The Effect of Interest rates on the Supply of Real Estate Finance In Kampala
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The purpose of the study was to portray the effect of interest rate on the supply of real estate finance with a focus on Kampala. The real estate sector being one of the major sectors of the economy in Uganda has been largely affected by fluctuating interest rates. The study sort to show case this effect by showing how property developments are affected by the cost of borrowing, other available sources of real estate finance and the property developers attitude towards the fluctuating prices. Real estate is a large investment which requires huge capital that most ordinary Ugandans cannot raise, therefore they turn to banks to finance this cost of construction or purchase. The cost of borrowing in all banks is driven by the real interest rate which is fuelled or largely accommodates inflation and political interplay in Uganda. Inflation is the key driver of interest rates. The banks are highly supervised and are under the obligatory role of the Central bank of Uganda which determines and controls the base lending rate accommodating all factors in the economy, based on this the commercial bank can then come up with their own mortgage rates or borrowing rates a few basis points from the Central Bank lending rate. The research problem was analysed through the use of the simple user cost model. The target population of this study was the 9 top mortgage lending banks in Uganda as at March 2018, and 4 real estate developers as all were analysed to solve the research problem. Data for the purpose of the study was collected using data interviews guides in mortgage lending banks that have been running the mortgage product from 2010-2018. In addition, Questionnaires were also used on a sample of 4 property developers where 2 respondents from each company responded. Study findings indicated that when interest rates are lower, people are generally more willing to take out a mortgage than when rates are higher. Though higher interest rates typically mean a cooling of demand for real estate, since a purchaser will have a higher payment on the same property, the opposite is happening in the short term. The following recommendations are made. Firstly, the government should play a more active role in control of interest rates through the Central bank of Uganda frequent bank supervisions v and policy implementations as most commercial banks are out to fleece lenders and stabilize inflation through the implementation of tough monetary policies. Secondly, the property market should be controlled through a house pricing index to protect the rights of both the owners and the investors. Thirdly, the Real Estate Investment Trusts should start functioning as soon as possible so that real estate developers can borrow money at a cheaper rate in a bid to protect the interests of real estate investors. The study recommends that there is need for further research to be done on all the financial Institutions providing mortgage such as Life insurance companies and others because they also determinant mortgage interest rates and yet their rates are different from those of commercial banks. Furthermore, a research can be done to determine on the other forms of real estate financing and the determinants of the final market value of real estate products.