Relationship Between Mortgage Interest Rates And Return On Investment Of Residential Property Industry In Kisumu City, Kenya

ABSTRACT

Globally, the demand for houses has immensely gone up in the last decade but their supply has been insufficient. Generally, real estate to a great extent relies on investment from loaned finances and the cost of financing. Housing affordability problem in Kenya is has caused many Kenyan families to spend in excess of 30-35% of their earnings on housing. This implies that property return in most circumstances are influenced by market forces of demand and supply. According to the Kenya National Bureau of Statistics, the average residential property return recorded sector records returns of 6.9%, in 2018, a 3.2% point (1.6% points annualized) decline from the 10.1% total returns recorded in May 2016. The Central Bank of Kenya (CBK) cut its benchmark interest rate to 10.5 % as of May 2016 due the exchange rate stability and inflation was expected to decline further in months that were to follow. Interest rates in Kenya have risen since 2011 after the Central Bank of Kenya (CBK) increased the Central Banking Rate (CBR) from 7% to 18% in an attempt to curb the run-away inflation and steady the dwindling shilling. The performance in residential properties is attributable to a decline in price appreciation, which dropped by 1.7% points. The disconnect that exists between the surging population growth, the biting shortage in housing and relatively low residential income has is the motivation for this research. Therefore, the purpose of this study was to assess the relationship between the mortgage interest rates and return on investment of residential property industry in Kisumu City. Specific objectives of this study were to: determine the association between the mortgage borrowing rates and return on investment of residential property industry in Kisumu City and ascertain the relationship between mortgage repayment rates and return on investment of residential property in Kisumu City. The study was anchored on the Loanable Funds, Liquidity Preference and the financial accelerator theories. A correlation research design was employed. The population of the study entailed residential property industry in Kisumu City for the period 2013-2018 involving monthly data yielding 72 data points. The study used secondary data. Secondary data was collected through desk review using a data collection form. Data was analyzed using descriptive and inferential statistics. Data is presented using tables and graphs. The findings were that mortgage borrowing rate and mortgage repayment rate significantly negatively predicts return on investment (ROI), β = - .0438 (p = .0350), β = - 0.0057 (p = .0353) respectively. These values are statistically significant since the p-value is less than 0.05. The study concludes that is that mortgage borrowing interest rate and repayment rate are an important negative predictors of ROI. The recommendations of the study are that managers of residential properties in Kisumu City should negotiate for reduced mortgage borrowing interest rate as this undermines ROI and scale down mortgage repayment rate as this undermines ROI of these investments. The research may help in creating proper policy framework governing credit and the rationale of setting mortgage rates for the benefit of both lenders and borrowers. It will greatly help finance students, with rich academic materials for their research, critique and filling any gaps that may exist.