Colombia: Meeting housing demand
As Colombia’s middle class continues to grow, so does its demand for housing. In 2011, licences were issued for the construction of 202,290 housing units, a 31.4% increase over the previous year. New home sales in the first half of 2011 were also up 19% in comparison to the first half of 2010.
While some policymakers and industry leaders are rejoicing over these results, others warn that this could be the build-up to an asset bubble in the real estate sector similar to that experienced by the US in 2008. Signs of the latter come in the form of rapid credit expansion and a surge in real estate prices, which are up 3.2% over 2010. A recent report by Daniel Volberg, an economist at Morgan Stanley, revealed that Colombia’s real estate prices are climbing to historical levels similar to those attained in the mid-1990s before the market crashed.
Colombia is indeed no stranger to crises in the housing sector. A rapid rise in interest rates in the late 1990s led to widespread mortgage defaults. According to a report by the Wharton School of Business at the University of Pennsylvania, to avoid mass evictions, the Colombian government forgave almost one-third of the mortgages affected by the crisis at that time.
Many argue that this experience provided leaders in the real estate industry with an important lesson, and things are now different. Firstly, many buyers are required to make a down payment of 30%. With this much money invested up-front, buyers are sure to take all possible measures to avoid losing their investment through a default on their mortgage.
Secondly, a large number of first-time buyers are given fixed-interest rates as low as 7% on a 15-year mortgage. Providing new homeowners with fixed-rate loans limits the possibility that they will default following an increase in interest rates.
Others point out that the rise in housing prices, rather than being a build-up to a crisis, is simply representative of a limited housing supply and growing demand. Carlos Raul Yepes, president of Bancolombia, the largest commercial bank in the country, recently told international press that given such strong demand in the housing sector, the bank could double the number of mortgages distributed over the next 10 years.
While much of the lead up to the housing crisis in the US can be accredited to predatory lending practices exercised by some of the nation’s largest banks, in Colombia, the growth in home lending can be strongly linked with a number of government programmes aimed at encouraging home ownership. For example, the Social Interest Housing programme provides a one-time payment intended to supplement beneficiaries’ savings towards purchasing or constructing a new home. Participants in this programme accounted for approximately 42% of new housing unit permits in 2011.
The Ministry of Housing, City and Territory is also working with Congress to institute several additional housing programmes, such as the law of priority interest housing (known locally by its Spanish acronym, VIP) and the Second Home Law. VIP is aimed at providing those in extreme poverty – defined as earning less than COP100,000 (US$55) per month – with their own home. The Second Home Law is actually directed towards foreigners (primarily retirees) and Colombian nationals living abroad. The law provides a series of incentives for those in this category to invest in a second home in Colombia.
The Colombian government is clearly investing heavily in the possibility that more Colombians (and foreigners) will become homeowners in the country in the coming years, and that they will do so in a way that is financially responsible.
Nonetheless, concern surrounding the rapid expansion in credit (both consumer and housing loans) led Colombia’s central bank to increase interest rates for the second month in a row in February. The overnight lending rate went to 5.25%, up a quarter of a point from the previous month. While this increase will obviously have no effect on homeowners with fixed-rate mortgages, it should help to slightly cool the market.
While the possibility of a housing asset bubble cannot be ruled out entirely, it appears that both policymakers and private sector leaders in the industry are aiming for the sort of sustainable growth that will allow more Colombians to experience the joys of home ownership without living in the constant fear of default.