The decline in the prices of houses is bad news for the financial sector, more so if the majority of the houses are mortgage-financed. The evidence of the loss in asset value is deduced from the high number of assets that are facing the auctioneer’s hammer as announced in the daily newspapers, specifically in the property and transport sectors. The first decline in asset prices was witnessed at the Nairobi Securities Exchange (NSE), where share prices tumbled significantly a few years back. In 2018, nearly all the shares in the NSE-20 share index were hit hard. The securities that lost significantly included shares in big companies such as Kenya Power, Nation Media Group, Centum Investment, NSE and the now-suspended ARM cement. This trend is worrying because companies exist to create wealth for shareholders and as such, a change in share prices indicates changes in shareholder wealth. Last year, moving from lower share prices the previous year, the NSE experienced marginal improvements in returns for shareholders from some shares. Several companies also reported huge declines in annual share returns, as large as 45 per cent in the case of Bamburi Cement, CIC (26 per cent), Barclays Bank Group (31 per cent), Uchumi (67 per cent), Kenya Power (48 per cent) and Nation Media Group (44 per cent). While the preceding firms have posted a negative decline in share prices, firms in the financial sector reported a huge improvement in share returns – Barclays 13 per cent, Equity 27 per cent, KCB 30 per cent and I&M 21 per cent. In the financial sector, the expectation is that the earnings of those firms will respond positively to the liberalisation of interest rates. For those who use shares as collateral when borrowing, this suggests that a fall in share price might not adversely impact the balance sheets of financial institutions. However, the worry is the undesirable impact of the expected decline in real property, specifically house prices on the balance sheets of financial institutions. If this happens, it will hurt the economy and reduce the quality of life. Rent increase Research shows that house prices are indicators of changes in the economy. In other words, the change in house prices passes information about the pending state of the economy. The value of a house depends on the rent that the tenant pays to the landlord. In finance, we discount rent in house […]
