing is limited in a particular area and demand remains high, prices tend to rise. This scarcity can be due to geographical constraints, zoning regulations, or lack of available land for development.
- Easy Access to Credit: Lenders offering easy credit terms can encourage more people to buy homes, increasing demand and driving up prices.
- Economic Factors: Economic growth, job opportunities, and increased income levels can boost demand for housing, leading to higher prices.
- Government Policies: Government policies such as tax incentives, subsidies, or favorable regulations can stimulate housing demand, potentially leading to a bubble if not carefully managed.
- Psychological Factors: Public perception and market sentiment play a significant role. If people believe that property prices will continue to rise, they are more likely to buy, further driving up prices.
Conclusion
When one or more of these factors are present in an economy, they can create conditions ripe for a real estate bubble. However, it’s important to note that the specific causes can vary depending on the economic and regulatory context of a particular region or country.
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