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Value Of Land In The Metropolitan Region Grows Twice As Much As The Price Of Housing

Posted by Leanne Dudley on November 6, 2019
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A CEP study investigated the causes of housing costs. According to the data, the increase of the land on multiple projects exceed 30% or 35%, in some areas. 

Housing prices in Chile have grown steadily in the last decade. In fact, the Central Bank price index (IPV) for the Metropolitan Region rose 106% in real terms between 2006 and 2018.

In that period, the largest increase was generated in the eastern sector of the capital. Houses rose in price by 110%, an effect that was led by the houses, with an increase of 117% in the same period.

A document from the Center for Public Studies (CEP), prepared by Clemente Larraín and Slaven Razmilic identifies at least three factors. These address the causes attributed to the rise in the midst of the debate over high housing prices. They include an increase in the costs for higher land prices, increased demand for residential space and higher demand for housing as an investment.

In the construction industry, this phenomenon is mainly associated with the increase in costs.

This is due to higher land prices from poor planning and regulatory restrictions that limit supply.

Others point to the pressure on sales prices exerted by the greater demand for housing as an investment. Some speak a third factor related to the increase in demand for residential space. This is derived from the rise in average income, a larger formation of households and the effect of recent migration.

Regarding the costs of construction and development of projects, the impact on the income of housing projects exceeds 30% or 35% in some areas.

By comparing the increase in the average value of land transactions each year with the highest average value in promises of sale of apartments, the price of land rose much more significantly. This includes 13 municipalities of the Metropolitan Region where housing projects are most built

“The difference between the two indicators is significant (almost 20%) so it should be taken into account,” says the study.

Specifically, in four years, the price of land in the Metropolitan Region rose by 45%; the value of housing sales increased by 27%.

On the other hand, the study indicates that the percentage of households that have real estate investments has risen steadily.

He explains that, in 2010, the proportion of properties held by minority investors was 13%. In 2018, it increased to 20%.
Meanwhile, the proportion of new apartments sold in Santiago to people that already had a property went from 17.9% in 2011 to 43.5% in 2018. This second unit would usually be for investment.

Regarding the latter, the report states that “although the demand for investors has grown substantially in recent years, this does not make it something unprecedented, since it was also relevant 10 years ago.” Furthermore, it states that “the proportion new apartments destined for investment, 91% was acquired by people. This correlates with the long-established idea about the benefits of real estate as a vehicle for saving and investment.”

The CEP researcher, Slaven Razmilic, explained to PULSO that “we are living a recurring phenomenon in the world. The political agenda has been taken in several developed countries. We are not alone in this.” In that sense, he concludes that “we don’t have silver bullets and we must certainly avoid simplistic solutions aimed at the gallery. You must advance in parallel by reviewing the different critical nodes.”

On how this problem could be solved, he comments that “the long-term solution is to facilitate the generation of supply. This could be through better urban regulation and complementing greater state participation through investment, public land management and incentives. It is also time to review the relevance of some tax benefits, but avoid price controls and returns.”

Building Permits

The CEP study also addresses the growth of homes built in the capital. He points out that the data indicates that in Santiago the number of homes built have not exceed the number in the last decade. This is despite the fact that the demand is much higher.

As an example, the number of approved homes have increased more in the Metropolitan Region in the last 5 years than the first half of the current decade. Between 2010 and 2013 the approved permits were around 30 thousand to 40 thousand. From 2014 onwards, the figure is around 50 thousand to 60 thousand.

However, the current construction levels are not very different from those observed in the middle of the last decade.

“Although construction has accelerated in the margin the truth is that the current levels of construction do not seem excessive; in 2014 and 2015, an attempt to anticipate and avoid the tax effects of the change to the VAT regime began. It was anticipated that the change would begin to affect the sector in 2016. This is especially if the greatest demand is taken into account,” says the report.

The permits to build in the Metropolitan Region in 2018 totaled 58 thousand (number of homes). In 2002, the figure reached 37 thousand.
This implies an increase of 57%. The southern part of the capital is the one that records the highest number of project approvals for homes, followed by the eastern zone.

 

Disclaimer:
Translated from ‘Valor del suelo en la Región Metropolitana crece el doble que el precio de las viviendas

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