The City of Nairobi is experiencing rapid population growth with a major impact on the housing sector. The low supply of rental housing units caused rental prices to rise, taking year-on-year growth to 19.6 percent in 2019 (Hassconsult 2019). As a result, housing is unaffordable for the majority of low-income households and unsustainable for the working class. This policy brief provides two options to address the growing problem: increase the percentage of affordable rentals within the existing affordable housing programs or create a government-supported rent-to-own program.
Estimates by United Nations indicate that Nairobi’s population will hit 5 million by 2025. Currently, the city is home to over 4 million people. 84 percent live in rental houses and 60 percent live in informal settlements or slums (Gulyani et al. 2014). Experts say Nairobi and other urban areas in Kenya urgently need 82,000 rental units every year in order to solve the current rental housing shortage (AfDB 2013). The rise in rental prices is nearly five times the rate of inflation (HassConsult 2019). Rental prices are expected to increase with the city’s growing economy and increasing working-class population.
Big 4 Agenda
The Kenyan Government is trying to tackle the housing shortage under the ‘Big 4 Agenda – Affordable Housing Pillar’; however, its approach focuses on building homes for purchase rather than increasing the supply of rental units. The current approach does not address the needs of 84 per cent of Nairobi’s population, which live in increasingly unaffordable rental houses. Statistics show that majority of Nairobi residents earn less than 2500 USD per year; the income of those who earn more is typically spent on pressing basic needs, like education and health (Kamau et al. 2011). The current structure of the government’s affordable housing programme seems to favour high-income earners or people with stable income from formal employment.
The national government is in the best position to address the housing challenges in Nairobi because it directs banking and economic regulations. Both of these regulations would be needed to increase the development of housing for the individual with low income or who have traditionally been part of the informal economy. Low-income earners put their money in local savings groups, popularly known as ‘Chama’; however, the majority of these Chamas are not tied to the formal banking system. This lack of formal banking makes it hard for residents to qualify for mortgages from commercial banks and other financial institutions.
To address the housing shortage, the government needs to shift the focus from building houses for sale to creating an environment that would encourage an increase in the number of rental units. This increase in rental units could be achieved through the following policy options:
- Set aside a percentage of the affordable housing units to rental.
- Develop a rent-to-own housing scheme.
Policy option I
This policy option seeks to increase the supply of rental units in the market. This can be achieved by apportioning a percentage of the affordable housing units to rental. Currently, the government’s affordable housing programme is building 500,000 units and there is no indication of setting aside any of these units to rental.
This is a feasible policy option because it capitalizes on the existing affordable housing development under the ‘Big 4 Agenda’. It is a cost-effective option since the government will not require additional resources to apportion or allocate the houses to Nairobi residents. Additionally, it accommodates the low-income communities who lack the financial security to obtain a mortgage or any other form of financial support towards house ownership. In case, the rental units fail to attain the expected levels of occupancy, the government and private developers can recoup the cost of development by selling the units at the prevailing market rates.
Increasing the number of rental units is likely to extend the recoupment period of the cost incurred in developing the housing units. Therefore, the government would need to develop regulations to enable recovery of costs associated with time value of money. This option is unappealing to private developers who wish to recoup their money earlier due to the time value of money. However, the government can offer free land to these private developers to cater for such costs.
Policy option II
This policy option seeks to provide Nairobi residents with an easier path to home ownership. Through rent-to-own scheme, the government would expand the existing affordable housing programme to include new buildings that would be run by the State Department for Housing and Urban Development. In this option, the government would act as the landlord.
This option accounts for the residents tied to the informal economy. Currently, this category of residents encounters challenges in accessing housing loans from financial institutions. This option would therefore enable them to bypass the bureaucratic requirements imposed by commercial banks and other lending institutions. Majority of residents within the informal economy do not pay rental tax. Therefore, this option would increase the government’s rental tax collection. Additionally, it would create jobs for rent collectors and estate managers.
The rent-to-own scheme would require the government to develop an efficient system of rent collection that is free from corruption. In addition, the government would need to impose an interest rate on the rental prices; this would enable recovery of the costs associated with time value of money. This option requires institutionalization to allow fair and equitable allocation of the houses. Lastly, it faces the risk of delayed payments or defaults arising from ‘home ownership’ entitlement.
Policy option I is more feasible because it minimizes government’s involvement as a landlord, thus eliminating possibilities of loss of rental income through corruption. It is effective in addressing the rental house supply which is essentially the immediate need of the low-income communities and the working class. It is easier to implement this option because of the existing political will under President Kenyatta’s ‘Big 4 Agenda’. Additionally, even if the government is to give the land away to private developers for free, there is still funding from organizations such as World Bank to support development of support infrastructures such as water and sewerage systems, urban roads upgrading and electricity connections. Lastly, this policy option would make it easier for the government to earn rental tax from informal settlements because of the formalization of rental collection under the affordable rental units’ programme.