Low Income Housing Programmes Present Upside To Construction Forecasts


BMI View: Central America is making a concerted effort to address housing deficiencies across the region. Governments are promoting the construction of new low - income housing through housing funds, promotion of mortgage expansion and subsidised lending. These measures are seeing mixed results across the region ; however , strong take up should help to alleviate the housing deficits and boost construction industry growth.

Central America has a substantial housing deficit, which needs addressing in order to boost wider economic growth and prevent social instability. An Inter-American Development Bank (IADB) study highlighted the sub-region as having the highest percentage of families in Latin America that are either homeless or living in poor quality houses. All countries score above 50% except for Costa Rica, which stood out as the sub-region's best, at 18%. This deficit and the potential implications of it, is driving low-income housing programmes across the region. In addition to government sponsored and developed programmes offering subsidies mortgages and lending rates, many of these programmes are being supported by development institutions like the IADB or Overseas Private Investment Corporation (OPIC), in order to boost home ownership and overall quality of life.

Nicaragua Leads The Way

The greatest success in tackling the housing deficit has been seen in Nicaragua. The country 's housing sector has been expanding as a result of low-income housing programmes put in place by the government. The country, which is amongst the poorest in Latin America, has the highest percentage of families either homeless or living in poor quality houses in the region (78% of households), according to the IADB study . The estimated housing deficit in the country is 957,000 and is growing by 15,000 families a year in a population totalling just 5.9mn (as of 2011).

To address this deficit, the government has overseen a number of measures to open up the housing sector to low-income families ( which live on less than US$521 per month). Subsidies are available for low-income homes (those between 36 and 60 square meters , including utilities ) with a cost of less than US$20,000. Through this programme , the government plans to enable the constructio n of around 5,000 homes a year.

W hilst this is a significant step forward in easing the deficit, this is not adequate enough to keep up with demand. A major problem has been access to mortgages, and this is causing the programme to stumble, with the biggest issues being the difficulty in documenting income and saving for a deposit . The Builders Chamber of Nicaragua (Cadur) has called for reduced interest rates or an extension of the mortgage term to 25 years in order to keep the programme from stagnating.

The IADB has also stepped in to offer assistance. In May 2012, the bank approved a loan for US$10mn to Nicaraguan commercial bank Banco de Finanzas , which it would use to implement a rent-to-own programme over a 10-year period . This would enable low-income homebuyers to build up savings and create a credit history. The pilot programme will allow clients to 'rent' the property for a period of 24 months, over which time a portion of the rent will be put aside to act as a deposit on the home. The scheme allows clients to build up credit history, save a deposit and allow the bank grounds upon which to make a decision on mortgage approvals. Not only will the programme help to make mortgage available for a larger portion of the population, but it will also help to formalise the construction sector. Around 20,000 homes are estimated to be constructed annually in Nicaragua; however, only 3,000 of these are built and financed through the formal sector.

Housing Boom
Nicaragua: Private Residential Construction Area, m2, % Growth y-o-y

The measures have proved effective in ramping up the construction of low-income housing. In 2012, 4,000 homes were built, representing an investment of US$120mn. It is hoped that this will be increased to 5,000 homes in 2013, with an investment of US$170mn. This is guiding our forecasts for construction industry value real growth, which we anticipate will grow strongly in 2013. We estimate growth of 20.4% for 2012, based on strong residential construction, with square metres (m2) of private residential construction posting its eight consecutive quarter of plus-20% year-on-year (y-o-y) growth in Q312, averaging a staggering 53% y-o-y growth in the first nine months of 2012. Growth in 2013 is expected to slow to 9.3% due to base effects and risks to the housing programme.

The most damaging threat to the sector's growth going forward is the impact demand is having on building material costs. Construction sector inflation reached 15% in 2011 and is estimated to have hit 20% in 2012. Developers in Nicaragua claim they can no longer build what is designated a low-income home for US$20,000, and that the cost is now closer to US$30,000 as a result of the increased cost of construction materials. Despite requests to lift the home price for which subsidies are eligible (to US$26,500), the government has resisted. Some movement was seen in March 2012, when the government agreed to assess house prices on a case-by-case basis. However, the problem remains pressing, with Cadur repeating in December 2012 its request for an adjustment in the maximum housing price, stating that with current building material costs it is no longer possible to build a 60m2 house for US$20,000.

Rest Of The Region Follows Suit

Most of the housing programmes implemented across Central America work to address the financing side of the equation, offering subsidised mortgages and preferential interest rates for low-income housing and first-time buyers.

Panama offers a comprehensive scheme for first-time home buyers. The Preferential Interest Rate Law offers subsidised lending rates to first-time buyers of newly-constructed homes, offering financing for up to 95% of the cost of the home. The programme is directly reducing homeless numbers, also in addition to boosting the construction industry. The country recently increased the thresholds on qualifying homes. It now offers a 100% preferential interest rate for homes up to US$40,000 (previously US$35,000) and a 2% discount on market rate for homes of up to US$120,000.

In El Salvador, an interest rate of 6% is offered for social housing. This compares relatively favourably against the base rate for mortgages, which stood at 7.3% at the end of 2012. The government has also increased the maximum loan available from US$75,000 to US$125,000, equal to four times the minimum wage, in order to expand the programme to a wider pool of people. Subsidised mortgages are supported by the Social Housing Fund, which has US$46mn allocated to support home construction. However, high levels of red tape are delaying construction of new homes in El Salvador and preventing more widespread success of the Social Housing Fund.

Investment Needed
Percentage Of Families Homeless Or Living In Poor Quality Homes

Guatemala also offers a preferential interest rate; however, this compares much more favourably with the policy rate at 7% versus the 13.5% market rate. The Guatemala Housing Fund has a budget of US$58mn per year, and offers 18,000 subsidies for home purchases and 6,000 for the 'safe floors' programme, which sees dirt floors converted to cement. Guatemala has the second worst housing deficit in the region, with an estimated 67% of families homeless or living in poor quality homes. The government puts the deficit at 1.7mn.

Costa Rica, on the other hand, has the least issue with housing compared to the rest of Central America and Latin America, with just 18% of the population homeless or living in poor quality homes. However, the country does have housing programmes to support low-income housing. Family Housing Bonds are offered to families with no homes, who earn under US$2620. In January 2013, the Housing Mortgage Bank announced plans to issue US$160mn for 10,000 housing bonds.

Housing construction has exhibited strong growth over the past year in Costa Rica, helping to drive a rebound in overall construction sector growth, pushing the industry out of a three-year recession (2009-2011). In 2012, growth of 5.8% is estimated, driven predominantly by housing. A 17% rise in permit applications over the year should continue to buoy growth into 2013.

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