Building finance, sectoral bias, and housing stock accumulation in Kenya, a nonlinear ARDL analysis

This paper examines whether Kenya’s building finance is subject to sectoral bias-flowing disproportionately toward non-residential rather than residential building stock, and what this implies for the long-run relationship between building finance and building stock accumulation. Despite an increase in credit proportions going to the building sector between 2010 and 2023, the country’s housing deficit has continued to widen, raising the question of whether this finance is actually reaching residential housing supply or is instead absorbed by the commercial real estate sector. We use annual data from 1970 to 2024 to estimate a non-linear autoregressive distributed lag framework that allows for asymmetric short and long run effects of building finance while distinguishing between residential housing stock and non-residential stock. The results show a limited transmission of building finance to physical housing stock. A sectoral asymmetry is observed, where building finance is associated with short-run adjustments in non-residential stock but no significant effect on residential housing stock. Residential stock accumulation is instead driven primarily by income growth and construction costs. The findings suggest that building finance deepening in Kenya has had limited sustained effect on residential housing stock expansion, raising important questions about the structure of credit allocation within the housing sector.