Chile's strong economic growth and expanded VAT credit encourage home buyers
Lalaine C. Delmendo | October 19, 2018
Chile´s housing market is vibrant. Home sales and prices fell in 2016 after the 19% VAT imposition, but the housing market rebounded in 2017 with house prices in Greater Santiago up 6.7% y-o-y in 2017; nationwide, home sales surged by 11.3%, and housing starts were up 8.9%. Home sales in Greater Santiago rose by 12.6% to 8,979 units during the year to Q2 2018, according to Chilean Chamber of Construction (CChC).
In January 2016, VAT of 19% had been imposed on sales of properties in Chile by "habitual sellers" such as real estate companies, or persons who sell their properties in less than a year. The VAT added around 4% to 11% to the price of new properties, making older homes more attractive. This, as well as the country´s weak economic growth, led to the housing market´s plunge in 2016. Greater Santiago´s house prices went down by 1.8% y-o-y by the end of 2016. Nationwide home sales and housing starts plunged in 2016 by around 35% and 31%, respectively.
Prior to the VAT imposition, Chile´s housing market had been thriving. Home prices rose 67% from 2004 to 2016. Even the global financial crisis of 2009 only caused a small decline of 0.7% (from May to September 2009). After the 2010 earthquake house prices bounced back, rising 9.5% in 2011, followed by 5.5% growth in 2012, 4.2% in 2013, and 11.7% in 2014, with strong demand in the northwest and southern areas of Greater Santiago from the beginning of 2014, mainly in the apartment market. In 2015, house prices in Greater Santiago rose 4.4%.
Now the market has recovered from the VAT imposition. New apartments in Southern Santiago saw the highest price increase, rising by 7.1% y-o-y in June 2018. In Central Santiago prices of new apartments also rose by 6.6% y-o-y, while apartment prices in Western Santiago were up 2.8% y-o-y. In Eastern Santiago new apartment prices actually fell by 1.1% in real terms.
In August 2018 an announced tax modernization project included 13 measures to boost the country´s growth and development. One measure will raise the property values that could benefit from a special VAT credit from 2,000 UF (US$ 80,106) to 4,000 UF (US$ 160,213), which will surely encourage middle class housing purchases.
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.
Key rate unchanged at 2.5%
Chilean interest rates have been trending down. In May 2017, the Central Bank of Chile reduced the benchmark rate by 25 basis points to 2.5%, the fourth consecutive rate cut since the beginning of 2017. The average market rate on housing loans has been much more stable than the central bank rate, floating down gradually from 2006 to 3.23% in August 2018.
The Central Bank of Chile held its benchmark interest rate unchanged at 2.5% in September 2018, in line with market expectations. Inflation was 2.7% in July 2018, within the 2%-4% target range.
However, the bank is considering tightening its monetary policy soon, due to faster-than-anticipated economic growth. The Central Bank said: "the Board believes that the monetary stimulus should start being gradually withdrawn in the coming months."
Chile has a small but competitive rental market. Apartment rental yields in Santiago city range from 4.26% to 5.20%, according to Global Property Guide research in November 2015. Rental yields in Viña del Mar are lower, ranging from 3.89% to 4.95%.
"What we´re seeing now is a market trending toward more of a rental market than a sales market," says Engel & Völkers Chile´s head of real estate, Jorge Mira Olivos. The agency saw a 30% increase in rentals they handled in 2016, and in 2017 rentals became even more popular, according to HYPERLINK "https://www.nytimes.com/2017/12/13/realestate/house-hunting-santiago-chile.html"Matías Montalva, owner of real estate agency Montalva Quindos. Montalva partly attributed the rise of rentals´ popularity to tighter lending standards and to the people´s preference of marrying at a later date.
Mortgage market is still rising
Chile´s mortgage market is one of the most developed in Latin America. It has grown steadily from 11.2% of GDP in 2001 to 24.4% of GDP in 2017. In 2017, the country´s outstanding mortgage loans increased by 10.1% y-o-y to CLP 43.2 trillion (US$ 65.5 billion), according to the Central Bank of Chile. Most mortgages are fixed rate with maximum LTV ratios of around 75% to 80%, which helps contain the banking system’s credit risk.
Chile´s banks do not usually lend to foreigners, even to those with a resident´s permit. Banks have strict lending criteria which are almost impossible for foreigners to satisfy. These tight controls on mortgage lending may have reduced the country´s exposure to the global financial crisis.
Housing starts are up in 2017
After the February 27, 2010 earthquake centred on Valparaiso, there was a large-scale reconstruction effort and the housing ministry (Ministerio de Vivienda y Urbanismo de Chile or MINVU) allocated US$2.5 billion worth of subsidies, and committed to rebuilding 220,000 homes. The earthquake, the sixth largest ever recorded, affected six regions of central and southern Chile inhabited by around 12 million people or around 75% of Chile´s population.
In 2010, construction starts were sharply down, due to changes in construction rules after the earthquake. In 2016, VAT had an earthquake-like impact. In 2017 housing starts rose by 8.9%, the impact of the 19% VAT imposed on "habitual sellers" having waned.
Chile´s successful housing program
Chile´s housing shortage has been reduced by a very successful housing policy. The Ministry of Housing and Planning (Ministerio de Vivienda y Urbanismo or MINVU) was created in the 1970s, and has dominated the housing sector since. It is the country´s largest real estate firm, and its second largest mortgage bank.
The special law Decreto con Fuerza de Ley 2 (DFL-2) encouraged affordable housing of less than 140 square metres (sq. m). DFL-2 properties are exempt from income tax, and enjoy 50% off the Real Estate Tax for corresponding periods, according to land area.
Robust growth is expected in 2018
Chile´s weak economic growth continues with 1.5% y-o-y growth in 2017, although higher than last year´s 1.3% growth. Following a slow start in the first half of 2017, growth picked up during the second half of the year. This was supported by the increase in exports, and business and household confidence, which are mainly attributed to "historically low interest rates, higher external demand and firmer global copper prices," according to the OECD. Investment had also been recovering, thanks to the stabilizing mining investment.
In Q2 2018, the economy posted 5.3% y-o-y growth, the highest growth in almost six years, following another robust growth of 4.2% y-o-y in the first quarter, according to the central bank. The recent expansion was driven by domestic demand, backed by household consumption and investment.
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, with 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%, and in 2016 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 2017, fiscal deficit was around 2.8% of GDP. The government is aiming to curb its fiscal deficit to 1.9% of GDP in 2018, according to Finance Minister Nicolás Eyzaguirre.
Due to the country´s deteriorating fiscal position over the last few years, credit rating agency Moody´s downgraded Chile´s senior unsecured debt ratings from "Aa3" to "A1" in July 2018.
Chile´s unemployment rate is 7.3% (August 2018), unchanged from the previous month and the highest since 2011. The country´s inflation rate was 3.1% in September 2018, up from 1.5% in the same month last year. The central bank expects a 3.1% average inflation rate in 2018, followed by 3% in 2019.
Chile´s general elections in November 2017 gave president Sebastián Piñera another term in office. Piñera represents the conservative Chile Vamos coalition, and won with 54.57% in the runoff vote against centre-left candidate Senator Alejandro Guillier who got 45.43% of the votes. Likewise, Piñera´s Chile Vamos coalition won 46% of the Chamber of Deputies and 44% of the Senate.
- Chile's housing market is recovering from VAT introduction, helped by low interest rates - August 01, 2017
- Chile's house prices up, sales down - June 29, 2016