Focus: Urban growth

Building strength

Building strength

Aug. 22, 2019

Colombia's urban centers are reaching maturity, which means opportunity for investors in the real estate sector as well as challenges for urban planners.

With a population of 48 million, Colombia has witnessed impressive economic development in recent decades. In 2002, only 16% of the population belonged to the middle class. By 2015, that figure had nearly doubled to 31%. Estimates indicate that by 2025, as many as 46% of Colombians will be in this social category.

This evolution has represented consequences for the country's urban matrix. With higher income came bigger families, and with economic development more people came from the countryside to the cities. While the construction sector has tried to keep up with demand in recent years, the faster growth of urban populations in comparison with housing supply has been pushing real estate prices up and making it harder for lower-income families to enter the real estate market. According to Colombia's urban expansion atlas, the country's main cities grew in occupied area by as much as 3% between 1991 and 2014. In centers like Cartagena, Pereira, and Cúcuta, the fastest growing in the country, this average stood at 5%; however, this does not seem to have been enough to keep up with demand. According to the world bank, Colombia's urban population in the same period grew from 69.9% to 79.5%.
This predicament has given rise to debate over the possibility that some cities, particularly Bogotá and Medellín, could be witnessing a housing market bubble. In early 2018, Housing Minister Camilo Sánchez tried to dispel that idea, noting that the 6.6% average price hike witnessed over 2017, which amounts to just 2.5% taking into account inflation, demonstrate a “healthy growth in the real estate market." Other market players from both the public and private state seem to support this, as do the figures. For example, in Medellín, in 1Q2018, the market for new houses witnessed a 21% decrease in sales YoY and a 9.4% decrease in sales volume. While this is not representative of the global market, it is an indication that the real estate value in one of the country's most sought after cities is not in an unsustainable climb.
Now, the strongest argument against the housing bubble theory is the relatively strict access to housing loans. A study developed by La Encuesta Longitudinal Colombiana of Andes University has found that in level one, which corresponds to families in the lower income level, only 8% of households purchased their house using a bank loan or any sort of credit. In level four, which corresponds to the middle class, that figure rose to 36.8%, which is still well below that of the housing market bubbles that affected European countries some 10 years ago.
This happens because Colombian banks have established very strict and meticulous checking systems for people applying for housing credit, which seems to indicate that the rising prices of real estate in the main urban centers has more to do with the market's natural growth than with excessive exposure to credit, which could come to crumble if a considerable number of people would fold on their loans in case of an economic downturn. The hike also is likely to partly result from growing interest from foreign investors in acquiring land and other properties. Colombia has been identified as an interesting investment opportunity for retirees and holidaymakers, particularly in the US, as illustrated by a Forbes Magazine piece from January 2019 naming Colombia one of the four best places to buy a second home overseas.
Finally, the government's social housing program continues to expand, creating new opportunities for industry players. The number of social houses bought through the government's program “Mi Casa Ya!" (“My House Now"), which helps lower- income families with access to credit for housing purchases, saw a 63% rise in 2018 YoY. This represents a striking contrast to the 0.58% crunch the market for new houses witnessed in the same period. Social housing will represent an important growth sector for the construction industry while the wider real estate market recovers from this short-term uncertainty and reduced investment.