Mortgage crisis: Lenders take back homes listed as loan collateral

High-end property developers and owners continue to suffer burnt fingers as lenders intensify the recoveries of bad loans through the auction of collateral.

A fresh report by Knight Frank paints the stakes for the high-end market owners who on one end continue to bare the impact of the oversupply linked price correction with buyers maintaining the control of the market.

“The rising number of distressed properties in Nairobi has also affected prime residential values significantly with lenders intensifying efforts to recover non-performing loans through the sale of collateral,” states part of the report.

Combined, the ongoing glut in the high-end properties segment coupled with the pressing need by lenders to recoup bad loans has led to the heavy discounting of property prices to see valuations in real estate remain on the slump.

The market distress has recently featured on daily newspapers as auctioneers place multiple advertisements on mass-property sell-offs even as they too face hardships in making a sale prompting the initiation of substantive price slashes.

“Deals are happening but are far between, and at discounted rates. It will take time for the economy to rebound considering it’s also not immune to external shocks,” Knight Frank Head of Agency Anthony Havelock noted.

Subprime mortgage crisis

The lender’s led pricing slump bares the connotations of the Unites States pre-financial crisis- subprime mortgage fallout of 2008 where increased repossessions by lenders led to the eventual collapse of market prices as more housing units came into the market for the low.

Nevertheless, the local repossessions differ from a mortgage crisis as the majority of repossessions emerge from the listing of homes as collateral for secured loans rather than direct mortgage defaults.

As such, the report argues against the case for an impending total collapse of the industry as mortgage defaults account for a mere share of the lender’s repossessions.

According to data from the recently published 2018 Banking Supervision Report by the Central Bank of Kenya (CBK), Kenyans still hold a less substantive 26,504 mortgage loan accounts with the average loan size having fallen to Ksh.8.52 million from 2017 on the back of tightening credit standards.

However, mortgage based non-performing loans (NPLs) increased to Ksh.38.1 billion from Ksh.27.3 billion with the segments ratio of bad loans sitting above the banking industry average of 12.7 percent at 16.9 percent over the period.

Illiquidity

The slump in the high-end property segment was however eased between July and September this year to 5.4 percent from a respective 6.7 and 6.5 percent in preceding reviews in 2018 and 2017.

Globally, the high-end segment similarly registered a softened decline of 1.1 percent with luxury property sales remaining on the rocks have global trade and political headwinds way hard on markets in spite of a longer than expected period of loose monetary policy and steady wealth creation.

Domestically, the recent repeal of the interest rate cap is expected to prompt the recovery of the market in the medium term by restoring liquidity in the market.

The real estate industry has remained cash-strapped from the elongated stay of the freeze to private sector credit flows as both developers and potential property off takers miss out on funding.