Chile's housing market strengthens
Lalaine C. Delmendo | September 30, 2019
Western Santiago saw the highest price rises for new apartments, with 18.2% increase during the year to Q2 2019 (15.1% inflation-adjusted), followed by Southern Santiago with 15.7% price increase. Central and Eastern Santiago saw price increases for new apartments of around 9.7% and 8.2%, respectively.
Yet sales are mixed. The total number of residential properties sold in Greater Santiago fell by 4.4% to 8,588 units during the year to Q2 2019, according to the CChC.
Residential construction is falling. During the first seven months of 2019, the total number and area of dwellings authorized fell by 10.9% and 9.7%, respectively.
Most foreign buyers in Santiago are from the United States or Europe, though interest from Chinese investors is growing. Lastarria and Bellas Artes, which are close to downtown and museums, and have a walkable 'European feel' are popular to foreign buyers, said Nathan Lustig of Andes Property. El Golf, a sophisticated, upper scale neighbourhood located in Las Condes, Santiago, tends to attract wealthy foreigners with its private golf club, luxury housing, five star hotels, renowned restaurants and fancy shopping destinations.
Any individual or corporate body can acquire and own real estate in Chile, whether or not they are residents, except near the country's boundaries. Chile has strong legal protection of property rights.
Properties for sales are typically quoted in Unidad de Fomento (UF), a currency tied to the Chilean peso (CLP) but regularly adjusted for inflation. The Central Bank of Chile posts the daily UF-to-CLP exchange rate on its website.
The economy expanded by a robust 4% last year, the highest growth since 2013. Economic growth is projected at 3.4% this year and 3.2% in 2020, according to the International Monetary Fund (IMF).
Moderate rental yields in Santiago
It is obviously impossible to summarise the many different price-ranges and yields in Chile's capital, Santiago. Our research covered the richer districts of Barrio Lastarria - a popular tourist hub and a historic district; Barrio Brasil - with its strong artistic and cultural scene and many universities; Bellavista, known as Santiago's bohemian quarter, with avant-garde galleries, bars and clubs, host to many of the city's intellectuals and artists; La Dehesa; El Golf; Las Condes, with its upscale population; La Reina, which consistently ranks in the top 5 districts for quality of life; Metro Alcantara; Metro Escuela Militar; Nunuoa; Providencia; and Vitacura.
We found great variations but the overall results was pretty clear, that a square metre of residential property in such upscale districts tends to go for around $3,200 to $3,700 and to command a rental yield of around 4%.
Chile's rental income tax is high
Rental Income: Nonresidents earning Chilean income are subject to AT, which is levied at 35% on gross income.
Rental incomeis subject to FCT at a flat rate of 27%. FCT and property taxes are credited against the taxpayer’s AT liability.
Leasing of real estate is subject to VAT at 19%.
Capital Gains: Gains are taxed at the standard FCT, like any other profit, if immovable property is sold within the first year after acquisition, or if an apartment is sold within the first four years.
Inheritance: Inheritance, gifts and donations tax rates vary according to the degree of relationship and the value of the inheritance, from 1% to 35%.
Residents: Residents are taxed on their worldwide income.
Total transaction costsare low in Chile
The total roundtrip transaction cost, i.e., the cost of buying and selling the property, is around 5.30% to 5.40% of the property value. This includes the estate agent's fee of 4%, which is split evenly between buyer and seller.
If the property is newly built by a developer, the transaction cost will be higher, due to the 19% VAT imposed on such properties.
Chile's law neutral between landlord and tenant
Chilean law is neutral between landlord and tenant, following fairly recent changes in the law.
Rents: The rent can be freely agreed upon. There is no legal maximum for deposits.
Tenant Eviction: Eviction of tenants may be difficult or easy depending upon the nature of the agreement. Monthly tenancies can be terminated by giving two months' (notarized) notice of eviction.
However tenants in fixed term contracts and in contracts exceeding one year can only be evicted through long judicial proceedings.
Economy to grow modestlyThe economy expanded by a robust 4% last year, more than thrice the previous year’s expansion and the highest growth since 2013, thanks to strong growth in mining and investments. In Q2 2019, the economy grew by 1.9% from a year earlier, following y-o-y expansions of 1.6% in Q1 2019, 3.6% in Q4 2018, 2.6% in Q3 2018 and 5.3% in Q2 2018 and 4.7% in Q1 2018, according to the central bank.
Economic growth is projected at 3.4% this year and 3.2% in 2020, according to the IMF.
Recently, President Sebastián Piñera unveiled plans to construct thousands of miles of roads, in an effort to buoy economic growth and create jobs.
Chile is an upper-middle income economy with a track record of sustained growth, its GDP having grown at an annual average of 5.6% from 1990 to 2007, among the highest growth rates in the world. Strong growth continued from 2008 to 2012, with an economic contraction of only 1.6% in 2009, amidst the global financial crisis. Chile then rebounded with 5.8% growth in 2010, despite the earthquake. From 2011 to 2013 there was average growth of 5.2%.
However, since then the economy has been hit by the decline in global demand for mining products. In 2014 GDP expanding by only 1.8%, in 2015 by 2.3%, in 2016 by 1.7% and in 2017 by only 1.3%.
Fiscal discipline is one of the pillars of Chile’s solid international image. From 2000 to 2012, Chile recorded an average budget surplus of 1.7%, reaching a record high of 8.8% of GDP in 2007. The budget surplus not only transformed Chile from a debtor to a creditor country, but also placed the country in solid position to weather global economic volatility. In May 2010, Chile became OECD’s first Southern American member, highlighting reduction of poverty from 45% in the late 1980s to around 14% in 2009. There were other advances, such as strengthening of state institutions and fighting corruption.
In 2018, fiscal deficit narrowed to 1.9% of GDP, from 2.8% of GDP in 2017, and 3.1% of GDP in 2016, driven by a growth in receipts, coupled with a reduction in public spending, according to the Ministry of Finance. Chile’s government debt stood at about 25.6% of GDP in 2018, up from 23.5% in the prior year.
Chile’s unemployment rate was 7.2% in July 2019, slightly down from 7.3% a year earlier, according to INE. Jobless rate averaged 6.4% in the past seven years.