Chile’s house prices continue to rise, amidst limited supply. The average price of residential properties in Greater Santiago surged by 18.4% in Q3 2022 from a year earlier, following y-o-y increases of 18.7% in Q2 and 14.3% in Q1. When adjusted for inflation, prices rose by a more modest 4.1% during the year to Q3 2022, according to the Chilean Chamber of Construction (CChC).
Chile’s house price annual change
Quarter-on-quarter, residential property prices increased by 3.9% in Q3 2022 (0.4% inflation-adjusted).
By property type:
- The average price of new houses rose by 18.2% (3.9% inflation-adjusted) in Q3 2022 from a year earlier and by 4.9% (1.4% inflation-adjusted) from the previous quarter.
- The average price of newly built apartments increased 19% (4.7% inflation-adjusted) y-o-y in Q3 2022 and by 3.6% (0.1% inflation-adjusted) q-o-q.
Southern Santiago saw the highest price rises for new apartments, with a 22% increase during the year to Q3 2022 (7.3% inflation-adjusted), followed by the Northwest with a 19.5% price increase. The Northeast and Central Santiago saw price increases for new apartments of around 15.9% and 13.5%, respectively.
The average price of apartments across Chile is around US$155,000 while detached houses are priced at about US$260,000.
Actual sales in the capital are actually falling, amidst rising interest rates. But this might also be partly due to the limited supply in the market and as buyers seek places outside of urban areas due to surging house prices. The total number of residential properties sold in Greater Santiago plunged by 35.7% y-o-y to 15,215 units in the first three quarters of 2022, following a 30.9% surge during 2021, according to the CChC.
“I sell some of the most expensive houses in Chile, and it hasn’t stopped,” said Folke Bergstrom of Sotheby’s International Realty Chile. “The issue is that there’s no more space to grow in small towns, and the number of houses for sale has not increased. The only way to get a piece of land is to convince an owner to sell.”
The number and area of dwellings authorized fell by 34.8% and 32.6%, respectively, in the first three quarters of 2022 as compared to the same period last year, according to the Instituto Nacional de Estadisticas (INE).
Yet the wider economy is slowing. In Q3 2022, the economy grew by a meager 0.3% y-o-y, sharply down from an expansion of 5.6% in the previous quarter and the weakest growth since Q1 2021. As such, economic growth is projected to slow to 2.1% this year, amidst global economic slowdown and heightened inflation risks, according to the International Monetary Fund (IMF). This is a sharp deceleration from strong economic growth of 11.7% in 2021.
The housing cycle
Residential property prices in Greater Santiago have risen by around 157% (66% inflation-adjusted) from 2004 to 2016. In fact, 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 last year, amidst the easing of pandemic-related restrictions. Residential property prices in Greater Santiago rose by 13.6% (5.5% inflation-adjusted) in 2021 from a year earlier, driven by a 31% surge in sales.
Property sales plummeting
The number of residential properties sold in Greater Santiago plunged by 35.7% to 15,215 units in the first three quarters of 2022 as compared to a year earlier, according to the CChC. During 2021, total sales reached 29,670 units, up by 30.9% from the prior year, following y-o-y declines of 28.2% in 2020 and 6.9% in 2019.
By property type:
- The number of apartments sold fell by 31.5% y-o-y to 12,573 units in Q1-Q3 2022.
- The number of houses sold dropped sharply by 50.1% y-o-y to 2,642 units over the same period.
Likewise, the value of sales fell by 36.2% y-o-y in the first three quarters of 2022, to 66.59 million UF or CLP1.84 trillion (US$1.99 billion), according to the CChC.
- Apartment sales declined by 29.6% y-o-y to 50.05 million UF or CLP1.38 trillion (US$1.5 billion) in Q1-Q3 2022.
- House sales plunged 50.4% y-o-y to 16.54 million UF or CLP456.5 billion (US$495.22 million) in the first three quarters of 2022.
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 again
Dwellings authorized plummeted by 34.8% y-o-y to 68,794 units in the first three quarters of 2022, following an annual growth of 16.8% in 2021, according to the Instituto Nacional de Estadisticas (INE). Likewise, the total area of dwelling permits authorized fell sharply by 32.6% y-o-y to 5.68 million square meters (sq. m) over the same period, amidst surging construction costs.
In September 2022, the construction materials and inputs price index (IPMIC) rose sharply by 22.44% from a year earlier, its eighteenth consecutive month of double-digit price increases. Similarly, the building cost index also increased by 7.2% y-o-y in August 2022.
There were about 141,000 new dwelling units authorized annually from 2011 to 2021.
Interest rates surging
In October 2022, the Central Bank of Chile raised its benchmark interest rate by 50 basis points to 11.25%, following six consecutive rate hikes of a cumulative of 725 basis points since January 2022, in an effort to rein in inflationary pressures. It is the highest level in recent history.
As a result, housing loan interest rates have been gradually rising, with the average rate increasing to 4.53% in October 2022, up from 3.56% in October 2021 and 2.47% in October 2020.
Inflation surged to 13.7% in September 2022, far higher than the annual average of just 2.9% from 2009 to 2021.
“The Board estimates that the monetary policy rate has reached its maximum level of the cycle that began in July 2021 and that it will remain there for as long as necessary to ensure the convergence of inflation to the target over the two-year policy horizon,” said the central bank. “The Board will monitor closely the unfolding of these events, and hereby reaffirms its commitment to conduct monetary policy with flexibility, in order for projected inflation to stand at 3% annually in the policy horizon.”
The mortgage market continues to expand despite tight lending criteria
Chile’s mortgage market is one of the most developed in Latin America, having grown steadily from 11.2% of GDP in 2000 to 27.2% of GDP in 2021.
In October 2022, the country’s outstanding mortgage loans increased by 15.3% y-o-y to CLP 73.51 trillion (US$79.75 billion), following annual growth of 13.5% in 2021, 8.1% in 2020, 11.2% in 2019, and 9.4% in 2018, according to the Central Bank of Chile.
However, the mortgage market’s growth is expected to slow in the coming months, as rising interest rates 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.
Moderate rental yields in Santiago
Chile has a small but competitive rental market. Unsurprisingly, there are great variations in rental yields in Chile’s capital, Santiago, but the overall results from Global Property Guide research conducted in November 2022 were pretty clear – in the capital city of Santiago, the rental yields are between 3.52% and 5.88%, with a city average being 5.09%.
From the Global Property Guide research, the city of Conception had the best yield rates of 5.53% to 9.01%. The rest of Chile still has moderate rental yields of 2.94% to 7.20%.
A two-bedroom apartment in Greater Santiago might, as a rough average, rent for about US$450 to US$800 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 for the purpose of financing 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.
Economic growth slowing again
The economy expanded by a huge 11.7% during 2021, in sharp contrast to the 6.1% contraction in 2020 and far higher than the annual average growth rate of just 2.9% in 2009-19.
“Fueled by a strong fiscal response, Chile’s GDP grew at 11.7 percent in 2021, one of the fastest recoveries worldwide,” said the World Bank. “Growth was driven by consumption, amid pension fund withdrawals and direct fiscal support of 9 percent of GDP. One of the fastest vaccination rates globally also contributed to the fast normalization of economic activity.”
However, economic growth is projected to slow sharply this year to 2.1%, and contract in 2023 by 1.3%, amidst the reversal of policy stimulus, coupled with a global economic slowdown and heightened inflation risks, according to the International Monetary Fund (IMF). The World Bank is even more pessimistic, expecting a meager growth this year of 1.9%.
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 had 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 debt stood at about 36.2% of GDP last year, up from 32.5% in 2020, 28.3% in 2019, and 25.6% in 2018. In fact, it was the highest debt level recorded since 1991.
Chile’s unemployment rate stood at 8% in Q3 2022, up from 7.8% in the previous quarter but down from 8.4% a year earlier, 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, as economic activity gradually improved.
- Real Housing Price Index (Chilean Chamber of Construction): https://cchc.cl/centro-de-informacion/indicadores/indice-real-de-precios-de-vivienda
- Real Estate Market – National Sale (Chilean Chamber of Construction): https://cchc.cl/centro-de-informacion/indicadores/mercado-inmobiliario-venta-nacional
- House Hunting in Chile: A Sinuous Oceanfront Wonder for $2 Million (The New York Times): https://www.nytimes.com/2021/12/02/realestate/house-hunting-in-chile-a-sinuous-oceanfront-wonder-for-2-million.html
- Building and construction (National Statistics Institute): https://www.ine.cl/estadisticas/economia/edificacion-y-construccion
- Building permits (Chilean Chamber of Construction): https://cchc.cl/centro-de-informacion/indicadores/permisos-de-edificacion
- Moderate rental yields in Santiago (Global Property Guide): https://www.globalpropertyguide.com/Latin-America/Chile/Rental-Yields
- Chile enacts tax reform to fund pension reform (Ernst & Young): https://globaltaxnews.ey.com/news/2022-5146-chile-enacts-tax-reform-to-fund-pension-reform
- Interest rates (Banco Central de Chile): https://si3.bcentral.cl/estadisticas/Principal1/Excel/EMF/TASAS/excel_EN.html
- Monetary Policy Report October 2022 (Banco Central de Chile): https://www.bcentral.cl/en/content/-/details/monetary-policy-meeting-october-2022
- Chile: Staff Concluding Statement of the 2022 Article IV Mission (International Monetary Fund): https://www.imf.org/en/News/Articles/2022/10/28/chile-staff-concluding-statement-of-the-2022-article-iv-mission
- Chile Overview (World Bank): https://www.worldbank.org/en/country/chile/overview
- Chile Sets Out Deficit, Debt Paths; Social Spending Still Key (Fitch Ratings): https://www.fitchratings.com/research/sovereigns/chile-sets-out-deficit-debt-paths-social-spending-still-key-10-05-2022
- Chile Government Budget (Trading Economics): https://tradingeconomics.com/chile/government-budget
- Chile Government Debt to GDP (Trading Economics): https://tradingeconomics.com/chile/government-debt-to-gdp