Why Housing Prices in Kuwait Keep Going Up? Unveiling the Drivers Behind the Crisis

by Sulaiman AlBader

In the early 1970s in Kuwait, a Mercedes S-Class would cost KD 5,000, while a 750 sqm plot in Nuzha was slightly higher at KD 8,000 (so 1.6 Mercedes per land). Today, that same plot would cost the equivalent of more than 22 Mercedes. Housing affordability has become a major concern for many families. The average house now costs KD 300,000 whilst the average monthly salary is KD 1,589. This means that the house-to-income ratio stands at over 15 times, classifying Kuwait as ‘Impossibly Unaffordable’ according to ‘Demographia International Housing Affordability’ standards.

This makes Kuwait’s house prices less affordable than in major cities like New York (10.2 times), San Francisco (9.2 times) and even London (13.3 times). The issue of home prices has long been a problem on the radar of policy makers dating back at least to 1977 but hasn’t been resolved. Although increased supply is the most effective policy to manage property prices, it takes time in Kuwait considering the infrastructure commitments required attached to a new house. This includes not only road and sewage construction but also the electricity and water capacity, let alone the subsidy commitment attached to each additional dwelling, which is already the second largest government expenditure (after salaries) in a budget that’s been in deficit for 9 out of the past 10 years.  To partially relieve people of their house purchasing burden, both past and recent policy makers, though well intentioned, sometimes exacerbate the problem.

A Model to Understand Kuwait’s Housing Market

Our research at the LSE Middle East Centre seeks to assist policy makers by developing a model that explains changes in housing prices in Kuwait. This would:

• determine the main drivers of residential real estate prices in Kuwait and
• quantify the effect of each driver. Most importantly, Supply.

The impact of this work will be twofold. The primary contribution will be to explain historical changes in real estate prices and use this model to input projected variables and forecast real estate prices under current policy conditions. The secondary contribution will be quantifying the impact of proposed policy solutions on residential real estate prices especially with respect to how increased supply affects these prices.

We tested our model’s ability to explain changes in housing prices over the past 12 years. During this period, the property market experienced two cycles, the first peaked in 2014 and the second in 2022. Both unsurprisingly coincided with peaks in oil prices. We used property transaction data from the Ministry of Justice to develop a real estate price index on an area-by-area basis. There are a total of 138 areas in Kuwait. We plotted the average price of a 400sqm plot in a popular, and close to the median priced, area in Kuwait (Abu Fatira) over our sample period.

Table 2: Abu Fatira 400sqm Median House Price Over Sample Period

Conclusion

Our initial results show that the government and policy makers have a long way to go to make home prices go from where they are now at 15 times income ‘impossibly unaffordable’ to less than 5 ‘seriously unaffordable’. Political incentives push both salaries and employment factors – and in turn house prices – upwards. And with limited supply, as is the case in Kuwait, it would mechanically push house prices back up with a similar magnitude or even worse if we take the lending effect. Interest rate policy is largely influenced by the respective central bank policies of the basket of currencies the Kuwaiti dinar is pegged to. Policy makers are therefore left with one important factor to improve affordability of housing in Kuwait: Supply.

Our initial results show that, all else equal, every supply increase of 2,450 dwellings (i.e. the number of housing requirements fulfilled by the Public Authority of Housing and Welfare (PAHW) decreases the average price of residential properties in Kuwait by KD 4 per sqm (~KD 1,600 per 400sqm plot of land).

We are continuing to improve the model’s accuracy by including the private sector land contributions and looking at the effects on an area-by-area basis. So, our numbers will change throughout this process.

However, no matter how our model adjusts, the results of this research seem to be clear and echo the findings from our previous colleagues at the LSE Middle East Center, Dr Dhari Al Rasheed, Sharifah Al Shalfan, Do Young Oh, Hyun Bang Shin and others. To improve housing affordability for families in Kuwait, the current solutions provider, the PAHW, will probably be unable to take on that task by itself. Unless we explore alternative methods to improving supply, homeownership in Kuwait will remain a distant dream for generations to come.

A Caveat

Our model is – at its best – is only that, a model. As Professor Gene Fama recently stated ‘[Predictive models] always worked in sample, and never out of sample’. No matter how accurate our work is, it would be wise to acknowledge its limitations and take its results with a grain of salt.

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