Nexus between Inflation and Real Estate Growth in Kenya:

Abstract

Real estate has been one of the most profitable industry world over. In Kenya, the industry has grown exponentially and contributes significantly to her GDP. The growth has been ascribed to demographic trends like rapid urbanization at 4.4% p.a against the world’s 2.5% p.a. The trends have led to rising demand for residential services with accumulated deficit of over 2 million units. This scenario attracted the attention of Kenya Government to the extent that it identified affordable housing as one of the key strategic focus areas in its Medium Term Plan III for 2018-2022. Despite the attention, paucity of information on the nexus between real estate growth and its determinants like inflation continues to hamper policy formulation in this sub sector. In addition, studies on the nexus have generated mixed results and debate in the realm of economics. The study utilized world bank time series data and estimated a vector error correction model which revealed absence of long run nexus between real estate growth and various dimensions of inflation (core, energy and food). However, short run causality running from energy inflation to real estate growth exists. The energy inflation had a significant negative effect on real estate growth. Core inflation had a positive significant effect while food inflation had an insignificant positive effect. Thus, ceteris paribus, in order to enhance growth of the real estate industry, energy inflation should be reduced and ensure continuous stabilization of core and food inflation as an incentive to potential investors and the households seeking to acquire housing services in the economy