Market Prices, Tax Revenue and Performance of the Residential Property Market in Kenya

Abstract

The inconsistency of research findings on the market price and performance of residential property market topped by the ever-growing interest on the performance of residential property market by a series of stakeholders including investors and policy makers places the need of this study at a podium of intellectual and academic interest. This study used Kenya’s residential property market over a fourteen-year period of January 2005 to December 2018 to assess the effect of market prices on that market. This was critical because existing theoretical and empirical literature was not clear as to how market prices affect performance of residential property market. The specific objectives were to evaluate the effect of inflation, interest rate, stock market price, exchange rate and moderating effect of tax revenue on performance of the residential property market in Kenya. Causal research design was employed in this study. The study led to the formulation of a financial econometric model that embraced the existing financial system and yielded effective and efficient results. The question of this study was; what is the effect of market prices on performance of residential property market in Kenya? Census was employed for the 56-market quarterly observations. The study used secondary data that was accumulated using secondary data collection sheet. The study conducted several test statistics and diagnostic tests in order to achieve the most optimal solution. In particular the study used t-statistics and the p-value to test the significance of the null-hypothesis for any type of individual test. Ninety five per cent confidence interval was employed to test the reliability of the estimated coefficients. Vector error correction model was employed to test the individual hypotheses while autoregressive distributed lag model was employed to test the general hypothesis and the moderated model. The findings of the study indicated that commercial bank lending interest rate, inflation rate, exchange rate and stock market prices had significant negative effect when individually measured to residential property market performance. In the overall model of market prices to residential property market performance commercial bank lending interest rate, inflation rate and exchange rate had long run negative effect to the residential property market performance while stock market prices had a long run positive effect to the residential property market performance. In the cointegrated model there was observed significant lags in adjustment to equilibrium that is interest rate had four lags, inflation rate two lags, stock market price and residential property performance had one lag each while exchange rate had zero lag. Under the moderated model, it was observed that when tax revenue was introduced as a moderating variable the adjusted R-squared increased on the moderated model. Thus tax revenue had a moderating role on the effect of market prices to the performance of residential property market in Kenya. The conclusion of the study is that market prices form an integral part on the performance of residential property market in Kenya. The scope of the study was limited to a time frame of year 2005 to 2018 and the Country of study was restricted to Kenya. The study recommends that investors in the residential property market to be analytic on market prices and make calculated moves with regard to information from market prices while investing in the residential property market in Kenya.