Last year, we released a report, The Nairobi Metropolitan Area Mortgage and Rental Affordability Report 2016, that covered the mortgage and rental affordability of the residential sector. According to the report, most sub-markets were unaffordable to prospective home-owners with an average mortgage affordability index of 66, whereas most markets were affordable to the renters with an average rental affordability index of 132, where index scores of 100 and above indicate affordability. This year, we update the report with research conducted in 35 sub-markets in the Nairobi Metropolitan, to estimate the affordability of mortgages in 2017 and to note any changes in affordability between the two years. We start by explaining the methodology used in constructing the index, then cover the mortgages affordability showing the areas various income groups will be able to purchase houses using mortgages, then concluding with the rental affordability and the areas the various income groups will be able to rent houses.
Mortgage and Rental Affordability
Using market data from the Nairobi Metropolitan area on house and rental prices, we constructed indices to gauge the affordability of mortgages and rents in specific locations. The purpose of the research is to inform households on the areas they will find affordable to purchase mortgages and / or rent houses based on their levels of income and the corresponding house and rental prices in those areas.
Methodology
The Mortgage Affordability Index is a tool used to measure whether the average income earned by a household is enough to enable a household to purchase a house with a mortgage option. The Rental Affordability Index is a tool used to measure whether the average income earned by a household is enough to enable a household rent a house in a given location. In the computation of these indices, the key factors under consideration are household income, house prices, locations in Nairobi and the Metropolis, and monthly payments for mortgages and rent. The index value is obtained by dividing the qualifying income by the median household income.
- The qualifying income is obtained by dividing the monthly mortgage payments by 40%. The assumption being made here is that households spend a maximum of 40% of their income on mortgage payments; and
- An index of 100 or above indicates the most affordable areas, while that of below 100 to 0 indicates the least affordable areas.
From our survey and analysis, of the affordability of mortgages in the Nairobi Metropolitan area, our take outs, were as follows:
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(all values in Kshs unless stated otherwise) |
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Nairobi Metropolitan Mortgage Affordability Index |
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Segment |
House Price per Square Meter** |
Median Monthly Household Income* |
Monthly Mortgage Payment*** |
Qualifying Household Income**** |
Mortgage Affordability Index ***** |
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High Income |
197,706 |
1,300,000 |
1,156,241 |
2,890,603 |
45 |
|
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Upper Middle |
129,165 |
450,000 |
301,139 |
752,848 |
62 |
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Lower Middle |
85,745 |
200,000 |
138,720 |
346,800 |
68 |
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Satellite Towns |
66,628 |
200,000 |
106,751 |
266,879 |
82 |
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Average |
107,455 |
325,000 |
219,930 |
549,824 |
65 |
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With an average index of 65, mortgages are unaffordable across all segments due to the high prices of houses and cost of debt indicating that the median-income household cannot afford to service a mortgage. The index records a slight decline of 1 point from the 2016 average of 66 mainly as a result of the 3.8% price appreciation recorded year on year |
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*Median monthly household income - this is the median of the monthly income earned by households in the area under consideration. For one bedroomed houses it is assumed that a household has one breadwinner and for the rest, a household has two breadwinners
**House price per square metre - this is the median of the price per square metre of houses in the region under consideration obtained by market research
***Monthly mortgage payment - this is the monthly contribution that a household makes to the mortgage lender to service the loan. It is calculated using the excel PMT function based on the house price, at a 15% interest rate and a 20-year term
**** Qualifying household income - this is the monthly income that a household needs to earn to be able to afford a mortgage on a house
*****Mortgage affordability index - is the quotient of the qualifying income and the median monthly household income |
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Source: Cytonn Research
As such, in order to provide actionable recommendations, the table below summarises where households should take up mortgages depending on their income levels:
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Summary and Conclusions –Mortgage Affordability |
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Income Bracket (Kshs) |
Towns in which mortgages are affordable to households for the stated income levels |
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150,000-300,000 |
Thindigua, Kiambu, Athi River, Komarock, Dagoretti, Thika Kitengela, Ruaka, Rongai, Donholm |
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300,000- 1,000,000 |
Kikuyu, Juja, Ruiru , Ngong , Mountain View, Imara Daima, Kasarani, Langata, Upper Hill, Kilimani, Lavington, Kileleshwa, Westlands, Runda Mumwe, Redhill |
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Above 1,000,000 |
Lower Kabete, Loresho, Ridgeways, Riverside, Roselyn , Karen, Runda, Kitisuru |
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· Satellite Towns such as Thindigua, Kiambu, Athi River and Kitengela are the most affordable mortgage market with a household requiring a median income of between Kshs 150,000 – Kshs 300,000 to purchase a house using a mortgage · Roselyn, Karen, Runda, Muthaiga and Kitusuru are the most unaffordable mortgage markets with households requiring a minimum monthly income of Kshs 1 Million to purchase a house using a mortgage |
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Source: Cytonn Research
Given the unaffordability in the mortgage market, we also constructed a Rental Affordability Index to analyse the affordability of rents in the Nairobi Metropolitan area. The results were as follows:
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(all values in Kshs unless stated otherwise) |
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Nairobi Metropolitan Rental Affordability Index |
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Location |
House Rent per Square Metre** |
Median Monthly Household Income* |
Rent 2017 |
Qualifying Household Rental Income*** |
Rental Affordability Index**** |
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Satellite Towns |
318 |
200,000 |
38,708 |
129,028 |
155 |
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Lower Middle |
400 |
200,000 |
47,063 |
156,875 |
127 |
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Upper Middle |
629 |
450,000 |
127,900 |
426,332 |
120 |
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High Income |
914 |
1,300,000 |
424,375 |
1,414,583 |
92 |
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Average |
514 |
325,000 |
87,481 |
291,604 |
124 |
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With an average index of 124, rents are affordable in most segments apart from the high-income segment apartment from the High income segment where a household needs to earn Kshs 1.4 mn per month to afford the average rent of Kshs 424,375 per month |
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*Median monthly household income - this is the median of the monthly income earned by households in the area under consideration. For one bedroomed houses it is assumed that a household has one breadwinner and for the rest, a household has two breadwinners
** House rent per square metre - this is the rent per square meter paid by households each month. It is obtained by market research
*** Qualifying household rental income - this is the monthly income that a household needs to earn to be able to afford to pay rent
****Rental Affordability Index - It is the quotient of Qualifying rental income and median monthly household income |
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Source: Cytonn Research
The table below summarises where households should take up rentals depending on their income levels:
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Summary and Conclusions on Rental Affordability |
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Income Level (Kshs) |
Towns in which rents are affordable to households for the stated income levels |
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50,000-150,000 |
Athi River, Kitengela ,Ruaka, Kiambu, Thindigua ,Rongai Komarock , Juja ,Ngong, Donholm, Thika |
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150,000-300,000 |
Dagoretti, Mountain View, Imara Daima , Kasarani , Ruiru Kikuyu, Langata, Upper Hill |
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300,000-1,000,000 |
Parklands, Redhill , Westlands, Lower Kabete , Kilimani Runda Mumwe, Kileleshwa, Lavington , Loresho ,Ridgeways, Riverside |
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>1,000,000 |
Karen, Roselyn, Runda, Kitisuru |
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· Athi River, Kitengela, Ruaka and Kiambu are the most affordable middle class residential areas in Nairobi Metropolitan area. A house hold needs to earn a median income of Kshs 50,000-150,000 to live in these estates · The most unaffordable rental markets are Karen, Roselyn, Runda and Kitisuru with a household requiring more than a million Kshs to be able to live in these estates |
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Source: Cytonn Research
Conclusion
In conclusion, similar to 2016, no area in the Nairobi Metropolitan Area had an index score of 100 and above for the mortgage market indicating that the market is still a renter’s market as opposed to a buyers’ market despite the government’s efforts to increase the affordability of houses through measure such as (i) Capping the interest rates, (ii) giving developers constructing more than 100 units p.a a tax cut of 15%, and (iii) removing NEMA, NCA and title search fees. The ineffectiveness can be attributed to low incomes levels that cannot service a mortgage, high property prices which keep on rising and low mortgage disbursements by banks following the implementation of the Banking Amendment Act 2015. Consequently, The Nairobi Metropolitan Area still remains largely a rental market. For additional information on how we constructed the index, methodology and our assumptions, including the mortgage and rental affordability indices of the individual towns, refer to the full report here: Nairobi Metropolitan Area Mortgage and Rental Affordability Report 2017
Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only, and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.
