House Prices Up in Colombia; Expected to Continue to Rise

Because of a peaceful transition to new leadership and positive economic prospects, house prices in Colombia were up in 2010. This increase is expected to continue this year, …

Because of a peaceful transition to new leadership and positive economic prospects, house prices in Colombia were up in 2010. This increase is expected to continue this year, helped by Colombia’s investment rating upgrade last month. Read more about this in the full article by Global Property Guide.

House prices in Colombia rose strongly in 2010, boosted by a peaceful transition to a new president, and generally bright economic prospects. House prices market are expected to continue rising in 2011, aided by Colombia’s investment rating upgrade in March to investment grade. In 2010, average house prices rose 9.25% (6.38% in real terms). 

Colombian house prices are on a rising upswing – the y-o-y price rise to Q3 2010 was 8.30%, after a 6.60% y-o-y price rise to Q2, and 5.45% price rises in 2009.

  •   Prices of new apartments rose 9.57% (6.69% in real terms) over the year 2010, according to Departamento Administrativo Nacional de Estadística (DANE).
  •   Prices of new houses rose 5.69% (3.17% in real terms).

Colombia’s economy grew by 4.3% in 2010, up from 2009’s 1.5% GDP growth.  The latest quarter’s GDP growth, at 5.1% annually, was particularly strong.

As a result of Colombia’s surging economy, there was a 3.2% rise in CPI in Q1 2011, but this was still within the central bank’s 2% to 4% target.

In August 2010 Juan Manuel Santos succeeded former President Álvaro Uribe. Santos, previously minister of defense, defeated his close competitor Antanas Mockus, after a second electoral round in June 2010. High unemployment and mending Colombia’s relations with Venezuela and Ecuador are main concerns for Santos’ government.

House prices continue to surge in key cities

Three cities showed particularly strong annual house price increases in 2010 – Bucaramanga, where new houses were up 15.2% from a year earlier (according to Banrep); Bogota (up 10.5%); and Barranquilla (up 8.6%).

Medellin (up 5.8%), Pereira (5.8%) and Cali (4.5%), showed appreciable annual price rises, but lower than their growth y-o-y to Q3 2010.

Housing deficit – closing the gap

Colombia’s ‘housing deficit’ amounts to 2.4 million houses, or about 26% of the housing stock, according to a 2005 survey.  185,000 houses are needed annually, yet only 104,208 housing units were approved in 2005, and 122,590 in 2006. Owner-occupation has declined over the long term – from 67.4% in 1988, to 63% in 2005. Similarly, the number of renters has increased from 24% to 30.6%.

Probably all these trends go back to Colombia’s last great housing crisis which occurred in 1995, and was triggered by high interest rates.

However, the gap is now closing. Housing approvals reached 153,903 in 2010, partly due to declining construction costs, which is helpful to developers. Though new housing construction still hasn’t surpassed its 1994 peak, things are heading in the right direction.

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The value of credits for house purchases rose 32.5% in 2010, with the total number of houses financed by mortgages up 22.6%, and used house mortgages up 29.3%, while new houses financed by mortgages increased 17.5%

Key rate increases

Colombia’s central bank, the Banco de la Republica Colombia, raised its key rate by 25 basis points to 3.5% inMarch this year, to keep up with inflation. The first increase was in February, when the rate rose to 3.25%, from the 3% which had prevailed since April 2010.

Colombia’s prime lending rate also rose in February to 10.26%, up from the previous month’s 10.02%.

Both increases were responses to rising Inflation, which rose to 3.17% y-o-y in February 2011, still within the central bank’s 2% to 4% inflation target.

Moderate yields

Rental yields in Colombia are moderate to good, ranging from 6.5% to 9.6% according to the Global Property Guide research of October 29, 2010.
Typical apartment costs:

  •     Chapinero Alto – from US$74,550 (50 sq. m.)  to US$513,810 (270 sq. m.)
  •     Chico – from US$149,695 (65 sq. m.) to US$661,200 (300 sq. m.).
  •     Santa Barbara amounts from US$93,050 (50 sq. m.) to US$1,068,200 (700 sq. m.).

The new government

Juan Manuel Santos became president in August 2010 after winning two electoral rounds. He was a key ally of his predecessor Alvaro Uribe. As defense minister, Santos was instrumental in weakening the Revolutionary Armed Forces of Colombia (FARC), Colombia’s biggest left-wing rebel group. Although he is a scion of a well-known political dynasty, he has shown some willingness to act as a “traitor to his class.” With graduate degrees in economics and journalism from the London School of Economics and Harvard, his win was welcomed by investors and businesspeople.

In March 2011, Colombia’s credit rating was upped to investment grade by Standard and Poor’s (S&P), a vote of confidence in Santos’ reform agenda, which includes changing the management of oil and mining royalties, and a health care overhaul. Colombia has shown resilience during the global crisis, as a result of sound fiscal management and careful use of oil revenues.

The country has a turbulent history.  It was ravaged in the 1990s by a decades-long conflict involving guerrilla insurgencies, drug cartels, and gross violations of human rights. In 2002 a hard-line right-leaning president, Alvaro Uribe, took power and implemented a tough line against left-wing guerrillas and right-wing paramilitaries.

In 2006, Uribe sought a constitutional revision to allow reelection for a second 4-year term. This was approved by Congress, and Uribe was reelected with a 64% of the votes, more than enough, given the 50%+1 requirement to avoid a run-off.

Uribe has been resoundingly successful. Though within Colombia Uribe polarized opinion, few would dispute the economic achievements.  From 2003 to 2007, the economy expanded by an average of 5.5% annually.  Such growth rates have not been seen in Colombia since the end of the 1970s. Hit by the global economic meltdown and by the credit crunch, GDP growth slowed to 2.7% in 2008 and 1.5% in 2009.

Despite the economic slowdown Uribe remained highly popular. He sought another constitutional revision to allow a third term but this was shot down by the Constitutional Court. Uribe’s defense minister and long-time ally, Juan Manuel Santos, ran as his successor. Santos won 46.7% of votes leading to a run-off, which he won with 69% of votes.

Though Uribe’s military focus was on combating leftist militias, he also challenged the paramilitary Autodefensas Unidas de Colombia (AUC), responsible for many recent kidnappings and murders.

Uribe’s heir Santos is slowly distancing himself from his predecessor, while promising to continue Uribe’s successful policies and programs

Tourism will be big

The new government will try particularly to stimulate growth in the tourism sector. Santos plans to spend about 120 billion pesos (approximately $67 million) to develop infrastructure – theme parks, docks, piers and convention centres, and create 250,000 new jobs in the construction sector.

“We intend to build 300 kilometers of highways each year, and ensure that tourist facilities are properly marked,” said President Santos. The government will also develop and modernize air terminals and tourist infrastructure, implementing an open skies policy, to improve prices and customer service for tourists.

President Uribe’s own tourism drive introduced incentives such as exemption from income tax for new hotels guilt between 2003 and 2018, and a  20-year income tax exemption in Ecotourism.

Fast-growing economy, but obstacles remain

GDP grew by an annualized 11.2% in the fourth quarter of 2010.  The main contributors to Colombia’s economic growth are:

  •   11.1% contribution from the mining sector,
  •   6% contribution from restaurants, hotels and trade sector
  •   4.9% increase in manufacturing sector
  •   4.8% increase in the transport, storage and communication sector
  •   Increase in consumption
  •   Low interest rates

Yet unemployment remains high in January 2011 at 13.2%, down only 0.2 percentage points on the previous year.  According to Fabio Sanchez, an analyst from the Universidad de los Andes, Colombia’s high unemployment is neither due to economic deceleration nor the financial crisis.

"The fact of having Latin America´s highest minimum wage relative to its GDP per capita, and the fact that labor costs are also the highest in Latin America, result in a situation where it is impossible to create formal employment," says Sanchez.

So despite Uribe’s and Santos’ efforts, much remains to be done.

This article was republished with permission from Global Property Guide.

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