Effect of Foreign Direct Investment on Affordable Housing in Kenya: The Role of Inflation as a Moderating Variable

Abstract

Purpose: Housing is a natural human necessity that affects health, community, economy, education, and social justice. Currently, Kenya is among countries that are faced with housing challenge both in rural and urban areas. The purpose of this academic paper is to demonstrate the role of Foreign Direct Investment (FDI) on Affordable Housing in Kenya. The study is anchored on Hedonic Price theory and based on the inferential analysis of 22 years (2010 to 2022) time series data obtained from Kenya National Bureau of Statistics, the Central Bank of Kenya, and the World Bank. The paper intends add on to the knowledge on affordable housing as influenced by FDI inflow in Kenya.

Design/Methodology/Approach: This paper applied a causal research design coupled with econometric models. To establish the relationships between FDI and affordable housing in Kenya. Quantitative data was analyzed both descriptively and by use of inferential analysis.

Findings: Test for Unit root using Augmented Dicky fuller revealed the presence of non-stationarity which was removed only after first and second differencing. The variance inflation factor indicated no multicollinearity and data were normally distributed. Summarized statistics synthesized its samples while distribution analysis marked FDI with a poor negative co-efficiency on the housing price index (-0.484778). At a 5% level of significance, in the regression analysis, the coefficients of log FDI were significant t (37) = -3.052, p = 0.0039 < 0.05. This model accounted for 45.3% of the variations in Affordable Housing. The overall analysis showed a more fluctuant direct effect of FDI on the Affordable Housing stock and revealed that inflation reduces the demand for affordable houses. Regression analysis carried out revealed an R2 of 0.795435 without the moderating variable, indicating FDI accounted for up to 79.5435% of variations in the Affordable Housing but no long-term equilibrium relationship was established. When inflation was included as an intervening variable, R2 was established at 0.6841 thus reducing from 0. 795435.The study contributes to the understanding of what FDI and inflation do to housing affordability in Kenya and policy recommendations for stability.

Implications/Originality/Value: This work reveals that FDI has a direct but volatile impact on effective housing inventory, consequently, the role of inflation is found influential. The regression analysis of FDI on Affordable Housing revealed a coefficient of determination of 0.795435, meaning that 79.5435% of the total variation in Affordable Housing can be accounted for by FDI. After including inflation as a moderating variable, the value reduced to 0. 684135. However, it is mixed with the result that, although the two sets of variables are in the long-run and short-run stationary relationship, no long-run cointegration was identified between the variables. This research is informative in understanding the effects of such external economic variables as FDI and inflation on the affordability of housing in Kenya and policy measures to encourage stable investment in the sector.