This report analyzes data provided by Colombia’s Central Bank (El Banco de la Republica) as well as information taken from the DANE (Departamento Administrativo Nacional de Estadisticas), Colombia’s Superintendencia Financiera, and the DNP (Departamento Nacional de Planeacion).
We hope to provide a realistic picture on the Colombian real estate market and it’s potential for growth in both the short term as well as the long term level.
The Shift From Variable Rate Mortgages to Fixed Rates
There are two major types of mortgages in Colombia. Mortgages in Pesos (Fixed Rate) and UVR (Adjustable Rate Mortgages).
In previous years, almost all home loans and mortgages used UVRs or some other type of variable interest rate system. This is no longer true.
Before the turn of the century, Colombia suffered from what economists called hyperinflation as well as steady currency devaluations which made the country’s Peso constantly weaker.
The cost of living was always increasing and the value of the Peso was always decreasing against the dollar or other hard currencies. This made banks fearful of giving out loans using fixed interest rates. Fixed rate mortgages were either seldom or never offered.
The UPAC and UVRs
In order to protect their investments, financial institutions used only variable types of interest rates. These rates were dependent on what the inflation was, how much the currency weakened or suffered from devaluation and other economic factors. However, while banks benefited from these types of mortgages and loans, borrowers were being abused due to really bad mortgage deals.
Adjustable rate mortgages such as UVRs or it’s infamous predecessor “The UPAC” had been known to cause mortgage debts to rise instead of getting paid off.
The More You Paid the Less Equity You Had
Amazingly, many times people that had perfect credit, always paid their loans on time, never defaulted and did this for years actually lost equity. Some ended up with mortgages that were much higher than what the commercial value of their home was.
The Shift Toward Fixed Rate Mortgages in Pesos
After the turn of the century, Colombia’s new found political stability and economic growth led the Colombian government to begin forcing financial institution into adopting and offering healthier financing options for borrowers; options such as fixed rate mortgages payable in pesos instead of UVRs.
This means that now, most people will always pay the same amount for their monthly instalments and the debt will always decrease regardless of how interest rates and currency value fluctuate in the future.
The graph above demonstrated that almost every mortgage being offered in Colombia today is using a fixed rate “in Pesos” policy.
Interest Rates are also on the Decline
Real Credit Interest Rates for mortgages have been slowly but steadily dropping for the past couple of years.
And they are expected to keep dropping.
The global economic crisis which has recently battered the US and Europe is slowly starting to creep up on South America and the Colombian government is preparing for it. The idea is to mitigate any effects it may have on the Colombian economy. One of the ways the Colombian government will try to combat the global recession threat is to stimulate spending by lowering interest rates.
New Housing Prices are Rising But People Are Starting to Borrow Less
NHPI = New Housing Price Index
CPI = Consumer Price Index
The past couple of years have seen a healthy and constant increase in home appreciation. In fact, home prices have risen substantially in almost every city and locality within the country.
However, less mortgages are being given out today than they were a few years back. And also, due to the increasing requirements and lending restrictions that financial institutions have implemented, the amount being borrowed is substantially less.
This leads me to believe that demand for housing will tend to decrease over the short to mid term and home prices should begin to stabilize in price or grow at a much slower rate than they have in the past couple of years.
Tighter restrictions on lending are probably the biggest factor forcing people to borrow less. The Colombian economy is going through a good moment right now, yet the graph above shows that mortgage borrowing is getting lower and lower by the year. In fact, the real growth rates for mortgage loans actually went up during the last two years (the chart shows the NHPI deflated), but people strangely borrowed less. They actually borrowed more during the financial crisis than they do now.
I find these excerpts taken From el Banco de la Republica explaining the graph above very interesting:
“Although the new housing price index (NHPI) has grown less than the consumer price index (CPI) after so-called ‘asset inflation’ (in the first five years of the nineties), its tendency reversed thanks to a moderate improvement since 2002″
The Banco de la Republica also affirms that:
“These facts suggest that a portion of household wealth remained stable after the crisis period. The same can be said of mortgage loan collateral.”
The Upside is the Economy is Looking Pretty Good in Comparison to the Past and Unemployment Rates are Steadily Dropping
Unemployment rates are at their lowest point in many years.
Both foreign and domestic investment have boomed during the current government’s administration. Even with the global economic situation at a downturn, Colombia seems to be weathering the storm pretty well.
Some analysts believe the positive trend will start to slow down. However most of them agree that Colombia is pretty much at little risk of entering a recession any time soon.
The growth in jobs has increased demand for labor but not enough to drive up wages. In fact, the average household is actually making less now than they were a few years back if you factor in things like inflation:
Basically, more people have jobs now but the average job is paying less. The chart above tells us that consumer spending in Colombia is slightly up (probably due to inflation) but real wages are declining.
Lower wages might negatively affect the average citizen’s ability to obtain a mortgage or buy a new home.
Loan Amounts and Number of Loans Being Given
The average loan amount for a mortgage is much less than it was a few years back. Loans are also being given to less and less people. The banks are becoming more conservative about who they lend to.
The financial sector seems to be at very little risk today because their loan portfolios are highly qualified. This means we won’t be seeing any Colombian banks going bankrupt due to bad decisions any time soon.
Loan Terms in Colombia
The average Mortgage in Colombia is only for around 13.6 years (163.4 months), which is much lower than it is in Countries such as the US.
Who are Mortgages Being Given To?
The graph below shows that every day it is more difficult to get a mortgage. Only People with an A credit rating are being approved.
This obviously means that the risk of default is much lower. But the growth in the construction industry should start to decline due to a lack of new buyers being approved.
Is this Positive or Negative?
This is both good and bad in my opinion. Good in the sense that the financial industry is way less likely to crash as it did in the US and Europe, primarily because everyone given loans is highly qualified. Bailouts won’t be necessary.
But it is also bad because less mortgages mean less economic activity, less fuel for the economy, and lower consumer spending.
If there is less money being borrowed, then there will be a much lower demand for property and the construction industry will likely suffer.
After analyzing the data above, I believe that home prices in Colombia will neither suffer nor grow substantially during the short term. Mortgages are becoming cheaper but at the same time lending requirements are becoming tighter. Domestic demand for new construction projects might decline.
Foreign capital should continue to come into the country but at a slower rate than it has before. This mainly due to the global economic recession, and the housing market depression that is happening in the US and Europe.
The Colombian economy seems pretty stable right now and should continue to thrive during the long term. However, it is still partially dependent on trading partners such as the US which are cutting back on overseas spending.
About the VivaReal Network
VivaReal is a Latin America real estate listings network focusing on the the US Hispanic Market as well as international real estate throughout the Americas. They have a broad range of real estate in Bogota and many other major cities in South, Central and North America, including the Caribbean.