Additional financing instruments to help close the housing gap

A combination of government incentives, in addition to strong fundamentals, are expected to continue having an impact on the building industry in a positive way. Despite the strong growth registered over the past few years, however, the challenge of reducing the number of Peruvians that lack appropriate housing remains. According to figures from the Ministry of Housing, Construction and Sanitation (Ministerio de Vivienda, Construcción y Saneamiento, MVCS), the housing gap in Peru totals 2m. This is composed of two different categories, with 500,000 new homes needing to be built from scratch, in addition to up to 1.5m existing homes that require renovation work. “A considerable amount of the housing deficit is due to the bad quality of housing,” Carlos Lock, a director at the MVCS, told OBG. “Illegal land occupation remains pervasive in Peru, in which people take a plot of land and end up building there, generally producing homes of bad quality.”

Government Instruments

Housing policy in Peru is managed by the MVCS, with government intervention in the sector focusing on the demand side, through subsidies and loans. These are not given to the home-buyers directly, but managed through the banking system, which ensures that money is injected back into the economy. Furthermore, since the eligibility of programme beneficiaries is decided by banks, public housing financing is allocated under strict risk guidelines, comparable to those applied by commercial banks to their customers. Over the years, a series of instruments have been implemented, with the two main programmes being the MiVivienda, or My House, fund and the Techo Propio, or Own Roof, programme.

Focused on the poorest families in the country, the Techo Propio scheme helps low-income families to acquire, build or renovate a home through subsidies and loans. The programme helps families with monthly incomes of up to PEN1860 ($664) through loans or a one-time subsidy called Bono Familiar Habitacional. This is a direct subsidy, the value of which will depend on the use. Beneficiaries aiming to buy a new home can get a loan of up to PEN18,500 ($6604) for homes costing between PEN20,350 ($7265) and PEN51,800 ($18,490). The programme encompasses homes with areas between 38 and 55 sq metres, and is targeted at low-income areas outside Lima. The government is currently studying the possibility of raising the maximum amount for loans under the Techo Propio programme, to counter recent increases in land prices and encourage developers to build more low-income housing.

Slightly higher in the public housing market, MiVivienda loans are given out for periods ranging from 10 to 20 years to home buyers aiming to purchase units valued between PEN53,200 ($18,990) and PEN266,000 ($94,960). The authorities are expecting to close 2014 with 60,000 new beneficiaries under both the MiVivienda and Techo Propio programmes at a total value of PEN1.2bn ($428.4m). To help low-income families further, home buyers who qualify for a MiVivienda loan can also benefit from the Bono del Buen Pagador, or Reliable Payer Grant, which provides an initial down-payment of PEN12,500 ($4463) as long as home buyers contribute at least 10% of the property value.

Rising Prices

Government policy needs to constantly adapt to an environment of rising prices and restricted supply of new housing stock. In September 2012 the government raised the maximum price limit for properties bought using MiVivienda loans from 50 applicable taxation units (approximately PEN190,000, $67,830) to 70 applicable taxation units (slightly more than PEN266,000, $94,960). This is a reflection of the market demand shifting towards costlier homes, as the lower-middle class uses their growing disposable income to pay for a better home. “This increase in subsidy has allowed us to widen the pool of potential buyers that are supported under the programme. Under the previous brackets, we were limiting people aiming to buy slightly more expensive homes,” Lock told OBG.

Rising land prices are also changing public housing policy. Not only has the government increased the limits for homes purchases that qualify for government assistance, but the geographic coverage of certain programmes has become more restricted. “In Lima it is virtually impossible to do any Techo Propio support,” Lock told OBG. “It is better suited for the provinces, where land prices are much lower.”

Mortgage Lending

Efforts to reduce Peru’s housing gap have also been strengthened by the growing access to mortgages. Figures from BBVA Bank show that home loans reached PEN28bn ($9.99bn) in October 2013. Although the growth of mortgage lending has slowed down because of curbed home sales, by the end of 2013 it already accounted for 5.8% of GDP.

Overall though, the fundamental conditions supporting bank lending are expected to continue to be strong, and this will do much to support home acquisition. The country’s healthy risk ratings are allowing banks to secure better conditions, which are passed on to consumers through lower interest rates. Central Reserve Bank of Peru (Banco Central de Reserva del Peru, BCRP) figures show that the average interest rate decreased from 9.8% to 9.27% between January 2008 and September 2014. The reduction was more relevant on dollar-denominated loans, which registered a drop from 9.8% to 7.67% over the same period.

Better income conditions and a stable macro-economic environment are allowing more Peruvians to afford a home. And despite the periodic variations, demand for new housing is expected to continue on an upwards trend. Fears of a potential housing bubble, however, have led the BCRP to implement certain measures. With the aim of reducing the risk of non-payment, lending conditions for Peru’s informal workers were strengthened. This had an impact on Ahorro Casa, a mortgage product typically used by banks to lend to the informal sector. Under previous conditions, informal workers were eligible for a mortgage as long as they could regularly show their ability to pay for the first four months of the loan. However, under the new guidelines this initial trial period was extended and credit given to those incapable of proving a regular income reduced. Despite the caution, risk of default on home loans in Peru has typically been very low. “We have one of the lowest rates of non-performing loans in Latin America, around 1.2%, because people prioritise paying for their home, above any other bills,” Angel Ramos, market analyst at real estate developer Edifica, told OBG.

An additional measure taken by the BCRP was aimed at reducing speculation in the market by raising requirements for second-home buyers. In a lot of cases, people started acquiring a second home, paying 10% of the total price upfront, and then covering the loan through renting out the unit. This practice led to more competition for some segments of housing and produced even steeper cost increases. To stem this, the authorities raised the initial minimum required downpayment for a second home to 30% of the total price of the unit, making speculative buying more difficult for investors.

Supporting The Regions

Besides securing against any risks that might arise in the housing market, authorities have also strengthened subsidy policies to provide adequate support in different regions. The Andean region is where the housing deficit is more pervasive, due to lower resource availability and access difficulties that combine to make building costs significantly more expensive. In some regions, such as in the Apurimac River basin and Ayacucho, authorities studied building materials and construction costs, as well as labour costs, and decided to allocate more comprehensive subsidies. In some cases, these have been raised by an extra 50% on the normal value of the subsidy.

“But those have been specific cases to serve demand that was very strong, not generally for the whole Andean region,” Lock told OBG. “The government focused on the areas where poverty, terrorism and drug trafficking are more prevalent.”

Government policy has been successful at continuing to challenge the housing gap in an effective way. Part of this success is due to the segmentation of the problem into different type of housing issues and coming up with tailored subsidies and loan programmes. For example, the Mi Terreno, or My Plot of Land, programme, which offers credit to buy land, limits allocation to plots that have been approved by the MVCS. This is intended to fight the rise of informal urbanisation, where land is sold without either having the right residential licences, clearly specified ownership titles or even the required sanitation infrastructure. “In Peru you sometimes see agricultural plots, for example, being parcelled out and sold as residential land,” Lock told OBG. Mi Terreno buyers, however, will be accessing land plots that are not only properly licensed, but have the necessary water and electricity connections.

By establishing different products that cover everything from people who have no homes, to families that need to renovate their unit or those who own a plot of land but have no liquidity to build, authorities are ensuring an effective use of funds. However, official policy remains threatened by rising prices and insufficient land. To solve this requires sinking significant investment in the expansion of basic services and utilities to create new building areas in the cities most in need.