It is more affordable to continue renting a house than buying and owning one during this time of hiked interest rates by Central banks, the International Monetary Fund (IMF) says.
According to IMF's sector outlook update, the increased rates have substantively raised mortgage interest rates making it costly to acquire housing loans.
“When interest rates are raised in a move to tame the rising inflation, and the supply of housing is limited, the cost of acquiring loans for buying homes will be much higher, a trend likely to be witnessed in the better part of this year before inflation eases,” IMF says.
“It would therefore be much more affordable to continue renting, even though rents have soared in the recent past.”
In Kenya, currency pressure remains a key risk to interest rates outlook, after the CBK retained the base lending rate at 8.75 per cent in January.
This means banks will continue advancing credit at an average of 14 per cent and are projected to continue raising the rates.
The benchmark rate by the regulator has been on an upward trend, increasing by about 25 per cent to January this year from the same period last year.
Consequently, this has impacted on mortgage charges, with commercial banks in the country now loading up to an extra 20 per cent cost on mortgages in multiple charges before they levy interest.
This has pushed loan repayment to almost three times the principal amount locking out more Kenyans from home loans capped at an average of Sh9.2 million.
According to data by banks, interest rates for a Sh9.2 million mortgage is priced between 11.5 per cent and 18.18 per cent, with customers expected to pay almost three times the actual loan at a maturity period of 12 years.
Therefore, with higher mortgage rates, the lender says the demand for housing will decline over time and in turn occasion a gradual reduction in housing prices which will trigger a negative effect on the economy.
“The housing market is strongly linked to the economic growth, and when the prices are lower, the wealth of home owners is likely to be reduced, prompting lower consumer spending and economic growth,” IMF says.
It adds that lower house prices and economic activity could also increase the probability of defaulting on existing loans which could undermine the stability of financial institutions making them less willing to extend loans, impacting investment and consumption.
The lender therefore advises on strategic policy measures that would help mitigate the house prices pressure on the back of rising interest rates.
“Leveraging on affordable housing initiative while reducing speculations through improved property taxation is one way to mitigate against these pressures while preventing future large price declines,” the lender says.
