Neighbourhood Microeconomic Influences on Residential Housing Prices in Kenyan Cities: Cognitive and Emotional Biases as Mediators of Psychological Expectations

Abstract

This study investigates the microeconomic indicators influencing residential property prices in Kenya's cities, focusing on the cognitive and emotional biases that shape psychological expectations. It underscores the importance of neighbourhood attributes for real estate stakeholders and their interplay with market forces. Utilising a mixed-methods approach with 234 participants, it combines behavioural economics to reveal the psychological elements that contribute to market fluctuations. The results show that location factors significantly affect pricing (R = 0.708, R² = 0.84), followed by various neighbourhood and structural elements. Cognitive biases lead to the undervaluation of structural quality (post-mediation β =- 0.224, p < 0.001), while emotional biases decrease the perceived value of location (β drops from 0.846 to 0.823). Emotional bias demonstrates a more substantial mediating effect (ΔR² =  8.9%) compared to cognitive biases (ΔR² = 8.2%), emphasising the emotion-driven dynamics of the market in Kenya, where factors like loss aversion and herding behaviour inflate prices. A notable aspect of the Kenyan context is the tendency to overlook structural qualities due to cognitive anchoring based on location. The rapid pace of urbanisation and the prevalence of informal settlements exacerbate these biases, leading policymakers to introduce transparency initiatives, such as standardised valuations, to mitigate market distortions. By merging microeconomic analysis with behavioural insights, this study situates housing volatility within emerging markets and suggests equitable urban development strategies to foster fair housing practices in developing economies. It highlights the influence of behavioural factors on Kenya's residential housing crisis and calls for their incorporation into the Affordable Housing Agenda, along with improved financial literacy and regulatory frameworks to limit speculation. Future research should adopt longitudinal methodologies, involve various stakeholders, and refine metrics such as herding behaviour.

Keywords: neighbourhood attributes, residential housing prices, real estate investments, psychological expectations, behavioural mediation.

JEL Classification: R21; R23; R31

DOI: 10.7176/RJFA/17-2-01

Publication date: April 30^th 2026