New building incentives help to tackle the housing gap

Ever since entering office for its first term in 2010, the government of President Juan Manuel Santos has put the construction of new homes for Colombians as one of the top priorities. Despite being behind its target of building 1m homes over the 2010-14 period, the government has been able to establish a consistent level of housing development. Much of the impetus has been achieved through a programme to build 100,000 free homes, established in 2012, as well as a series of subsidies to help low-income families buy homes through the mortgage system. The construction of new homes has been helped by a dynamic real estate market, pushed by rising income levels, which has translated into new middle- and high-income housing options reaching the market, especially in major cities.

Housing Deficit 

Government-supported home construction has been divided into three groups. The first one, priority interest housing (vivienda de interés prioritário, VIP) involves homes the government builds targeting the vulnerable segments of the population, such as the extremely poor or Colombians displaced by internal conflict. The social interest housing ( vivienda de interés social, VIS) category was established to assist low-income families to acquire homes and has been implemented in conjunction with subsidies to ease access to the commercial mortgage system. The non-VIS includes the remaining housing segments, from middle-income up to high-income housing. According to the Colombian Chamber for Construction (Cámara Colombiana de la Construcción, CAMACOL), as of June 2014 the number of new homes built in Colombia since 2010 reached 129,105 in the VIP segment, 273,822 units for the VIS segment and 348,865 new homes for the medium and upper segments of the market.

Successive governments have sought to tackle the housing problem. According to the Ministry of Housing and Colombia’s National Planning Department, published in April 2014, the housing deficit decreased 46.3% between 2005 and 2012, from 12.56% to 5.54%. The deficit as of 2012 was 554,087 homes. Additionally, the deficit in terms of quality of housing, measuring the difference between existing units and those that are in acceptable living conditions, registered a 7.8% reduction over the same period, meaning that as of 2012 there were 1,093,066 urban homes in need of repair work. The numbers show progress, but increasing population and incomes, plus a strong demand for land, are putting pressure on plans.

Finacing Support

In late 2013 the government came out with an additional housing programme, called Vivienda para Ahorradores (Homes for Savers) with the aim of building an extra 86,000 units. Although these are not free homes, as in the Vivienda Gratuita (Free Homes) initiative, they do come with considerable state incentives. Eligible home buyers get a subsidy for the down payment and a subsidy on the interest rate for a mortgage. Furthermore, the state has established financial guarantees to the bank giving out the mortgage. However, the government decides on which residential developments are eligible for buyers to get the benefits of the programme. The average price for a home in the programme is COP40m ($20,000). “A family earning between one or two minimum salaries will get about COP15.4m ($7700) for the down payment, and the remaining COP27.7m ($13,850) will be a mix between previous savings (COP2.1m, $1050) and a mortgage, including a subsidy on the interest rate,” Sandra Forero Ramírez, executive president at CAMACOL, told OBG.

In a way, the Homes for Savers programme has more risk for the builder, because contractors still need to promote and sell the homes, and the government decides which residential developments are eligible. However, it has the positive impact of making home buyers go through the commercial mortgage market, adding dynamism to the sector. Moreover, it will allow low-income families to buy property. Currently 34% of the nationwide home market is under rental agreements.

Authorities have distributed financial support to buyers in different regions of the country, focusing specifically on some of the smaller cities with fewer options for new residential developments. Of the 86,000 homes to be built under the Homes for Savers programme, as of April 2014 26,000 had already been assigned to contractors, according to CAMACOL. On the other hand, a big push was given to the VIP housing segment in 2012, when the government launched an initiative to build 100,000 free homes for the country’s poorest. The Free Homes programme involves an investment of COP4.2trn ($2.1m), and as of June 2014 had already produced 65,000 new homes. The Free Homes programme had a positive impact on the construction market, firstly, because builders acted as contractors for the state, participating firms were spared the risk of building homes and then trying to sell them, having payment guaranteed by the state from the start of the projects. Instead of having to deal directly with the government for payment, this is done through a real estate trust, which acts as an intermediary between the government and contracted companies. Another advantage was that it allowed circumvention of the low availability of land, which weighs heavily on project costs, as the majority of homes for the Free Homes programme are being built in areas of low real estate development, where less competition for space means that costs are more manageable. Despite having most developments on the outskirts of urban areas, authorities were keen to not make the distances unmanageable for new homeowners. “We tried not to make the same mistakes as we have seen in the Mexican case, by trying to develop these homes in areas where families could live comfortably. Because if you take a family with financial problems and you put them far away from economic centres, you will not be helping them,” Ramírez told OBG.

Private Initiative 

Private companies are also taking part in the housing programmes. In the first quarter of 2014 cement manufacturer CEMEX announced it had completed 640 out of 3000 homes it is building in Monteria. The company aims to build up to 12,800 homes for the government’s Free Homes programme.

International cooperation is also set to help establish new homes. On the back of a recently established free-trade agreement between the two countries, Colombia’s Ministry of Housing signed an agreement with the South Korean government to build national social housing macro projects (macroproyectos de interés social nacional, MISN) in the city of Cali. The 1400-ha area will include 40,000 VIS housing units. The project, which will benefit from a $3m investment from the South Korean government, will include 350 ha of green space and social infrastructure such as health facilities, schools and retail options. The deal might also have a positive effect on restarting other large-scale housing projects which have been in the pipeline. About 25 MISN projects had been planned, but half of those failed to take off due to bureaucratic obstacles.

The government is expected to continue to channel financial resources towards the construction of new housing. However, better coordination with local and municipal authorities to come up with the necessary land requirements will determine the success of the nation’s housing programmes in coming years.