Colombia: Confronting a housing shortage
As income levels continue to rise, more and more Colombians can be categorised as aspiring homeowners. In fact, current demand for housing far outpaces the rate of home construction. In 2011, some 135,000 homes were built, while the demand exceeded 200,000.
In response to the housing shortage, the government is working on plans to provide heavily subsidised homes to the poorest segment of the population. The Ministry of Housing (MoH) recently received congressional approval for a project aimed at providing 100,000 free homes to be classified as “priority interest” housing, known locally as VIP.
Bidding for the construction contracts for the VIP housing project was scheduled to begin in July. From July 3 families could apply for a fixed-rate subsidy to acquire VIP housing and so far more than 5400 families have applied for the benefit. Prospective construction companies must have a minimum of five years development experience and no previous record of wrongdoing. Meanwhile, the government is looking to negotiate supply contracts with cement, iron and brick manufacturers, with the aim of locking in prices that will allow the project to remain viable throughout the construction phase.
Construction material pricing will be crucial to the success of the VIP project, as rising costs have previously inhibited housing development. According to the National Administrative Department of Statistics, (Departamento Administrativo Nacional de Estadística, DANE), in July the price of iron and steel fell by 1.71% over the same period in 2011, while mortar, concrete and stucco prices all increased between 0.81% and 1.19%.
Meanwhile, the price of land is also on the rise. Given Colombia’s mountainous terrain and highly concentrated urban centres, limited land is available for the development of housing projects. The cost of land contributed around 8% to a home’s sale price several years ago, although this figure has climbed to above 20%, in light of the growing demand for home ownership.
Higher land prices are likely to complicate efforts to develop the VIP project, as well as other social interest housing, known as VIS. For example, Bogotá is scheduled to receive 11,000 homes as part of the VIP project. However, current land prices in the city threaten to make this plan unviable.
The prices for government subsidised housing are fixed, meaning that in order to construct VIP and VIS homes in major urban centres such as Bogotá, the government will have no other option but to substantially subsidise land costs for the recipients of VIP and VIS housing.
The lack of available land and the resulting impact on land prices are largely responsible for the significant decrease in construction permits, precisely at a time when they should be on the rise. According to DANE, construction permits were down 28.4% in June compared to the same period in 2011, as a result of the decrease in the amount of available land approved for housing, which fell 33.8% in the same period. Meanwhile, land approvals for social housing fell even further in the same period, by 41.8%.
Unless efforts are made to reduce land costs and increase approvals, they could begin to take a toll on the economy as a whole. Real estate is expected to account for 11.7% of GDP in 2012, indicating that supporting the continued growth of the sector should be a top priority for the government.
However, a housing shortage also represents an opportunity for the construction and real estate sectors. Sergio Mutis Caballero, the president of Grupo Valor, one of Colombia’s most prominent real estate, construction and infrastructure firms, told OBG, “As long as the demand for housing in the country outstrips supply, this will allow housing projects to be carried out until every Colombian achieves his or her dream: home ownership”.
Providing the government can reduce the cost of land and stabilize that of building materials, as well as increase the number of permits for development projects, the goal of meeting the country’s surging demand for both state and private housing will be more easily achieved.