Does housing sector expenditure crowd out real estate growth?

Abstract

The issue of whether government spending on housing mitigates or hinders residential investment and housing supply remains debatable.  This study examines the impact of government housing spending on housing supply in Kenya from 1980 to 2024. This study employed a time series data regression method, utilizing a fully modified ordinary least squares (FMOLS) approach and the Granger causality test, to examine the relationship between the study variables. A unit root test is conducted to determine whether the time series variable is non-stationary and possesses a unit root. The results showed that government housing expenditure has a negative and significant impact on the supply of housing in Kenya. A 1% change in public housing expenditure can potentially decrease the number of housing units supplied by 0.77 units in Kenya. Findings suggest that public spending can harm housing sector investment, employment and slow housing supply. The Granger causality test confirms that past values of government expenditure significantly predict future changes in housing supply. However, the negative impact and the lack of a reverse causal flow from public spending to the supply of housing indicate that government expenditure on housing is not optimally allocated and needs reprioritization. The study recommends that the government should leverage private sector expertise and funding to build and maintain houses, potentially reducing costs and improving government expenditure efficiency. A balanced approach that combines government support with market-based solutions is crucial for addressing the housing crisis in the Kenyan construction sector.