Housing bubbles are dangerous — when they burst, they can drag the rest of the economy down with them. The 2008 financial crisis in the United States, for example, was trigged by a mortgage disaster that have left communities blighted with abandoned homes, lenders sunk under bad debt, and made hundreds of thousands homeless. So, signs in Chile of a possible bubble, including a recent spike in prices and demand for new homes, are cause for concern.

But is Chile really facing a bubble? The word first grabbed the public's attention in June when the president of Chile’s Central Bank, Rodrigo Vergara, used the term. Speaking about home prices that had grown by more than 20% since 2009 in some parts of Santiago, after barely rising at all in the previous decade, he hinted that the bank was keeping an eye on the real estate sector.

"We're not talking about a bubble, but simply developments that need to be monitored," said Vergara.

Since June, however, prices have continued to rise. Developers sold a record number of new houses and apartments in greater Santiago in the third quarter of 2012, at 11,145 units, up 3.2% from the second quarter, says GfK Collect, a private research company that collects real estate data. The boom is even more apparent on the financial side, with sales of 35.6 million inflation-indexed units (UF), or about US$1.7 billion in the third quarter — an 11% increase from the previous quarter. Year-on-year sales leapt 22% in the period January to September, according to figures from Collect.

Moreover, the stock of existing new homes in Santiago is disappearing, forcing ever-more buyers to purchase en verde, meaning buildings that are under construction, or even en blanco — those that are still only blueprints. A staggering 21.7% of new homes sold in the third quarter will not be completed for at least another 18 months, according to figures from GfK Collect. 

Most new apartments sold in the period from July to September are concentrated in the municipalities of Santiago, Ñuñoa and Las Condes, while the areas of Colina, Puente Alto and San Bernardo, on the outskirts of Santiago, led the ranking in sales of new houses.

"We're having a very good year," said Vicente Domínguez, executive director of the Chilean Real Estate Developers' Association (ADI). "The best we can hope for in 2013 is that we maintain this level."

Chile’s real estate market is unlikely to go down with a bang reminiscent of Miami or Costa del Sol, but the industry faces a different problem: it is being squeezed by cost pressures that are driving up prices and shrinking the market.

As the stock of new homes dwindles, developers that have seen sales soar in 2012 will be lucky to maintain those numbers next year, and in the longer term, the industry is almost certain to lose dynamism, says Javier Varleta, who manages real estate research at GfK Collect.

Safe as houses?

Since Chile’s massive earthquake of February 2010, which spared most of Santiago’s high-rises from major damage, real estate prices have climbed steeply.

The average price per square meter for new apartments has risen nearly 30% to about 45UF (just over US$2,100), while new houses cost an average 15% more at 35UF per square meter, according to data from GfK Collect. 

Part of the demand growth can be explained by changes in the Chilean family. Kids are leaving home younger and want their own homes, Varleta said. Rising incomes are also a factor, as people want homes with more features, like automatic garage doors and sprinklers. Tighter standards for seismic safety, acoustic insulation and thermal comfort also drive up prices, said Domínguez.

But the main driver behind the surge in demand, particularly for new apartments in Santiago, is speculation. Since the 2008 financial crisis, real estate has become an increasingly popular investment option in many emerging markets, not just in Chile, as stocks and bonds have lost their image of reliable returns.

"With so much turbulence in the financial markets, people have tended to pull back a little and take positions in developments with move-in dates 12, 18, even 24 months in the future, betting on selling them for a better price," said Augusto Rodríguez, manager of real estate at the investment firm Celfin Capital.

Individual investors are looking for well-located one or two-bedroom apartments in Santiago to rent out or sell at a profit, he said. Indeed, the shift away from seeing real estate strictly as a place to live or work and towards its new status as a financial investment may pose price risks.

"We've seen this as an eventual risk factor that could inflate the prices of some products," said Rodríguez.

Bubbles, after all, happen when speculators move into particular assets and drive up prices quickly without fundamental demand growth. But the mere worries about a bubble may keep one from forming, industry experts say.

Since the financial crisis of 2008, mortgage lenders in the United States and Europe have tightened their lending criteria. In Chile too banks have reduced the amount they are willing to lend and have increased loan qualification requirements.

This increased caution is reflected in the decline of mortgage defaults — the portion of overdue mortgage loans in Chile’s banking system shrank to 1.26% in October from 1.56% in January this year and 2% in January 2011, according to figures from the Superintendency of Banks and Financial Institutions (SBIF).

"Today, the banks are much more restrictive than they were in the U.S. or Spain," Varleta said. "They don't lend to just anyone."

Builders have also sought to root out one of the elements of the US bubble: the phenomenon of “flipping” unbuilt homes by placing a deposit and reselling the unit before opening day. New restrictions have made this practice all but impossible in Santiago, said Domínguez.

For example, if someone places a deposit on a half-built property — effectively an option to buy at a set price — they can only sell their rights to a third party if they split the profits with the developer or pay a fine, he said.

Office for rent

It’s not just individuals who are buying up properties in Santiago with the hope of making a profit. Institutional investors are also buying office buildings and vacant land — though this is harder to track, as there is less data on buyers who don't need bank loans.

"There's been a lot of turnover in some sectors, like office real estate," said Alejandro Puente, manager of research at BBVA.

Foreign investment funds are buying entire buildings to rent out, he said.  For example, Socovesa, Chile's largest real estate developer, has sold office tower projects in Santiago’s Providencia neighborhood to MetLife and Credit Suisse this year.

Part of the reason for the demand is that, while Santiago office rents are rising, the vacancy rate remains "very low by international standards" at around 1%, said Puente, adding that yields on office properties are currently around 8%.

Such eager investors and rising prices are what give rise to worries about a bubble. But analysts and builders argue that the market’s fundamentals explain the growth in prices.

Chile is attractive to international investors because of its stable legal framework and low risk, said Puente, noting that unlike many emerging markets, where there are significant political and legal risks, the main risks in Chile are in the broader world economy.

And, as much as prices have risen, Santiago still has room to climb before prices approach those of its peers in the region, Puente said.

"It’s hard to think that this is a bubble if you look at how Chile compares to other countries, even here in the region," he said. "In Brazil, Mexico, Venezuela, both homes and offices are much more expensive. Prices in Santiago are closer to those in Bogotá or Lima, and with lower vacancy rates.”

Cost pressures

While demand continues to grow, the supply side of the equation is also pushing prices higher. Climbing development costs mean the industry may face a greater risk of a pinch in supply than a crash in demand.

Labor costs are up about 10% this year, said Cristián Hartwig, president of Socovesa.

One reason is that the industry is competing with labor-hungry mines, which require people with similar skills, he said. Moreover, a sales tax exemption for construction materials ended last year, pushing up the price of materials, he added.

And one possibly permanent change — at least in the trendiest areas of Santiago — is that land has grown steadily more expensive. "We're exhausting some districts," Hartwig said.

That's partly because the most apt areas for denser construction are already built-up. It's also because municipal governments are growing more restrictive, said Domínguez.

"Municipalities have reacted in recent years by restricting the possibility of growth in height and density," he said.

With limited supply and strong demand, prices rise. One effect has been the depletion of finished units from the new-home market. In the third quarter of 2010, 75% of new apartment sales were of completed units, according to GfK Collect figures. Two years later, that was reversed. Three quarters of sales were of unfinished — or even not started — units.

In some industries, a period of tight supply would be an opportunity for outside companies to enter the market. But Hartwig says he hasn't seen foreign developers succeed in Chile. "Chile is a very competitive market. It takes expertise, knowledge of the market. That doesn't come easily."

Room with a view

Looking forward, the prognosis is mixed. It's unlikely that the coming years will see so many new units enter the market, Domínguez said. "Fewer residential projects were started in the third quarter than in the second quarter. There's a slowdown there because people are taking precautions," he said.

Hartwig said he expects construction to grow about 5% next year, decelerating from growth this year. "The construction business depends primarily on one variable," he said. "The growth of the Chilean economy."

Ultimately, the country’s real estate market depends on macroeconomic factors such as copper sales and the strength of the global economy. If the economy as a whole stumbles, demand for housing could be affected since real estate prices tend to rise and fall in line with Gross Domestic Product.

At Collect, Varleta said he expects 2013 to be a good year, at least for the first few months. "Booms are never long-term," he said. "But the Chilean market will keep growing."

Steven Bodzin is a freelance journalist based in Santiago

Housing bubbles are dangerous — when they burst, they can drag the rest of the economy down with them. The 2008 financial crisis in the United States, for example, was trigged by a mortgage disaster that have left communities blighted with abandoned homes, lenders sunk under bad debt, and made hundreds of thousands homeless. So, signs in Chile of a possible bubble, including a recent spike in prices and demand for new homes, are cause for concern.

But is Chile really facing a bubble? The word first grabbed the public's attention in June when the president of Chile’s Central Bank, Rodrigo Vergara, used the term. Speaking about home prices that had grown by more than 20% since 2009 in some parts of Santiago, after barely rising at all in the previous decade, he hinted that the bank was keeping an eye on the real estate sector.

"We're not talking about a bubble, but simply developments that need to be monitored," said Vergara.

Since June, however, prices have continued to rise. Developers sold a record number of new houses and apartments in greater Santiago in the third quarter of 2012, at 11,145 units, up 3.2% from the second quarter, says GfK Collect, a private research company that collects real estate data. The boom is even more apparent on the financial side, with sales of 35.6 million inflation-indexed units (UF), or about US$1.7 billion in the third quarter — an 11% increase from the previous quarter. Year-on-year sales leapt 22% in the period January to September, according to figures from Collect.

Moreover, the stock of existing new homes in Santiago is disappearing, forcing ever-more buyers to purchase en verde, meaning buildings that are under construction, or even en blanco — those that are still only blueprints. A staggering 21.7% of new homes sold in the third quarter will not be completed for at least another 18 months, according to figures from GfK Collect. 

Most new apartments sold in the period from July to September are concentrated in the municipalities of Santiago, Ñuñoa and Las Condes, while the areas of Colina, Puente Alto and San Bernardo, on the outskirts of Santiago, led the ranking in sales of new houses.

"We're having a very good year," said Vicente Domínguez, executive director of the Chilean Real Estate Developers' Association (ADI). "The best we can hope for in 2013 is that we maintain this level." 

Chile’s real estate market is unlikely to go down with a bang reminiscent of Miami or Costa del Sol, but the industry faces a different problem: it is being squeezed by cost pressures that are driving up prices and shrinking the market.

As the stock of new homes dwindles, developers that have seen sales soar in 2012 will be lucky to maintain those numbers next year, and in the longer term, the industry is almost certain to lose dynamism, says Javier Varleta, who manages real estate research at GfK Collect.

Safe as houses?

Since Chile’s massive earthquake of February 2010, which spared most of Santiago’s high-rises from major damage, real estate prices have climbed steeply.

The average price per square meter for new apartments has risen nearly 30% to about 45UF (just over US$2,100), while new houses cost an average 15% more at 35UF per square meter, according to data from GfK Collect. 

Part of the demand growth can be explained by changes in the Chilean family. Kids are leaving home younger and want their own homes, Varleta said. Rising incomes are also a factor, as people want homes with more features, like automatic garage doors and sprinklers. Tighter standards for seismic safety, acoustic insulation and thermal comfort also drive up prices, said Domínguez.

But the main driver behind the surge in demand, particularly for new apartments in Santiago, is speculation. Since the 2008 financial crisis, real estate has become an increasingly popular investment option in many emerging markets, not just in Chile, as stocks and bonds have lost their image of reliable returns.

"With so much turbulence in the financial markets, people have tended to pull back a little and take positions in developments with move-in dates 12, 18, even 24 months in the future, betting on selling them for a better price," said Augusto Rodríguez, manager of real estate at the investment firm Celfin Capital.

Individual investors are looking for well-located one or two-bedroom apartments in Santiago to rent out or sell at a profit, he said. Indeed, the shift away from seeing real estate strictly as a place to live or work and towards its new status as a financial investment may pose price risks.

"We've seen this as an eventual risk factor that could inflate the prices of some products," said Rodríguez.

Bubbles, after all, happen when speculators move into particular assets and drive up prices quickly without fundamental demand growth. But the mere worries about a bubble may keep one from forming, industry experts say.

Since the financial crisis of 2008, mortgage lenders in the United States and Europe have tightened their lending criteria. In Chile too banks have reduced the amount they are willing to lend and have increased loan qualification requirements.

This increased caution is reflected in the decline of mortgage defaults — the portion of overdue mortgage loans in Chile’s banking system shrank to 1.26% in October from 1.56% in January this year and 2% in January 2011, according to figures from the Superintendency of Banks and Financial Institutions (SBIF).

"Today, the banks are much more restrictive than they were in the U.S. or Spain," Varleta said. "They don't lend to just anyone."

Builders have also sought to root out one of the elements of the US bubble: the phenomenon of “flipping” unbuilt homes by placing a deposit and reselling the unit before opening day. New restrictions have made this practice all but impossible in Santiago, said Domínguez.

For example, if someone places a deposit on a half-built property — effectively an option to buy at a set price — they can only sell their rights to a third party if they split the profits with the developer or pay a fine, he said.

Office for rent

It’s not just individuals who are buying up properties in Santiago with the hope of making a profit. Institutional investors are also buying office buildings and vacant land — though this is harder to track, as there is less data on buyers who don't need bank loans.

"There's been a lot of turnover in some sectors, like office real estate," said Alejandro Puente, manager of research at BBVA.

Foreign investment funds are buying entire buildings to rent out, he said.  For example, Socovesa, Chile's largest real estate developer, has sold office tower projects in Santiago’s Providencia neighborhood to MetLife and Credit Suisse this year.

Part of the reason for the demand is that, while Santiago office rents are rising, the vacancy rate remains "very low by international standards" at around 1%, said Puente, adding that yields on office properties are currently around 8%. 

Such eager investors and rising prices are what give rise to worries about a bubble. But analysts and builders argue that the market’s fundamentals explain the growth in prices.

Chile is attractive to international investors because of its stable legal framework and low risk, said Puente, noting that unlike many emerging markets, where there are significant political and legal risks, the main risks in Chile are in the broader world economy.

And, as much as prices have risen, Santiago still has room to climb before prices approach those of its peers in the region, Puente said.

"It’s hard to think that this is a bubble if you look at how Chile compares to other countries, even here in the region," he said. "In Brazil, Mexico, Venezuela, both homes and offices are much more expensive. Prices in Santiago are closer to those in Bogotá or Lima, and with lower vacancy rates.”

Cost pressures

While demand continues to grow, the supply side of the equation is also pushing prices higher. Climbing development costs mean the industry may face a greater risk of a pinch in supply than a crash in demand.

Labor costs are up about 10% this year, said Cristián Hartwig, president of Socovesa.

One reason is that the industry is competing with labor-hungry mines, which require people with similar skills, he said. Moreover, a sales tax exemption for construction materials ended last year, pushing up the price of materials, he added.

And one possibly permanent change — at least in the trendiest areas of Santiago — is that land has grown steadily more expensive. "We're exhausting some districts," Hartwig said.

That's partly because the most apt areas for denser construction are already built-up. It's also because municipal governments are growing more restrictive, said Domínguez.

"Municipalities have reacted in recent years by restricting the possibility of growth in height and density," he said.

With limited supply and strong demand, prices rise. One effect has been the depletion of finished units from the new-home market. In the third quarter of 2010, 75% of new apartment sales were of completed units, according to GfK Collect figures. Two years later, that was reversed. Three quarters of sales were of unfinished — or even not started — units.

In some industries, a period of tight supply would be an opportunity for outside companies to enter the market. But Hartwig says he hasn't seen foreign developers succeed in Chile. "Chile is a very competitive market. It takes expertise, knowledge of the market. That doesn't come easily."

Room with a view

Looking forward, the prognosis is mixed. It's unlikely that the coming years will see so many new units enter the market, Domínguez said. "Fewer residential projects were started in the third quarter than in the second quarter. There's a slowdown there because people are taking precautions," he said.

Hartwig said he expects construction to grow about 5% next year, decelerating from growth this year. "The construction business depends primarily on one variable," he said. "The growth of the Chilean economy."

Ultimately, the country’s real estate market depends on macroeconomic factors such as copper sales and the strength of the global economy. If the economy as a whole stumbles, demand for housing could be affected since real estate prices tend to rise and fall in line with Gross Domestic Product.

At Collect, Varleta said he expects 2013 to be a good year, at least for the first few months. "Booms are never long-term," he said. "But the Chilean market will keep growing."

Steven Bodzin is a freelance journalist based in Santiago

Housing bubbles are dangerous — when they burst, they can drag the rest of the economy down with them. The 2008 financial crisis in the United States, for example, was trigged by a mortgage disaster that have left communities blighted with abandoned homes, lenders sunk under bad debt, and made hundreds of thousands homeless. So, signs in Chile of a possible bubble, including a recent spike in prices and demand for new homes, are cause for concern.

But is Chile really facing a bubble? The word first grabbed the public's attention in June when the president of Chile’s Central Bank, Rodrigo Vergara, used the term. Speaking about home prices that had grown by more than 20% since 2009 in some parts of Santiago, after barely rising at all in the previous decade, he hinted that the bank was keeping an eye on the real estate sector.

"We're not talking about a bubble, but simply developments that need to be monitored," said Vergara.

Since June, however, prices have continued to rise. Developers sold a record number of new houses and apartments in greater Santiago in the third quarter of 2012, at 11,145 units, up 3.2% from the second quarter, says GfK Collect, a private research company that collects real estate data. The boom is even more apparent on the financial side, with sales of 35.6 million inflation-indexed units (UF), or about US$1.7 billion in the third quarter — an 11% increase from the previous quarter. Year-on-year sales leapt 22% in the period January to September, according to figures from Collect.

Moreover, the stock of existing new homes in Santiago is disappearing, forcing ever-more buyers to purchase en verde, meaning buildings that are under construction, or even en blanco — those that are still only blueprints. A staggering 21.7% of new homes sold in the third quarter will not be completed for at least another 18 months, according to figures from GfK Collect. 

Most new apartments sold in the period from July to September are concentrated in the municipalities of Santiago, Ñuñoa and Las Condes, while the areas of Colina, Puente Alto and San Bernardo, on the outskirts of Santiago, led the ranking in sales of new houses.

"We're having a very good year," said Vicente Domínguez, executive director of the Chilean Real Estate Developers' Association (ADI). "The best we can hope for in 2013 is that we maintain this level." 

Chile’s real estate market is unlikely to go down with a bang reminiscent of Miami or Costa del Sol, but the industry faces a different problem: it is being squeezed by cost pressures that are driving up prices and shrinking the market.

As the stock of new homes dwindles, developers that have seen sales soar in 2012 will be lucky to maintain those numbers next year, and in the longer term, the industry is almost certain to lose dynamism, says Javier Varleta, who manages real estate research at GfK Collect.

Safe as houses?

Since Chile’s massive earthquake of February 2010, which spared most of Santiago’s high-rises from major damage, real estate prices have climbed steeply.

The average price per square meter for new apartments has risen nearly 30% to about 45UF (just over US$2,100), while new houses cost an average 15% more at 35UF per square meter, according to data from GfK Collect. 

Part of the demand growth can be explained by changes in the Chilean family. Kids are leaving home younger and want their own homes, Varleta said. Rising incomes are also a factor, as people want homes with more features, like automatic garage doors and sprinklers. Tighter standards for seismic safety, acoustic insulation and thermal comfort also drive up prices, said Domínguez.

But the main driver behind the surge in demand, particularly for new apartments in Santiago, is speculation. Since the 2008 financial crisis, real estate has become an increasingly popular investment option in many emerging markets, not just in Chile, as stocks and bonds have lost their image of reliable returns.

"With so much turbulence in the financial markets, people have tended to pull back a little and take positions in developments with move-in dates 12, 18, even 24 months in the future, betting on selling them for a better price," said Augusto Rodríguez, manager of real estate at the investment firm Celfin Capital.

Individual investors are looking for well-located one or two-bedroom apartments in Santiago to rent out or sell at a profit, he said. Indeed, the shift away from seeing real estate strictly as a place to live or work and towards its new status as a financial investment may pose price risks.

"We've seen this as an eventual risk factor that could inflate the prices of some products," said Rodríguez.

Bubbles, after all, happen when speculators move into particular assets and drive up prices quickly without fundamental demand growth. But the mere worries about a bubble may keep one from forming, industry experts say.

Since the financial crisis of 2008, mortgage lenders in the United States and Europe have tightened their lending criteria. In Chile too banks have reduced the amount they are willing to lend and have increased loan qualification requirements.

This increased caution is reflected in the decline of mortgage defaults — the portion of overdue mortgage loans in Chile’s banking system shrank to 1.26% in October from 1.56% in January this year and 2% in January 2011, according to figures from the Superintendency of Banks and Financial Institutions (SBIF).

"Today, the banks are much more restrictive than they were in the U.S. or Spain," Varleta said. "They don't lend to just anyone."

Builders have also sought to root out one of the elements of the US bubble: the phenomenon of “flipping” unbuilt homes by placing a deposit and reselling the unit before opening day. New restrictions have made this practice all but impossible in Santiago, said Domínguez.

For example, if someone places a deposit on a half-built property — effectively an option to buy at a set price — they can only sell their rights to a third party if they split the profits with the developer or pay a fine, he said.

Office for rent

It’s not just individuals who are buying up properties in Santiago with the hope of making a profit. Institutional investors are also buying office buildings and vacant land — though this is harder to track, as there is less data on buyers who don't need bank loans.

"There's been a lot of turnover in some sectors, like office real estate," said Alejandro Puente, manager of research at BBVA.

Foreign investment funds are buying entire buildings to rent out, he said.  For example, Socovesa, Chile's largest real estate developer, has sold office tower projects in Santiago’s Providencia neighborhood to MetLife and Credit Suisse this year.

Part of the reason for the demand is that, while Santiago office rents are rising, the vacancy rate remains "very low by international standards" at around 1%, said Puente, adding that yields on office properties are currently around 8%. 

Such eager investors and rising prices are what give rise to worries about a bubble. But analysts and builders argue that the market’s fundamentals explain the growth in prices.

Chile is attractive to international investors because of its stable legal framework and low risk, said Puente, noting that unlike many emerging markets, where there are significant political and legal risks, the main risks in Chile are in the broader world economy.

And, as much as prices have risen, Santiago still has room to climb before prices approach those of its peers in the region, Puente said.

"It’s hard to think that this is a bubble if you look at how Chile compares to other countries, even here in the region," he said. "In Brazil, Mexico, Venezuela, both homes and offices are much more expensive. Prices in Santiago are closer to those in Bogotá or Lima, and with lower vacancy rates.”

Cost pressures

While demand continues to grow, the supply side of the equation is also pushing prices higher. Climbing development costs mean the industry may face a greater risk of a pinch in supply than a crash in demand.

Labor costs are up about 10% this year, said Cristián Hartwig, president of Socovesa.

One reason is that the industry is competing with labor-hungry mines, which require people with similar skills, he said. Moreover, a sales tax exemption for construction materials ended last year, pushing up the price of materials, he added.

And one possibly permanent change — at least in the trendiest areas of Santiago — is that land has grown steadily more expensive. "We're exhausting some districts," Hartwig said.

That's partly because the most apt areas for denser construction are already built-up. It's also because municipal governments are growing more restrictive, said Domínguez.

"Municipalities have reacted in recent years by restricting the possibility of growth in height and density," he said.

With limited supply and strong demand, prices rise. One effect has been the depletion of finished units from the new-home market. In the third quarter of 2010, 75% of new apartment sales were of completed units, according to GfK Collect figures. Two years later, that was reversed. Three quarters of sales were of unfinished — or even not started — units.

In some industries, a period of tight supply would be an opportunity for outside companies to enter the market. But Hartwig says he hasn't seen foreign developers succeed in Chile. "Chile is a very competitive market. It takes expertise, knowledge of the market. That doesn't come easily."

Room with a view

Looking forward, the prognosis is mixed. It's unlikely that the coming years will see so many new units enter the market, Domínguez said. "Fewer residential projects were started in the third quarter than in the second quarter. There's a slowdown there because people are taking precautions," he said.

Hartwig said he expects construction to grow about 5% next year, decelerating from growth this year. "The construction business depends primarily on one variable," he said. "The growth of the Chilean economy."

Ultimately, the country’s real estate market depends on macroeconomic factors such as copper sales and the strength of the global economy. If the economy as a whole stumbles, demand for housing could be affected since real estate prices tend to rise and fall in line with Gross Domestic Product.

At Collect, Varleta said he expects 2013 to be a good year, at least for the first few months. "Booms are never long-term," he said. "But the Chilean market will keep growing."

Steven Bodzin is a freelance journalist based in Santiago