Kenya’s Affordable Housing Crisis
The Africa Housing Finance Yearbook 2023 paints a worrying picture: Kenya faces an annual shortfall of 200,000 housing units, with developers delivering only 50,000 units against a demand of 250,000. What’s worse, low-income groups remain locked out, with only 2% of housing units built catering to this segment.
Even at a subsidized rate of one million shillings, most Kenyans cannot afford a mortgage. According to the Kenya Mortgage Refinance Company (2022), only 11% of Kenyans earn enough to qualify for a one-million-shilling mortgage.
Mortgage-Based Housing Incentives in Kenya
For decades, Kenyan governments have promoted homeownership through mortgage tax incentives. Initially, tax deductions on mortgage interest were capped at KSh 12,500 per month, later doubled to KSh 25,000 in 2018, and further increased to KSh 30,000 in December 2024.
The Finance Act 2023 also expanded the scope by allowing SACCOs to qualify as lending institutions, aiming to broaden mortgage access.
But has this worked? Data says otherwise. The Central Bank of Kenya’s Bank Supervision Report (2023) showed 30,015 active mortgage accounts, an increase of just 2,229 from 2022. Clearly, the mortgage model has failed to reduce Kenya’s housing deficit, despite tax relief.
Why Mortgages Don’t Work for Most Kenyans
Two critical issues make mortgages unattractive:
- Exorbitant Housing Prices – Developers charge inflated rates, making even interest-free mortgages out of reach.
- High Interest Rates – Average rates stood at 14.3% in 2023, unsustainable for long-term repayment.
No wonder the 2019 Census revealed that 93.9% of Kenyans built their homes, 3.3% inherited, and only 2.8% purchased through mortgages.
The Shift to Construction Loans in Kenya
The Finance Act 2025 has introduced a landmark amendment by extending mortgage tax incentives to construction loans. With just a few words—adding “construction of”—the law now recognizes the reality of Kenya’s housing market.
This could be a game-changer for:
- Low-income earners, who can build affordable homes.
- Rural and peri-urban residents, often excluded from mortgage-financed housing.
- Local economies, through job creation and demand for building materials.
Construction Loans: A More Inclusive Solution
Construction loans align with Article 27 of the Constitution, which guarantees equality. Unlike mortgages that serve urban elites, construction loans:
- Support self-built housing, often more affordable than purchased homes.
- Allow use of local materials and labor, cutting costs significantly.
- Benefit small-scale suppliers and artisans, fueling a bottom-up economy.
Challenges Facing Construction Loans
Despite the progress, hurdles remain:
- Collateral requirements make loans inaccessible to many.
- Pension-backed mortgages, once allowed under the Tax Laws (Amendment) Act 2020, were invalidated by courts due to inadequate public participation.
Resolving these issues could unlock wider access.
The Role of Banks and SACCOs
Financial institutions must rise to the challenge by creating affordable, long-term construction loan products—similar to structured mortgages.
- Banks should move beyond packaging construction loans as “personal loans.”
- SACCOs, now recognized as lending institutions under the Finance Act 2023, can mobilize grassroots financing.
What Lies Ahead for Affordable Housing in Kenya
Prospective homeowners eagerly await:
- Full approval of tax incentives on construction loans by Parliament.
- A resolution on pension-backed home loans.
If these align, Kenya could finally witness inclusive, sustainable, and affordable homeownership, reducing the housing deficit and empowering millions.
Conclusion
The tax incentive on construction loans in Kenya marks a turning point in addressing the housing crisis. By shifting focus from mortgages to self-construction financing, the Finance Act 2025 offers a more practical path toward affordable housing.
With government support, financial sector innovation, and community-driven building, Kenya may finally unlock its affordable housing puzzle.