Chile’s house price growth moderating

Chile’s house prices continue to rise, albeit at a much slower pace, despite recovering demand. The average price of residential properties in Greater Santiago rose by a modest 2.76% in Q3 2023 from a year earlier, following year-on-year increases of 6.23% in Q2 2023, 10.75% in Q1 2023, 18.38% in Q4 2022 and 18.05% in Q3 2022. When adjusted for inflation, prices dropped 2.24% during the year to Q3 2023, according to the Chilean Chamber of Construction (CChC).

Chile’s house price annual change

Quarter-on-quarter, residential property prices increased by a minuscule 0.71% in Q3 2023 and declined by 0.43% in real terms.

By property type:

  • The average price of new houses rose by 4.99% (-0.12% inflation-adjusted) in Q3 2023 from a year earlier, a slowdown from y-o-y growth of 18.2% in the same period last year. Quarter-on-quarter, house prices increased 1.01% (-0.13% inflation-adjusted) during the latest quarter.
  • The average price of newly built apartments increased by 2.55% (-2.45% inflation-adjusted) during the year to Q3 2023, a sharp deceleration from a y-o-y rise of 19% in Q3 2022. Quarterly, apartment prices were up by a meager 0.58% (-0.55% inflation-adjusted).

The Northeast saw the highest price growth for new apartments, recording a y-o-y increase of 8.2% (2.9% inflation-adjusted) in Q3 2023, followed by the Central Santiago with a 7.2% price increase. In contrast, the Northwest and the South registered price declines for new apartments of around 6.3% and 1.0%, respectively.

The average price of apartments across Chile is around US$160,000 while detached houses are priced at about US$270,000.

Demand is showing signs of improvement. In the first three quarters 2023, residential property sales in Greater Santiago rose by 33.3% y-o-y to 20,274 units, in stark contrast to the more than 29% decline in the full year of 2022, according to CChC figures. Over the same period, apartment sales surged 42.4% y-o-y to 17,900 units while home sales fell by 10.1% to 2,374 units.

Nationwide, residential property sales also increased 12% to 23,107 units in H1 2023 as compared to the same period last year, buoyed by a surge in apartment sales.

Despite the improving demand, construction activity is falling rapidly. In the first ten months of 2023, the total number of dwellings authorized plummeted by 19.4% y-o-y to 67,159 units, following a decline of 19% in 2022 and an increase of 18.3% in 2021, according to the data released by INE. Likewise, the total area of dwelling permits authorized fell sharply by 21.5% y-o-y to 5.41 million square meters (sq.m) over the same period, despite declining costs of construction materials.

During 2022, Chile’s economy expanded by a modest 2.4%, a sharp deceleration from a huge growth of 11.7% in 2021, amidst weaker private consumption and investment, coupled with a reduction in public spending. The economy slowed further this year, with real GDP growth of just 0.6% in Q3 2023 from a year earlier, following y-o-y declines of 0.8% in Q2 and 0.7% in Q1, according to Banco Central de Chile.

The Finance Ministry’s best-case scenario is for the economy to post zero growth this year. The International Monetary Fund (IMF) and the World Bank expect Chile’s economy to contract in 2023 by 0.5% and 0.4%, respectively.

Chile is an upper-middle-income economy, with a total population of nearly 20 million people in 2023, with a GDP per capita of more than US$15,000.

Chile GDP Per Capita graph

The housing cycle

Residential property prices in Greater Santiago have risen by around 157% (66% inflation-adjusted) from 2004 to 2016. The global financial crisis of 2008 had barely impacted the housing market, registering a small decline of just 4.7% (-3.4% inflation-adjusted) from Q3 2008 to Q2 2010.

After the 2010 earthquake house prices bounced back, rising by 12.2% in 2011, followed by 7.5% growth in 2012, 10.6% in 2013, and 16.5% 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 by 13.3%.

In January 2016, a VAT of 19% was imposed on property sales 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 weak economic growth, led to a slight housing market downturn in 2016. Greater Santiago’s house prices went down by 0.4% (-3% inflation-adjusted) y-o-y by the end of 2016. Nationwide home sales and housing starts plummeted in 2016 by around 35% and 31%, respectively.

But the impact of the property sales tax quickly waned, with new residential property prices rising again by 10.7% in 2017 and by another 9.5% in 2018. In 2019, the housing market continued to expand, with prices increasing by 10.5%.

Chile saw another housing market downturn during the onset of the Covid-19 pandemic. During 2020, residential property sales plummeted by 28.2% y-o-y to 22,672 units. Construction activity was also adversely affected, with dwelling permits falling by 22.2% y-o-y to 123,779 units in 2020.

Chile’s housing market started to bounce back in 2021, amidst the easing of pandemic-related restrictions. Residential property prices in Greater Santiago rose by 12% (4.5% inflation-adjusted) in 2021 from a year earlier, driven by a 31% surge in sales. Then during 2022, residential property prices surged further by 18.4% (5% inflation-adjusted).

Chile Real House Price Index in Greater Santiago graph

Nationwide property sales recovering

Nationwide, the total number of residential properties sold plummeted by 30.1% to 41,839 units during 2022, following a y-o-y growth of 27.2% in 2021 and declines of 25.3% in 2020 and 1.7% in 2019, based on figures released by CChC.

By property type:

  • The number of apartments sold in the country fell sharply by 25.6% y-o-y to 34,501 units in 2022, in contrast to an annual growth of 37.1% in 2021.
  • Home sales nationwide dropped sharply by 45.6% y-o-y to 7,338 units last year, following an annual increase of 1.9% in 2021.

Demand shows some improvements this year. In the first half of 2023, residential property sales in Chile increased 12% to 23,107 units as compared to the same period last year, buoyed by a surge in apartment sales. Over the same period, the number of apartments sold increased 19.9% y-o-y to 19,889 units while home sales fell by 20.6% to 3,218 units.

Housing Offers in Chile graph

Greater Santiago follows the national trend

Property demand in Greater Santiago follows the national trend. During 2022, the number of residential properties sold in Greater Santiago dropped 29.1% to 21,046 units, in contrast to a y-o-y growth of 30.9% in 2021.

By property type:

  • The number of apartments sold fell by 22.7% y-o-y to 17,718 units in 2022, in sharp contrast to a huge 42.1% increase in 2021.
  • The number of houses sold dropped sharply by 50.6% y-o-y to 3,328 units in 2022, after increasing by a modest 3.1% in the prior year.

In the first three quarters of 2023, residential property sales rose by 33.3% y-o-y to 20,274 units, according to CChC figures. Over the same period, apartment sales surged 42.4% y-o-y to 17,900 units while home sales fell by 10.1% to 2,374 units.

Chile Housing Offers in Greater Santiago graph

Foreign homebuying is still limited

Foreign homebuying in Chile remains limited. Unlike neighboring Argentina, where foreign investors have driven property sales in recent years, “Chile has never been a huge market for foreign buyers,” said Matt Ridgway of Colchagua Valley-based realty firm Chile Investments.

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 with foreign buyers, said Nathan Lustig of Andes Property. El Golf, a sophisticated, upper-scale neighborhood 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.

Housing construction activity falling sharply, despite declining construction costs

The total number of dwellings authorized plummeted by 19.4% y-o-y to 67,159 units in the first ten months of 2023, following a decline of 19% in 2022 and an increase of 18.3% in 2021, according to the data released by INE. Likewise, the total area of dwelling permits authorized fell sharply by 21.5% y-o-y to 5.41 million square meters (sq. m) over the same period, despite declining costs of construction materials.

In October 2023, the construction materials and inputs price index (IPMIC) fell slightly by 1.84% from a year earlier, its sixth consecutive month of decline and in sharp contrast to the double-digit price increases a year ago.

Similarly, the building cost index was up slightly by 0.7% y-o-y in July 2023, a sharp slowdown from the prior year’s 8.9% growth and the lowest increase recorded since May 2017.

There were about 138,000 new dwelling units authorized annually from 2012 to 2022.

Chile Number of Houses Authorized graph

Housing interest rates rising, despite successive key rate cuts

In its December 2023 meeting, the Central Bank of Chile lowered its benchmark interest rate by 75 basis points to 8.25%, its fourth consecutive rate cut in six months, to buoy its ailing economy amidst falling inflation.

Despite this, housing loan interest rates continue to rise, with the average rate increasing to 5.18% in November 2023, up from 4.64% in November 2022 and 3.91% in November 2021.

Nationwide inflation eased for the 12th straight month to 4.8% in November 2023, the lowest level since August 2021. From an annual average of 2.9% in 2009 to 2021, inflation surged to 11.6% in 2022.

“The monetary policy interest rate (MPR) has accumulated a reduction of 300 basis points (bp) since July and stands at 8.25%. The Board considers that, in line with the central scenario of this Report, the convergence of inflation to the target will require further cuts in the MPR,” said the central bank.

“Regarding risks, the evolution of the external scenario continues to be subject to important sources of uncertainty. The fragility of the Chinese real-estate sector, doubts about the fiscal situation of the U.S., and a more complex geopolitical environment with new armed conflicts are just some examples,” the central bank added.

Chile Interest Rates Percentages graph

Mortgage market continues to expand

Chile’s mortgage market is one of the most developed in Latin America, having grown steadily from 11.2% of GDP in 2000 to 28.5% of GDP in 2022.

In November 2023, the country’s outstanding mortgage loans increased by 7.6% y-o-y to CLP 79.67 trillion (US$89.23 billion), following annual growth of 14.3% in 2022, 13.5% in 2021, 8.1% in 2020, 11.2% in 2019, and 9.4% in 2018, according to figures released by the Central Bank of Chile.

However, the mortgage market’s growth is expected to slow in the coming months, as rising interest rates for housing loans render such loans less attractive to borrowers.

Most mortgages are fixed rates 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 external shocks and global crises.

Chile Housing Loans Outstanding graph

Moderate rental yields

Chile has a small but competitive rental market. Unsurprisingly, there are great variations in rental yields in Chile, particularly in its capital city, Santiago. But the overall results from Global Property Guide research conducted in December 2023 were pretty clear – the gross rental yields for apartments nationwide are moderately good at an average of 4.73% in Q4 2023, slightly down from 4.99% in Q2 2023.

  • In Santiago, gross rental yields for apartments range from 4.4% to 5.4% in Q4 2023, with a city average of 4.83%.
  • In Conception, apartments offer rental returns of between 5.08% and 5.6%, with a city average of 5.38%.
  • In Viña Del Mar, apartment rental yields range from 3.65% to 4.33%, with a city average of 3.99%.
  • In Concon, gross rental yields range from 3.61% to 4.38%, with a city average of 3.91%.
  • In Temuco, apartments offer gross rental yields of around 4.64% to 5.16%, with a city average of 4.96%.
  • In Valparaiso, rental yields range from 3.33% to 4.46%, with a city average of 3.83%.
  • In La Serena, rental yields range from 4.37% to 5.78%, with a city average of 5.10%.
  • In Antofagasta, rental yields range from 5.36% to 6.39%, with a city average of 5.83%.

In Greater Santiago, a two-bedroom apartment, as a rough average, rents for about US$420 to US$520 per month.

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 meters (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. This applies regardless of the number of homes an individual may own.

However, on February 4, 2022, Chile enacted tax reform (Law No. 21.240) that reduces or eliminates certain tax exemptions to finance Law No. 21.419 (the new pension law). Beginning January 1, 2023, the said law will limit the tax benefits for DFL-2 housing to the first and second homes acquired by individuals, regardless of the acquisition date of the real property.

Chile’s economy now struggling

In 2022, Chile´s economy experienced a modest expansion of 2.4%, marking a significant slowdown from the robust growth of 11.7% recorded in 2021. This deceleration was attributed to weaker private consumption and investment, along with a reduction in public spending. The economic slowdown persisted into the following year, with real GDP growth reaching just 0.6% in Q3 2023 compared to the same period in the previous year. This followed year-on-year declines of 0.8% in Q2 and 0.7% in Q1, as reported by Banco Central de Chile.

The lackluster performance of Chile in 2023, according to the World Bank, was “mainly driven by the lagged effects of fiscal and monetary contraction in 2022 after extraordinary spending in 2021.”

The Finance Ministry´s most optimistic projection anticipates zero growth for Chile´s economy this year. Contrastingly, the International Monetary Fund (IMF) and the World Bank have less optimistic expectations, forecasting a contraction of 0.5% and 0.4%, respectively, for the Chilean economy in 2023.

The economy is projected to grow slightly by 1.6% during 2024.

After growing by an annual average of 2.9% in 2009-19, the Chilean economy recorded a contraction of 6.1% in 2020 due to the COVID-19 pandemic.

Chile GDP Growth and Inflation graph

Chile is an upper-middle-income economy with a track record of sustained growth, its GDP has 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 1.1% 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 an average growth of 5.2%.

However, since then the economy has been hit by the decline in global demand for mining products. From 2014 to 2019, the average real GDP growth was below 2% annually.

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 a solid position to weather global economic volatility. In May 2010, Chile became OECD’s first Southern American member, highlighting the reduction of poverty from 45% in the late 1980s to around 14% in 2009. There were other advances, such as the strengthening of state institutions and fighting corruption.

Fiscal deficit has been manageable since, ranging from just 0.6% to 2.8% of GDP in 2013-19, driven by a growth in receipts, coupled with a reduction in public spending, according to the Ministry of Finance. However, the introduction of fiscal stimulus packages to mitigate the adverse impact of the COVID-19 pandemic pushed the deficit to as high as 7.1% of GDP in 2020 and to 7.5% of GDP in 2021.

Chile’s government budget balance quickly returned to a surplus equivalent to about 1.1% of GDP in 2022.

The central government’s fiscal position is expected to weaken significantly this year, with a deficit of 2.4% of GDP, amidst slowing fiscal revenues due to lower copper prices and rising fiscal expenses due to higher pension benefits, salaries, and capital expenditure, according to Fitch Ratings.

Chile’s government debt increased to 38% of GDP last year, up from 36.3% of GDP in 2021, 32.5% in 2020, 28.3% in 2019, and 25.6% in 2018. It was the highest debt level recorded in recent history. The debt level is projected to increase further to about 39.1% of GDP by end-2023.

Chile’s unemployment rate stood at 8.9% in October 2023, unchanged from the previous month but up from 8% in the same period last year, according to INE. The jobless rate averaged 6.8% in 2011-19 before increasing to 10.8% in 2020 due to the pandemic. It fell to 8.9% in 2021 and further to 7.9% in 2022, as economic activity gradually improved.

Chile Unemployment Rate graph

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