April 5th, BOGOTÁ (Colombia Reports) – Colombia’s financial sector has resisted lowering mortgage rates in accordance with the central bank interest rate cut to 3.25%, the bank’s most recent cut in March.
“The central bank has developed an expansionary monetary policy since July 2012, but the interest rate cuts have not yet been transferred to the rates of financial institutions,” said international market analyst Cristian Lancheros of Acciones y Valores, a Bogota-based brokerage firm.
“This scenario requires a greater commitment of financial institutions with reduced rates to encourage consumption … it will not deteriorate significantly household demand,” Lancheros added.
Worries of rising new real estate prices, which increased by 2.4% in the latter trimester of 2012, have fueled a fiery debate over the severity of the housing sector’s impact on the Colombian economy.
Finance Minister Mauricio Cardenas recently called on banks to be more responsive with the central bank in order to decrease interest rates in accordance with the cut, and in turn decrease the cost of mortgage lending for buyers.
“We are planting our concern with the financial sector regarding this situation … it doesn’t seem that the financial sector, let’s say, is helping in proportion to the central bank’s interest rate cut,” said Cardenas.
Cardenas, however, has kept the focus of Colombia’s growing pains toward the peso, naming it “the mother of all problems”. A strong peso, he has said, is the culprit behind a sluggish manufacturing sector and struggles in the agriculture business, which in turn is flaying the country’s exports.
Yet some experts disagree about where the problem is, saying that the most important risk to the Colombian economy right now is soaring housing prices.
Economist at the University of the Andes Marc Hofstetter told Colombia Reports that “the most important risk is that the central bank is lowering rates, but housing prices are still high.”
“By lowering rates, the central bank intends to stimulate the economy. Most of the economy needs a stimulus, but the housing sector does not need a boost in the middle of rising prices,” Hofstetter added.
Although lower interest rates intend to kick start the economy the central bank says it is growing below its potential, lower mortgage rates could further drive up prices in the housing sector. That could be dangerous for consumption.
And that potential danger is the same concern that was recently investigated by a handful of central bank researchers. Earlier this month, a report published by researchers at Colombia’s central bank warned of a housing bubble in Colombia’s market that could mirror the same conditions which led up to the United States mortgage crisis in 2008.
“We find evidence of a bubble (defined as explosive behavior in a sub-sample of the series) during the second semester of 2012,” Jair Ojeda-Joya, co-author of the central bank’s research said to Colombia Reports.
Rich Holman, a real estate broker and founder of First American Realty Medellin, is not convinced though. He says that the worry over Colombia’s housing market “is uniformed diatribe” and declares the idea of a bubble is nothing more than a “myth”.
“Is Colombia being overbuilt, is there too much inventory, is the property market overvalued and is Colombia having a real estate bubble?” asks Holman. “The answer is no, not yet.”
- Interview with International Market Analyst Cristian Lanchero (Acciones y Valores)
- Interview with Economist and Professor Marc Hofstetter (Universidad de los Andes)
- Gobierno espera compromiso del sector financiero en matería de reducción de tasas de interés (Ministry of Finance)
- Indicadores y Estadisticas (DANE)
- Colombia’s finmin calls peso ‘mother of all problems’ (Reuters)
- Colombia’s real estate bubble: fact or myth? (Colombia Reports)