Effects of Market Fundamental Variables on Property Prices in Kenya – A Case of Nairobi Residential Property Market

Abstract

Property prices in Kenya are high leading to concerns over fundamentally unstable market, a situation with severe financial crisis consequences. The study seek to dispel this fear, using VAR model. Property pricesis the dependent variable while stock prices, interest rate, building cost and inflationare the independent variables. The results showproperty price that is reliant on its lagged values. Inflation and interest rate have insignificant lagged positive and negative effectsproperty prices while neither stock prices nor building cost can explain the prevailing property prices. The findings are consistent with the theories that property investment isa hedge against inflation, property prices are inversely related to interest ratesand inefficiency of the property market as evident in the time lapse required for adjustments.The study implies a fundamentally weak property market, an empirical facts that emulates a price bubble requiring necessary policy steps to supress.