Chile is a country that, since becoming a democracy in the 1990s, has been lauded for its political stability and attractive business environment. Its housing market has been on a steady upward trend since 2008’s global financial crisis. Indeed, this growth was barely touched by February 2010’s earthquake, which was a catalyst for infrastructure investment and actually had the knock-on effect of boosting house prices. That said, pressure on the Chilean economy has grown in recent years. The matrices of the US-China trade war and concerns surrounding China’s economic growth, since the country constitutes Chile’s primary export partner, have hampered GDP.
However, hot on the tails of social unrest in late 2019, the pandemic has caused a litany of adverse consequences for both Chile’s economy and housing market. In the third quarter of 2020, the economy contracted by 9.1% after shrivelling by 14.5% in the previous quarter. The OECD even reported that in 2020 overall the economy declined by 6%, one of the worst results since the South American debt crisis in the 1980s. A weakened economic environment has damaged both the supply of and demand for houses. Whilst in previous years Santiago has achieved outsized growth, since there has been a particularly strong sales trend for homes valued at over $1m, this year it has proven to be a revealing litmus test for the Chilean housing market as a whole. During the year to the third quarter of 2020, the average price of new apartments in Greater Santiago increased by a tiny 0.55%, a marked slump compared to the 5.81% gain over the previous year. Demand is also very sluggish: over the first nine months of 2020, the number of new homes sold in the same area dropped year-on-year by 45%, according to the Chilean Chamber of Construction.
Protests in Santiago, Chile. Image: LA Times
State of play for foreign investors
Depressed house prices, in the context of a nation regaining past stability, can indicate enticing investment opportunities. Indeed, Chile is known for its attractive property laws. Foreign buyers have the same property rights as local citizens and there are very few restrictions on property purchases. Annual property taxes are low, at a few hundred dollars per year. VAT has increased in the country in recent years. It is worth noting that in 2016 VAT on regular sellers, such as real estate companies, was raised to 19%. Prices suffered a brief downturn after this news, but recovered favourably in 2017 and 2018. Properties on the market are most often not quoted in Chilean pesos, but ‘UF.’ Unidad de Fomento is a currency linked to the Chilean peso, but adjusted for inflation. At the time of writing (17th February 2021), 1UF was the equivalent to roughly 29,200 pesos. The rental market in Chile is limited compared to other South American countries and rental yields can often reach over 4% in both some of the wealthier districts of Santiago and in rural farmland areas.
Despite a recent past of relative consistency and growth, Chile’s housing market’s status as a target of investment is dependent on how 2021 plays out. In 2019, many years of increases in costs of living and a widening gap between the wealthy and poor led to a number of destructive riots, aimed in particular at Santiago’s metro system (a metro fare hike was considered one of the main catalysts of the protests.) In late October 2020, after over a year of protests, Chile’s population voted in favour of removing their current constitution and drafting a new one. The current constitution, enacted under General Pinochet, promotes the privatisation of a number of key sectors. Furthermore, laws in relation to areas such as mining, political parties and constitutional reform require a supermajority, stifling attempts at reform. Chileans will vote in 2022 whether to approve or reject the new draft constitution. Social democratic reforms, popular amongst the Chilean youth, which prioritise social rights over pro-market policies, may be beneficial to a country in which it was estimated that the wealthiest 1% receive nearly a quarter of total income. However, a move too far in this direction has the potential to destabilise Chile’s position as an alluring target of foreign direct investment into real estate. The country’s investor-friendly climate, which has led to significant interest in recent years, is in danger. Even global commodity price tailwinds could be dampened in the country by the threat of nationalisations, business reform and higher business tax rates.
In conclusion, foreign investors in Chile in the last ten years have had many reasons to be confident. However, despite the opportunity for discounted prices in an otherwise attractive legal and tax environment for investors, there is reason for caution. The two years ahead will be pivotal: Chile’s free market model is in danger and both the pandemic and the constitutional process should be followed carefully.