Kenya, like many other developing and urbanising nations, has been battling the housing problem for some time now. The government’s intervention through the Affordable Housing Program (AHP), which is part of their Bottom-up Economic Transformation Agenda (BETA), was created to attempt to solve the problem of housing. However, I have a contrary opinion about its effectiveness in doing what it was intended to do.
For context, Kenya is estimated to have an annual demand of 250,000 housing units. The current production is reported to churn out 50,000 housing units only (supply from both private and public sector involvement). This results in a 200,000-unit deficit. Even with the AHP, we are not anywhere near beating the total demand for housing units in the country.
The president has, time after time, hailed the AHP as the backbone for Kenya’s economic transformation, praising it as a creator of employment. During the 2025 State of the Nation Address, he touted it as a national empowerment engine, arguing it has created over 500,000 jobs already, with young graduates in construction, engineering, and related disciplines getting absorbed into the program as interns.
Why is the narrative shifting from the provision of housing to the creation of jobs using housing?
In this article, I argue out why the government cannot solve the housing problem by just building more units, and give my thoughts on what the best solution is for this problem.
Affordable Housing is Subjective, Hard to Agreeably Define
Let’s begin with the basics. If you search for the word “affordable” in your dictionary, you will get the following meanings:
- “cheap enough that people can afford to pay it or buy it”, according to the Oxford Learner's Dictionaries,
- “not expensive”, as defined by the Cambridge Dictionary, and
- “able to be afforded: having a cost that is not too high”, according to Merriam-Webster.
You see that if we apply these meanings to housing, it becomes vague. If affordable housing is one that is cheap enough that people can afford to buy it, then what is cheap enough?
Is five million Kenya shillings per unit cheap enough? It depends on who you ask. For someone with a disposable income of over 500,000 shillings a month, it may be cheap for them. What about the ones with 25,000 shillings monthly net earnings? They will tell you the 5 million housing unit is way out of their reach. So, you cannot really generalise and say you will provide affordable housing as bulk standardised units. You will be overlooking a very important characteristic of the consumers you are targeting with these units.
Demand and Supply of Housing: An Economist’s Explanation
I will explain this in the simplest way possible because it forms the basis for arguments I will make later in the article.
In a market, there are two actors: consumers who buy goods and services (these are responsible for the market demand), and sellers who produce and distribute goods and services (these are responsible for market supply).
Demand is the consumer's desire to buy goods and services and their willingness to pay a specific price for those goods and services. When the price goes down, the quantity that consumers are willing and able to buy increases, and vice versa.
Supply describes the amount of a good the producer is willing to sell at each price. The law of supply says that a price increase almost always leads to an increase in the quantity supplied of a good or service, while a price decrease will decrease the quantity supplied.
We see that price is an important factor in the market. While consumers are interested in maximizing the satisfaction they get from every shilling they spend, the producers aim at maximizing the profits they get from every shilling invested in the factors of production. These are opposing interests, and that explains why the quantities demanded and quantities supplied respond to price changes in opposite directions.
In the housing market, property developers are responsible for the supply of housing units. Also, when the government participates as a client through the “State Department for Housing and Urban Development”, it becomes a supply-side player. Private developers are motivated by profits, like any other business. Therefore, they will respond to general increases in price levels in the economy and changes in rent prices over the years.
On the demand side, there is the general population. I say general because housing, simplified as shelter, is a basic need. All human beings will want to be accommodated in one way or another. However, those who have built and live in their houses will not contribute to the demand. This concept of housing demand is better modelled in an urban setup, especially because those are the places where there is a high concentration of individuals looking for houses, either to buy, rent, or lease (although these represent different housing market segments).
Demand for housing units is driven by an increase in the population as a result of high birth rates or rural-urban migration, changes in people’s disposable incomes, personal tastes and preferences, and changes in the general price levels in the economy. Supply is influenced by housing prices, rental incomes, availability of land for property development, profitability, and government regulations and policies.
The nature of construction is that it is capital and labour-intensive, takes a lot of time to design, procure, build, and deliver a project, and the costs and associated risks are very high. This is a process that the supply side uses to respond to housing demand. Therefore, we can begin to see that the speed of this response cannot match the speed of growth of households, through population increases and migration.
Price Elasticity of Housing Demand and Supply
In markets, generally, we expect the quantity demanded for products or services to increase with falling prices and the quantity supplied to increase with increasing prices. However, the rates of change for the supply and for the demand are not equal in a housing market. Housing supply generally responds slowly to price increases as construction takes time.
Therefore, by the time a construction project is delivered, say three or five years since conception, the dynamics for the housing demand have already changed. At the time of handing over, you are responding to the market situation that existed five years ago!
Price elasticity is a measure of how responsive the supply and demand for housing are to changes in prices, depending on the earlier identified factors such as land availability, construction costs, regulations, interest rates, people’s disposable incomes, personal preferences, and expectations. This price elasticity affects the affordability and stability of the housing market, including the overall economic growth or decline of this sector.
Housing demand has low elasticity. This means that the consumers do not considerably change their demand for housing when the market price changes, as housing is a basic need and a durable good that requires long-term investment.
Also, developers do not necessarily build more houses when the prices for the housing units increase. As earlier indicated, housing is a complex heterogeneous good, and goes through a lengthy production process for it to be available in the market for renting or buying.
In Kenya, where the population growth is very high, and there is increasing rural-urban migration as people move to urban areas in search of work, this means that the elasticity of housing demand is higher than the elasticity of housing supply. This is because housing supply is less responsive to price changes than the demand for housing. This unique condition is an important phenomenon to understand, as it fundamentally influences the way the housing market in Kenya should be approached.
In such a market, when the demand for housing increases, it leads to a large and persistent increase in housing prices. This happens because increasing the housing supply is rigid. New housing units cannot be created as fast as the demand for them arises. That means there’s a shortage of housing units in the market, which drives their prices up. Likewise, a decrease in demand does not lead to a sudden decrease in housing prices. This is important to grasp as it will help us understand the consequences of some of the policies developed by the government in the effort to solve the housing problem in Kenya.
What Happens When Housing Supply is Inelastic?
We saw that inelastic supply means that developers will not respond to increases in rent prices or buying prices of housing units by quickly building more properties. Housing supply is rigid because it takes longer to build, the land available for property development, especially in urban areas, is limited and pricey, and some strict laws and regulations must be adhered to for a developer to construct new housing units.
Therefore, instead of an increase in housing demand fuelling a corresponding increase in supply, because it means developers build more and increase their chances of earning more, it instead triggers a sharp increase in housing prices rather than rapid new construction. The consequence is that rent keeps on going up, and housing units for sale start to attract higher prices because there’s a lot of competition for them. This erodes affordability (housing becomes more expensive as its demand surges).
If you live in a city like Nairobi, you must have noticed that the rent prices keep going up. More people are looking for houses to rent than the houses available for that specific market segment. So, it seems that the way to make housing affordable is not build more units, but to deal with the demand side of it.
We should be exploring how to stabilise housing demand by distributing it to the various urban centres in the country instead of allowing it to pile up in specific geographical markets. The concept of devolved government, I guess, understood this idea that we can spread development all over the country and decentralise economic activities to the counties so that people do not have to always migrate to big towns and cities in search of better livelihoods. That way, we are dealing with the demand side of the housing market, which is certainly always responsible for the ever-surging housing prices.
Further, the inelastic housing supply means that monetary policies by the government may not be very effective in increasing the number of housing units available in the market. A monetary policy is a process used by governments through their central banks to manage the money supply in the economy, regulate interest rates, and make loans available for businesses to borrow. These impact the cost of accessing financing, spending, and investment by businesses.
A good example is what we have seen recently with the president promising that mortgage lending interest rates will be below 10%. Does it increase the number of housing units in any way? Maybe?
These changes in interest rates make the mortgages more affordable. However, this is not always direct, as the cost of finance is also highly influenced by the repayment period. If the interest rates go down and the repayment period lengthens, there is a possibility that the two effects cancel out. You might think you are paying less monthly, but in the long run, it will cost you more.
Lower interest rates mean the cost of finance is low, and this can make borrowing and building houses cheaper. However, that does not translate to an increase in the number of housing units supplied, as we saw that the housing supply is rigid. Therefore, people will borrow cheaply and will compete for the limited number of units available in the market. This competition drives up the demand for that housing segment, further driving up the prices for that segment and cancelling the immediate effect the lower interest rates had on housing prices. Nevertheless, in the long run, the impact of lower mortgage rates (if the rates are sustained longer) will start to be felt in the economy.
A Critique of Direct Government Involvement in Housing Provision
First, I appreciate the fact that the government, through the AHP, has created a lot of informal jobs in the construction industry and other formal jobs for contractors, manufacturers, suppliers, and consultants involved in the projects. Through these jobs, the earning potential of these workers increases, and they can afford more goods and services with their wages. This may improve their living standards, although it is subject to other influencing factors.
However, job creation was not the primary aim. The aim was to deal with the housing problem. Jobs would come as a byproduct of the housing solutions that the government would see fit to implement.
But let us face the bitter truth, we have failed to offset the annual deficit of 200,000 housing units. The government has recognised this as an actual problem that requires solutions, as evidenced by its initiative to include it among the country's national research priorities, through the National Commission for Science, Technology and Innovation (NACOSTI).
I think we cannot beat the demand for housing by building more houses in the manner of standardised units, like we are doing in Kenya with the Affordable Housing Program. Why? Because the supply of housing is inelastic.
While demand (especially demand for rental units driven by population growth through migration to a certain urban area) responds swiftly to general changes in price levels in the market, and other factors such as personal disposable income, supply takes time (some years to design, procure, and build), and huge input resources (finance, materials, etc.), meaning by the time you deliver a project, the market forces have changed. You are dealing with a totally different problem than when you started constructing.
Then, the demand for housing is not homogeneous. It is segmented into the different social groups, education levels, income levels, cultures, religions, locations, etc. Therefore, you cannot claim to be responding to this kind of demand by providing standardised housing units. For example, the type and quality of housing demanded by someone earning a net 300,000 Kenya shillings monthly salary is not the same as that of someone earning 50,000 Kenya shillings monthly. Housing units demanded in Kitui are not the same as the ones demanded in Mombasa or Nairobi. That is a fact based on the diverse nature of our societies and communities. So, a one-size-fits-all solution tries but cannot offset the demand.
Further, it is not the government's job to build houses for its citizens; it should develop the country by focusing efforts on economic growth and industrial development. Housing can then be left to the individuals and private developers to solve.
Why? Industrial development, in the manner that increases the production of goods and services in an economy, is good for the expansion of the aggregate supply in a country, which translates to economic expansion. During periods of economic expansion, when businesses produce more goods and services, there is more supply with a sustained demand. This tends to contribute to lowering price levels.
People can afford more with their wages. That way, they can provide for their basic needs (which include food, shelter, and clothing as the basic minimum). The individual actors best know what is affordable shelter to them, and based on their disposable wage, they will build that and be satisfied with that.
You don't need to have the government intervene by initiating the supply of standardized housing units. The housing market will regulate itself; all we need is to empower people with productive economic activities, so that they can have money to take care of themselves and build houses for themselves, too. Then we can distribute these productive economic activities all over the country so that people won't have to migrate and concentrate themselves in major urban areas only. That eases the pressure on major cities and distributes the demand for housing across other urban and peri-urban areas, including in the counties, making it easier to tackle than the current state in Kenya.
I have seen people argue that the AHP is more than just the government building houses, which I do not dispute. The current status looks like the government building houses for poor people (but we know the prices are too high for the so called the poor to afford them). Then, to solve affordability, they instruct mortgage lenders to lower the interest rates to below 10%. That’s fine, people can borrow more at a lower cost to finance the purchase of these houses. However, I think this is totally off. We are funding people to buy houses in neighbourhoods they cannot sustainably live in. They will be boxed in endless service charge payments, which even makes life harder for them than it was before buying these houses using the mortgage facility. Still, lending is based on cash flows or the ability of the borrower to demonstrate the availability of future cash flows to finance the periodic repayments. Can a boda-boda rider raise enough cashflows to borrow five million Kenya shillings to buy a housing unit? Yet these are the people the program is targeting!
I think we should discourage individual borrowing that is intended to be spent on buying goods and services (it doesn’t matter whether it is durable goods or not). This money is only encouraging consumption, but not production. I know the banks and other lending institutions don’t care as long as they make their money, but we should think long-term and at the aggregate level of the economy.
I ask this question to you: for a person whose income only allows them to rent and not build or buy to own, what is wrong with renting? Why is the mortgage glorified as the solution to affording housing? With a mortgage, they will pay more in interest in the long run, which even makes their finances more strained. If you can't afford to build, don't borrow to build and pay for the rest of your life. These kinds of financing at the end, benefit the lenders more than the borrowers.
Yes, I have simplified industrial development to production of goods and services; it is more than that, but that's the ultimate end. Instead of the president arguing that the affordable housing program is the backbone for Kenya’s economic transformation, I think the focus should be on economic transformation first, then the citizens will be so empowered that they can afford to build or buy their own houses (if the goal is ownership).
That means we should discourage individual borrowing to finance consumption (such as taking mortgages to build or buy houses) and encourage corporate borrowing for people to invest the money in building businesses. That means banks will lend to businesses, to support startups and entrepreneurship, including to established firms, to support further expansion and production of goods and services for the economy.
When the production in a country increases, it ultimately leads to lower prices. This is because the supply of products is high, and with a sustained demand, the market prices will fall. With lower prices, even at a stagnant wage, the citizens can afford to buy more goods and services, which translates to an improvement in their standards of living. This is called economic development, which results from economic growth paired with the right policies to encourage and empower individuals to support themselves by working and contributing to the production and growth of the country’s economy.
Conclusion
The main points discussed in the critique are as follows:
- Supply of housing responds rigidly to price changes, because it takes longer to build, with high financial requirements, and strict government regulations. As housing demand keeps on increasing at a higher rate than the supply, it means prices of housing units keep on going up, and houses become more unaffordable. If we can avoid concentrating this demand in one place, it can help to regulate the prices of housing units.
- If you cannot afford to buy or build to own a house, but you can afford to rent, just rent. Does it make sense to commit to a mortgage facility, then later be required to pay exorbitant monthly charges for a house you borrowed to buy?
- Borrowing is not bad, but we need to encourage lending to businesses to support start-ups and entrepreneurship. These are the real builders of the economy through production. If we rely on consumption-motivated borrowing, then we are borrowing to consume instead of producing, missing out on the economic growth that would have happened if businesses were financed to produce goods and services for the economy (add value to the economy).
What do you think? Share your thoughts in the comments section below.
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