Macroeconomic and Behavioural Drivers of Residential Housing Price Fluctuations in Kenya

Abstract

The interplay between macroeconomic forces and behavioural expectations fundamentally dictates the volatility of residential housing prices, yet remains critically underexplored in developing economies. This study addressed the problem of inconsistent residential pricing in Kenya, which undermines affordable housing objectives amid rapid urbanisation, by moving beyond purely mechanistic economic models to incorporate human expectations. The analysis of macroeconomic data from credible sources such as the World Bank, IMF, CBK, KNBS, and Hass Consultants covering the years 2000 to 2023 reveals significant insights into the dynamics of price variations. Utilising both the Rational Expectation Hypothesis and the Adaptive Expectation Hypothesis, the study finds that these price fluctuations are influenced by essential economic fundamentals, including the foreign exchange rate (β=0.734, Std Err=0.295), GDP (β=0.201, Std Err=0.052), and disposable income (β=0.455, Std Err=0.043). Market psychology significantly influences economic outcomes alongside fundamentals. The model's fit was assessed using F-statistics, yielding a value of 50.78 and a highly significant p-value of 0.0000, confirming its robustness. These findings reveal that Kenya’s housing sector is intricately embedded within a broader macroeconomic and behavioural context. Consequently, this study implied that effective, affordable housing strategies require coordinated monetary and fiscal policies, supply-side reforms, and the proactive management of market expectations to ensure stability and inclusivity.