Effect of GDP, Population and Interest Rate on Residential House Prices in Nairobi County, Kenya

Abstract

Previous studies have shown an increasing trend in house prices over the past ten years and it is anticipated that the trend is likely to continue into the foreseeable future. This trend has been attributed to various factors, both microeconomic and macroeconomic. However, there is scant information on the effect of various macroeconomic factors such as GDP, population and interest rate on house prices in Kenya. Consequently, there is need for more research to be undertaken in order to determine the effect of such factors on house prices over time using the latest data. This study therefore sought to address the current literature gap by determining the effect of various macroeconomic factors on house prices in Kenya. In particular, the study sought to examine the effect of; GDP, population and interest rate on residential house prices in Nairobi count. To achieve this, the study adopted an explanatory research design as it attempted to explain the effect of GDP, population and interest rate on residential house prices for the period 2004-2016. The target population comprised of quarterly (2004Q1-2016Q4) observations of the House Price Index (HPI) and the quarterly observations of the variables. Data on quarterly observations of the House Price Index was obtained from Hass Property Consult Ltd while that on quarterly observations of the variables was obtained from Kenya National Bureau of Statistics and Central Bank of Kenya. Vector Error Correction Model (VECM) estimates were used to establish the long-run relationship between the determinants and residential house prices. Results confirm the existence of a long-run equilibrium relationship among variables in the model. The size of the coefficient of the error correction term (β = - 0.0004, p = 0.0383) suggests a relatively lower speed of adjustment from the short-run deviation to the long-run equilibrium. VECM coefficients specifically revealed that in the long-run GDP (β= - 0.6067, p = 0.0071) and interest rate (β = - 17.99, p= 0.0009) have a negative significant effect on house prices. Though having a negative relationship with house prices, the study failed to identify any long-run relationship between population and house prices (β= -0.5340, p = 0.4562). The study recommends that the government of Kenya should create an enabling environment for availability of credit to spur economic growth and hence check the house prices. Further, there is need to check on urban population growth so as to match the number of houses available with the increase in population.