Santiago, Chile – Real Estate Bubble or Opportunity?
While I have been away from home for quite a while, I do not intend to leave you loyal BiggerPockets readers hanging — I’m here to make an appearance from abroad, and will do my best to bring you the latest “BiggerPockets International Edition” (like House Hunters International!)
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As a real estate investor, we shouldn’t often limit ourselves to just our local markets alone. Good opportunities are extremely hard to come by in a local market at a specific time. While it is difficult to get familiar with a new market, let alone a new country, I think it is always beneficial as a real estate investor to consider, or at least monitor, other real estate markets all over the world. After all, I did make the move to Las Vegas from New York to invest in a market that, at the time, offered tremendous opportunity. I made a ton of mistakes and I still made money. What’s to say you can’t find another market with a similar opportunity to make a killing?
I’m currently in Chile, and unfortunately, the best time to invest in the Santiago real estate market had already passed. After having a pleasant chat with another real estate investor in Santiago, I learned not only more about the market, but had the opportunity to see the signs that called for either a prosperous real estate market or a property bubble that was slowly forming.
First of all, from a macroeconomic prospective, Chile has been prospering thanks to its main economy being dependent on copper prices (we probably often get frustrated by vagrants stealing copper wires in houses,) which have been quite high. The government favored investors and businesses, despite the fact that income inequality was quite high.
Second, Santiago contains nearly half the population of Chile and everyone, it seems, practically lives in Santiago. People are all moving to Santiago, whether they be Chinese, Koreans, Palestinians, Turkish, Africans, or Chileans from elsewhere. Apartment buildings are scattered all over the city and new ones are continually being constructed. After talking to a few residents, I realized rents have been rising at a tremendous pace as well. Some rates have gone up nearly 100% within the last 5 to 6 years, and as we know, higher rents are definitely a bonus for real estate investors. On the other hand, it is a bit concerning that Chileans are suddenly forced to pay so much.
With that in mind, it is interesting to note that 5 to 6 years ago in Chile, a typical mortgage would have a monthly payment that is nearly twice as high as rent. As a result, many Chileans preferred to rent rather than own. But now, with rents rising to the point where it is as much as mortgage is, suddenly Chileans are becoming much more interested in owning an apartment than in renting one.
Needless to say, housing prices, like rental prices, have gone up quite fast as well. The question is how much higher would housing prices go before they become unaffordable for Chileans? After all, the average salary, I hear, is about $1,000 USD a month, while a typical apartment now costs about $120,000. The average mortgage rate is around 7%! In just a quick glance we can deduce that housing prices are beginning to move beyond affordability for the average Chileans.
On the other hand, if Chileans begin to believe that housing prices are going to continue to go up, how likely will it be that they do everything in their powers to get a piece of a property now?
Fortunately, I hear that the banking system in Chile has not been as wild as the US banking system had been in the mid 2000s. Chilean banks still require a hefty down payment – hopefully that will stay the same. If the Chilean banking system opens the floodgates, it is highly likely that we will witness a property bubble similar to that of the US.
So, as of right now, I am still a bit wary about the Santiago real estate market. I don’t know if it will continue to rise or if it will stabilize. All I know is that I will invest in Santiago if the market ever goes through a crash. All the signs are eerily similar to Las Vegas during its heydays. So who knows, maybe in a few years the whole market there may crash. If it does, I don’t mind making a trip down there to invest in as much property as I can.
Photo: alobos Life