Chilean Government Creates Special Group to Monitor Real Estate Sector Risk
Due to concerns regarding an increase of residential real estate prices, the Chilean Financial Stability Council (Consejo de Estabilidad Financiero) has announced the creation of a new group to monitor residential real estate sector risk. The group, comprised of representatives of the Ministry of Finance, the Central Bank and Superintendents of Pensions, Securities and Insurance and Banks, will seek to identify and monitor systemic threats to local financial stability.
Real estate prices in Chile have increased sharply over the past 9 years, with a significant amount of the increase notably occurring over the last two years. The component of the Housing Price Index prepared by the Chilean Construction Chamber tracking the price of houses increased approximately 45% between January of 2004 and September of 2012. Particularly noteworthy is the sharp jump in the index from a level of approximately 115 in April of 2010 to 145.3 in September of 2012.
The increase in apartment prices has also been significant. Over the last nine years the Housing Price Index for apartments has increased nearly 25%. Nearly all of this increase, however, has been in the last 30 months.
In the Greater Santiago area, home and apartment sales are at three year highs. According to a report by El Mercurio, apartment sales jumped from 4,654 to 6,746 to 7,131 units in the first three quarters of 2012. On a yearly basis the number of apartments sold jumped 48% from the third quarter of 2011 to the third quarter of 2012. Sales of houses increased from 2,600 homes in the first quarter of 2012 to 3,659 homes in the third quarter. On a yearly basis the increase was approximately 14%.
Adding to concerns regarding the sector are construction cost increases. Between October of 2011 and September of 2012 the Construction Cost Index prepared by the Chilean Construction Chamber increased over 10%. Construction activity generally has also been on the rise and it has been reported that some areas of Chile, including La Araucania, Antofagasta, Magallanes and Los Rios, have witnessed jumps in construction activity of over 20%. This has put significant pressure on labor costs.
Whether the sharp price increases indicate a growing real estate bubble is a hotly debated topic in Chile. Some market observers have taken the view that residential price increases have been driven primarily due to low levels of unemployment and increasing disposable income rather than speculation driven by overly aggressive home lending practices. Another factor which should help to reduce the probability of a sudden and major price collapse, at least in the short term, is that there are many housing price levels in different Santiago neighborhoods, which creates the option that home shoppers facing growing housing costs can look to less expensive areas rather than be forced to compete for homes in a single area in a relatively narrow price range.
On the other hand, while Chile's economy has remained strong and is forecast to grow over 5% in 2013, it remains heavily dependent on natural resource exports. A substantial drop in export volumes would cause a very rapid decrease in housing affordability, particularly in parts of Chile where local economies are particularly tied to a single industry, construction costs are high and housing options are limited.