Most of us grew up in a 'land is the ultimate investment' culture. In some communities, you're not considered mature if you don't own a place of your own.
This 'reasoning' I believe, partly explains why the real estate market is so inefficient.
This 'reasoning' I believe, partly explains why the real estate market is so inefficient.
In the developed world, specifically in the US, the value of properties and indeed many assets, is often quoted as a multiple of annual earnings, rental yields or capitalisation rate (cap rate) if you like...5X, 10X etc.
Here in Kenya property prices are speculative in nature.
Here in Kenya property prices are speculative in nature.
People buy property not because the fundamentals make sense but because of the cliché 'you can never go wrong with real estate'. In the process, people are prepared to pay prices that don't make any sense. This explains the crazy prices in the real estate market.
Remember there's no such thing as a great asset regardless of price. Everything boils down to price! A great asset can be a bad idea at some price.
In circa 2014, NSSF's planned high rise residential property sold out for about Sh33 million a piece.
In circa 2014, NSSF's planned high rise residential property sold out for about Sh33 million a piece.
Today the going price of those units is about Sh15 million!
Financial planning is an alien concept in Kenya. People are ill prepared to face the future both in terms of having a nest egg and adequate financial knowledge...and so owning a house becomes the ultimate fall back plan.
Financial planning is an alien concept in Kenya. People are ill prepared to face the future both in terms of having a nest egg and adequate financial knowledge...and so owning a house becomes the ultimate fall back plan.
People will often say 'atleast I will have a roof over my head in the event the unthinkable happens' to justify the crazy lengths they're prepared to go to own a house, which explains the "peace of mind" line.
An asset can be defined as a series of cash flows, which means the value of an asset is the present discounted value of future cash flows. The law of one price states that the market price of an asset is the present discounted value of future cash flows.
That also implies that assets with the similar cash flows should have the same price.
When that relationship is broken, you have a mispricing and or arbitrage opportunity. An arbitrage opportunity exists when assets with similar cash flows have different prices.
When that relationship is broken, you have a mispricing and or arbitrage opportunity. An arbitrage opportunity exists when assets with similar cash flows have different prices.
It's a riskless opportunity to make profit by exchanging similar cash flows for a lower price.
In efficient markets, such mispricings rarely exist and when they do they quickly disappear as participants in the market quickly recognise these opportunities and take advantage...
In efficient markets, such mispricings rarely exist and when they do they quickly disappear as participants in the market quickly recognise these opportunities and take advantage...
...of them.
In Kenya, a very inefficient market, such mispricings have continued to persist for long. You can make a riskless profit by selling your property and investing the money in government securities.
In Kenya, a very inefficient market, such mispricings have continued to persist for long. You can make a riskless profit by selling your property and investing the money in government securities.
I mean, it's crazy that riskless government securities have higher yields than riskier assets like real estate. It violates the principle of risk and reward!
That's why I said the "peace of mind" line is for lack of a better word, is perpetuated by a lack of financial knowledge.
That's why I said the "peace of mind" line is for lack of a better word, is perpetuated by a lack of financial knowledge.
