Chile's strong economic growth and expanded VAT credit encourage home buyers
Lalaine C. Delmendo | October 19, 2018
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.
Moderate rental yields in Santiago and Viña del Mar
Gross rental yields in Santiago and Viña del Mar - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - are moderate. Gross rental yields are an important consideration even for those who do not intend to become landlords, because a high rental yield indicates that the property market is reasonably priced.
Prices for apartments in Santiago are around USD 2,500 to USD 2,800 per square metre (sq. m.) or around USD 335,000 for a 120 sq.m. apartment. Prices in Viña del Mar are around 30% to 40% lower.
These are reasonable prices, and by the standards of the continent, Santiago has a comparatively low price to income ratio, with a typical 120 sq. m. apartment 17 times average GDP per capita.
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.
Chile's robust growth is expected in 2018Chile'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.