Interest is the cost of borrowing money, usually a percentage of the borrowed amount known as the principle. Prevailing rates are dependent on the Central bank’s base rate and even the government’s borrowing rate. The base rate is the rate at which the Central Bank of Kenya lends to commercial banks.
In real estate, loans secured against a property are known us the mortgage. Mortgage rates have an enormous considerable effect of the Real Estate industry. Currently, mortgage rates in the country have risen to 27% up from 19% at the beginning of the year; this has been attributed by the high returns on treasury bills offered by the central bank. Despite increasing the interests of existing mortgage holders, change in interest rate also has an impact on real estate values.
To most people, property values are only influenced by demand and supply in a given location and replacement cost of a particular development in addition to the price of land it stands on. However, changes in interest rate and Treasury bill rates have a profound effect on the value of the income generating properties as on any investment channel.
The rise in interest rates tend to influence negatively credit availability in the real estate industry; this does not only reduce the purchasing power of the public to Real Estate but also reduces the funds available for development. This results in a decrease in supply and also a reduction in demand, this would hypothetically lead to the decline of property values. The opposite would occur if the interest rates were to be reduced.
This tends to means that if the current interest rates remain in the current position, The industry could experience stagnation and also a possible decrease in property values. This, however, might not prevail since the Treasury bill rate has since reduced and bank lending rates are expected to reduce by January.