OBG talks to René Cornejo Díaz, Minister of Housing, Construction and Sanitation

Interview: René Cornejo Díaz

Are recent rapid property price rises indicative of excessive speculation and a potential bubble, and what is the risk in the long term?

RENE CORNEJO DIAZ: The significant rise in housing prices recently is in fact a correction in a market in which prices have been suppressed for the past 30 years. The fundamentals of the market are strong, and economic indicators within the sector go against any claim of a market bubble. There is a housing deficit, estimated to be around 1.9m homes. As access to credit gradually improves, this deficit will become active demand, creating a market of potential new buyers that will grow every day. As long as mortgage and lending practices remain as conservative as they have been, and access to credit does not become excessive, the risk of a market bubble is minimal. Additionally, outside of a niche upper market, speculative buying is simply not happening.

What is the best way to address a housing shortage that may number up to 2m homes?

CORNEJO: The government’s goal is to construct 500,000 housing units between 2011 and 2016, through various public initiatives as well as the participation of the private sector. At the same time, the national government is collaborating with regional governments and municipalities to raise efficiency through better city planning, the development and reclamation of underutilised urban land, and the building up of urban centres.

Given the large housing deficit and the fact that the proportion of the population that is economically active is growing faster than new housing projects are completed, much remains to be done. One key step being taken has been to ensure stable and sustainable access to credit, as the lack of access to formal funding is one of the major obstacles to growth in the sector.

The ministry, primarily through its MiVivienda Fund, aims to provide access to credit to many without alternative access to funding. However, more must be done to reduce the size of the informal economy, as the level of informality is inversely related to the penetration level of banking and formal funding. A reduction in this informality will improve access to funding and allow more families to purchase their first homes.

To what extent should home building be reduced until infrastructure concerns are minimised?

CORNEJO: Access to potable water in Lima has improved a lot over the past five years, from 90.3% of the population in 2007 to 93.4% in 2012. Nonetheless, the end goal is 100% access by 2016. The government has subsequently planned 148 different projects to expand coverage and to rehabilitate the existing network, with investments expected to total $3.3bn. Even so, it is not simply about improving infrastructure, but also about boosting efficiency. Efforts to eliminate illegal connections and to repair existing inefficiencies in the network have allowed us to reduce water loss across the network from 34% to 30%, placing it among Latin America’s most efficient networks. However, the current price of water in Lima is unsustainable and below the regional average. Further, it is 50% of that in Santiago, Chile. That said, any rise in price must be justified with improvements to the system and the service the city provides.

How does the ministry plan to address informal construction and further formalise the market?

CORNEJO: There is a generational shift occurring in the market, with younger people favouring formal construction more than past generations, and we are taking steps to facilitate this change. The most basic is to bring more formal projects to the market and to make them accessible to a wide socioeconomic audience, as well as to support the sustainable expansion of credit to increase purchasing power. Additionally, through urban development plans that optimise development, we plan to incorporate new land as well as to rehabilitate badly utilised or underutilised lands. With the consent of local communities, the goal is to improve the standard of living for the city’s population, which may ultimately include reconstruction of these areas.