Slower price hikes in Colombia
Lalaine C. Delmendo | March 31, 2020
Colombia's property market is slowing, after many years of vigorous price rises. Colombia's house and apartment prices increased by 4.7% during the year to Q3 2019, according to the Banco de la Republica Colombia (Banrep) index, which covers second-hand houses and apartments. When adjusted for inflation, however, prices increased by only 0.9% y-o-y.The Banrep house price index includes nine cities (Bogotá, the capital, with a population of 7.2 million), Medellin (pop: 2.5 million), and Cali (pop: 2.4 million), plus Barranquilla, Bucaramanga, Cucuta, Manizales, Neiva and Villavicencio.
Colombia´s property market has experienced strong house price growth over the last thirteen years. From 2011 to 2018, house prices in Cali have risen by 85.35%, followed by Medellin (84.5%) and Bogota (79.68%). So it is not surprising to see a slowdown now:
However prices in the three major cities have continued to enjoy strong price rises during the year to the third quarter of 2019:
- In Cali, nominal new house prices surged by 8.6% during the year to Q3 2019. When adjusted for inflation, house prices were up by 4.6%.
- In Medellin, new house prices were up by 8.9% (4.9% inflation-adjusted) during the year to Q3 2019.
- In Bogota, new house prices rose by 8.2% y-o-y (4.2% inflation-adjusted) in Q3 2019.
Some area that posted robust house price hikes were Armenia, with new house prices up by 6.2% (2.3% inflation-adjusted), followed by Pereira with 4.9% (1.1% inflation-adjusted), and Barranquilla with 4.3% (0.5% inflation-adjusted). In contrast, Bucaramanga's new house prices fell by 3.7% (-7.2% inflation-adjusted), according to DANE.
Foreigners can freely buy property in Colombia.
Analysis
of Colombia Residential Property Market »
Moderate to good rental yields in Bogota, Colombia
Gross rental yields in Bogota, Colombia - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - are quite attractive, though significantly lower than they were a few years so (our research suggests that they have fallen over the past year). 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.
Across the Bogota districts that we cover, gross rental yields range from 5.7% to 7.1%. Given that the cost of managing a property can typically be estimated to be around 2% of the yield, this still means that property in Bogota is reasonably valued, and will yield a reasonable return to the investor.
Round trip transaction costs are not high in Colombia (i.e., the total costs of buying and selling a property). See our Colombia residential transaction costs analysis
and Residential transaction costs in Colombia compared to the continent
Taxes are generally high at 33%
Rental Income: Rental income earned by nonresidents is taxed at a flat rate of 35%. Income-generating expenses are deductible when computing taxable income.
Capital Gains: The capital gains tax is levied at a flat rate of 10%.
Inheritance: Inheritance is taxed at 35% for non-residents.
Residents: Residents are taxed on their worldwide income at progressive rates, from 19% to 33%.
Total transaction costs are low in Colombia
Total roundtrip costs are relatively low at around 5.28% to 6.44%of the property’s value, inclusive of the 3% to 4% estate agent’s fee (subject to 16% VAT), which is paid for by the seller.
Rental system is neutral to pro-landlord
Colombia’s rental market legislation is neutral between landlord and tenant. Some aspects are pro-landlord, while others are pro-tenant.
Rent Control: The most pro-tenant aspect of the law is that monthly rents cannot exceed 1% of the property value, giving the landlord a 12% maximum yield. But in reality, if the tenant does not complain, the landlord can get more.
Tenant Security: The rules for renewal and termination tend to favor landlords. If the tenant owes rent, the landlord can seize his properties. And even if eviction proceedings are long, the tenant is required to pay the rent for the duration of the proceeding.
Positive economic outlook in 2020
In 2019, Colombia's economy accelerated to a new four-year growth high with 3.3% y-o-y growth in Q3 2019. It had expanded by 2.7% in 2018, following the country’s lowest growth for eight years at 1.4% in 2017, according to the DepartamentoAdministrativo Nacional de Estadística´s (DANE).The stronger economic growth was attributed to higher private consumption (up by 4.9% y-o-y) due to higher salaries and higher growth in consumer loans and remittances. Fixed investment saw 5.1% y-o-y growth, resulting from a tax reform in December 2018.
The IMF expects Colombia’s economy to continue growing by end of 2019, estimating an annual GDP growth of 3.4%. In 2020, Colombia’s economy is predicted to grow by 3.6%, according to the IMF.
In November 2019, annual inflation slightly fell to around 3.8% from 3.9% in October, although the price level is still within the central banks´ 2%-4% target rate.
Unemployment in Colombia was 9.8% in October 2019, up from 9.1% in October 2018.
In May 2018 presidential elections, Iván Duque, a former senator and a candidate for the Partido Centro Democrático (Democratic Center Party) was elected as Colombia’s youngest president. Duque defeated Gustavo Petro of the MovimientoProgresistas (Progressive Movement) party during the second round of the elections, winning 54% of the votes against Petro’s 42%. Duque assumed office on August 7, 2018.
Just over a year after Duque assumed office, however, Duque had the lowest approval rating for any Colombian president since 1998 at 26%, based on the most recent Gallup Poll as of October 2019. Part of the reason was due to the government’s inability to fully implement the peace agreement with the FARC. The people’s dissatisfaction on the government grew further due to alleged measures intended to cut benefits for workers and retirees, which resulted in protests that started in November 2019.