Long-run relationship between inflation rate and real estate investment in Kenya

Abstract

This paper has analyzed the inflation rate in form of consumer price index, comparing them with real estate investment from GDP contribution in the long-run. The long-run relationship between inflation and real estate investment is considered one of the primary financial concerns of long-term investors as well as prudent contribution to GDP in Kenya. Despite the fact that Kenyan government is pushing for affordable housing as one of her four main agenda, it is going through various transformations such as; Sustainable Development Goals for health, and enhancing manufacturing sector, at the same time thus raising a concern over how inflation relates with real estate investment. Gordon growth theory has been employed as an underlying theory while all variables are measured annually in a period of 34 years from 1985 to 2018 comprising of 34 observations. The study has employed time series data where real estate investment and inflation data have been obtained from KNBS. The quantitative analyses have been carried out, whereby, the stationarity test of the time series are investigated through unit root tests. Real estate investment and inflation rate stochastic processes have been found to be stationary at 5% level of significance with the aid of KPSS test. The causality tests of the time series have been performed using one lag SC selection criteria and finally the VAR system is estimated. It is found that, in the long-run, real estate’s GDP contribution are associated with 2.177 increase in current inflation rate but associated with a 3.455 decrease in the subsequent year’s inflation showing an inverse relationship making the researcher to conclude that real estate investment exhibited a hedging ability on inflation in the long-run which is consistent with. Based on conclusions, the study recommended that, in order to curb serious future inflation rates in Kenya, real estate investment should be given priority in terms of sectorial development both in the long-run since real estate investment responded well towards inflation rates in terms of shocks. Also, county governments should adopt the national’s policy of affordable housing to improve their GDP.