Bubble is bursting, Donde says

October 29, 2008

, NAIROBI, October 29 – The local property market is headed for a slump that could see prices plummeting, economist Joe Donde has told Capital Business.

Saying the current property prices are hugely exaggerated, Mr Donde predicted a price correction which he compared to the one that happened in the stock market about a year ago, and attributed it to the cyclic nature of products where market sentiments drive property values to their peak.

“You can no longer find decent housing for a fair price,” he said. “Most newly employed executives who should be in a better position to secure good housing are ending up in slums.”

The former legislator added that because the price rally was not based on any fundamentals, the market will have to eventually correct itself, leaving many people in a situation where they are paying for over priced mortgages.

Mr Donde said such a phenomenon was last experienced in the country in 1994, where the market eventually underwent a price correction in 2001-2002.

“This house I’m living in used to be rented out for Sh70,000 a month in 1994, but in 2001 it came down to Sh35,000 because of  the market correction,” he Donde said.

While different players in the sector have raised concern about the same issue, others have argued that the lack of adequate housing could have fuelled the high prices in the sector.

At the same time Mr Donde is blaming the current bearish market and regulation problems at the Stock Exchange on a poor political system. The economist explained that the lack of a strong public sector had resulted to a weak private sector that has no inclination to regulations and thus the fall of a number of stock brokerages in the country.

“It is until we have a strong public sector that is accountable that we will be able to make our private sector more answerable to the public and thus a better-run economic engine for the country,” Mr Donde said. 

The economist is of the view that regulation within the industry can only succeed when the political system is competitive enough to allow proper legal structures to be put in place and consequently more effective policing.

“We are an evolving economy and considering that competitive politics only came into the country in the early 1990s we are yet to get there. However the electorate has to understand that how they elect their leaders has a lot to do with how everything in this country runs and operates,” he noted.

He added: “Until we stop electing our leaders just because they belong to a certain party or tribe, we will suffer the kind of problems we are experiencing in our markets for a long time with the masses suffering and no one coming to their aid.”  

He further predicted that the bourse could take at least three years to turn around from the slump, noting that a lot of share prices had been grossly overvalued and had grown not necessarily based on fundamentals but sentiment.

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