Kenya Needs 2 Million More Low-income Homes: Building Them Would Boost Its Economic Growth

Latest Issue: 
  • April 2017

Photo: Denis Mukundi / World Bank

  • World Bank says Kenya’s economic growth will dip to 5.5% for 2017, down from earlier forecasts
  • Slowdown in Kenya’s economic outlook is due to drought, weak credit growth, and rise in global oil prices.
  • Kenya’s GDP growth will accelerate to 5.8% in 2018 and 6.1% in 2019

Kenya’s economic activity remained robust in 2016 but is expected to dip in 2017 to 5.5%, picking up again in 2018 and 2019, according to the latest economic update from the World Bank Group. The Kenya Economic Update: Housing—Unavailable and Unaffordable, attributes the slowdown in economic activity to weak credit growth, the ongoing drought, and rising global oil prices.

“While Kenya is currently facing certain economic headwinds that are likely to dampen GDP growth in 2017, I am happy to note that the GDP forecast is expected to pick up in 2018 and 2019 as headwinds ease,” said Diarietou Gaye, the Bank’s Country Director for Kenya.

Photo: Sarah Farhat / World Bank

The focus section of this edition of the Kenya Economic Update is dedicated to analyzing Kenya’s housing market and the policies that can be put in place to make housing more affordable for many Kenyans, as stipulated in the Constitution of Kenya 2010 and the National Development Plan, Vision 2030 Strategy.

These blueprints have targeted the provision of 200,000 housing units annually for all income levels. However, the production of housing units is currently at less than 50,000 units annually, well below the target number, culminating in a housing deficit of over 2 million units, with nearly 61% of urban households living in slums. This deficit continues to rise due to fundamental constraints on both the demand and supply side and is exacerbated by an urbanization rate of 4.4%, equivalent to 0.5 million new city dwellers every year.

According to Mehnaz Safavian, Lead Financial Sector Specialist and co-author of the report, “Kenya can make housing more affordable to many more Kenyans, and in turn create new channels to boost overall economic growth both at the national and county levels.”

Numerous benefits can be attributed to improving access to housing finance, including economic growth, job creation, and deepening of the financial sector. There are various global examples supporting the “housing multiplier effect” as every dollar spent directly on a housing unit results in various indirect benefits to the country.

Kenya has the right fundamentals in place to achieve results on a significant scale. Collaborative efforts between government and the private sector are required, and a supportive policy and regulatory environment strengthened so that tools like the ones below can be leveraged:

  • Narrow the affordability gap in the housing market and improved financing for both developers and users. The inaccessibility of affordable housing finance is highlighted by the fact that there are fewer than 25,000 mortgages outstanding. Mortgage debt in 2015 represented 3.15% of GDP, substantially lower than in developed countries. Banks have limited access to long-term funding and few institutions have accessed capital markets to fund mortgages. Kenya ought to explore the role of SACCOs to help bridge the gap in the housing finance market.
  • Explore financing solutions can play a catalytic role in stimulating the supply and demand of affordable housing, and create momentum for other underlying reforms. Such solutions have been used in other emerging markets, including the creation of Mortgage Refinance Companies (MRCs), the provision of Housing Finance Guarantees, and developing Public-Private Partnerships (PPPs) for Affordable Housing. 
  • Innovative financing instruments must be accompanied by policy reform to be effective. Such reforms include the standardization of mortgage contracts, the establishment of appropriate mortgage foreclosure regulations, a clear legal and regulatory framework for mortgage-backed securities and covered bonds, and the creation of an environment conducive to mobilizing long-term domestic capital. Underpinning these is the inclusion of cooperatives and SACCOs.
  • The Government of Kenya could rely on the private sector to provide financing for affordable housing, with government actively supporting the sector by creating the right environment for lenders and developers. Such support can come in the form of working with the private sector to attract financing through financing instruments, improving access to land, providing basic infrastructure, and improving the efficiency of accelerating mortgage registration and title transfers.

Outside of housing, Kenya’s economic performance is expected to strengthen once the rains return to normal, the global economy picks up, the tourism sector rebounds, and some of the underlying causes of slow credit growth are resolved, as well as the completion of major infrastructure projects.