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Annex I. Government Housing Programs
Government housing programs have expanded in recent years, partly in response to the economic slowdown. Traditionally, government housing programs have aimed to reduce gaps in home ownership and improve social conditions. At the same time, in recent years, new housing programs have been used as a countercyclical response to country-wide economic slowdown exploiting the spillovers that construction activity has into other sectors (official estimates suggest the construction sector is interconnected with 25 percent of the industrial sector). Examples of the latter are mortgage subsides targeting middle-income households included in the government programs PIPE (Plan to Boost Productivity and Employment) in 2013 and PIPE 2.0 in 2015. The number of houses sold with mortgage subsidies increased from about 21,000 in 2013 to about 33,000 in 2016.1
Existing housing programs combine support for down payments and subsidized mortgage interest rates. The government has a standing program to provide free housing to the most vulnerable including people displaced by the conflict with the FARC. Further, the program Mi Casa Ya targets households with income between 2 and 4 minimum wages and for houses worth up to US$30,000.2 The program offers support for down payments and a subsidy for interest payments. Another program, FRECH, offers only interest rate subsidies (4–5 percentage points) and targets households earning up to 8 minimum wages and houses worth up to US$50,000. The FRECH program is also included in Mi Casa Ya through the program Mi Casa Ya subsidio a la tasa. Finally, FRECH No-VIS is aimed at middle-income households providing interest rate subsidies (2.5 percentage points) for houses worth up to US$82,378 and is open to any household regardless of its income level.3 The government sets annual ceilings (cupos) for the number of houses to be subsidized under each program; the programs are only for new houses.
Data suggest housing programs have contributed to Colombia’s relatively strong economic performance over the last few years. The construction sector has outpaced total GDP growth during most of the last years, supported in part by an increase in residential construction. The data shows a clear boost to construction exactly at the time of PIPE in 2013; at the same time, the response to PIPE 2.0 has been more muted (other key drivers of construction activity include subnational expenditure execution, and the authorities’ infrastructure agenda). Official estimates suggest the fiscal multipliers of the housing program varies from 10 for FRECH No-VIS to 1 for the free housing program.
Annex II. The 1998–99 Financial Crisis
The origins of the financial crisis in 1998–99 can be traced to events in the early 1990s, when Colombia underwent a process of financial and trade liberalization, together with a considerably reduction in public and private savings. Public spending increased substantially because of the constitutional reform of 1991, which introduced large social programs and higher expenditure by regional and municipal governments. As a result, the public deficit deteriorated from near balance in 1992 to around 4 percent in 1998. At the same time, the combination of the financial deregulation process and favorable external financing conditions triggered large capital inflows that were intermediated by the domestic financial system, which contributed to the decline in private savings from 14.1 percent of GDP in 1990 to 8.7 percent of GDP in 1998. Thus, the current account worsened from a 2 percent surplus in 1992 to a 6 percent deficit in 1998, giving rise to a large credit expansion that fueled a boom in asset prices (particularly in the real estate sector). Bank credit as a share of GDP doubled between 1991 and 1997, making the financial system vulnerable due to weak regulatory and supervisory systems.
Between 1997 and 1999, growing concerns about the sustainability of these macroeconomic imbalances together with a reversal in capital flows due to the Asian crisis resulted in speculative attacks on the domestic currency. The authorities responded by depreciating the exchange rate band and tightening monetary policy. The monetary policy tightening and the reversal in capital flows affected the financial system through a reduction in liquidity and a subsequent increase in the cost of funds. Moreover, in 1993 the indexation of mortgage loan rates switched from the UPAC (an inflation index) to a market interest rate (the 90-day deposit rate). Thus, the rise in real interest rates, coupled with the fall in house prices, affected the financial burden of households, thereby leading to higher NPLs and worse solvency ratios of intermediaries. In the end, output fell by more than 4 percent in 1999, and real estate prices contracted by nearly 27 percent in real terms.
DANE and staff calculations.
The quantitative deficit is measured by the number of households that do not have an independent house while the qualitative deficit takes into account the quality and condition of houses and their access to basic services.
The IDB uses a homogeneous approach to estimate housing deficits across Latin American countries. However, the latest estimations are from 2009, and will be updated only in 2018.
Around 30 percent of the mortgages originated in 2016 were subsidized.
VIS is defined as a house or apartment whose value is below 135 monthly minimum wages: around USD$31,000 in 2016.
The results could change if the new home price index is used due to the historical gap between the existing and new home price indices. This robustness check is left for future work.
Excludes houses worth more than US$30,000.
Mi Casa Ya also includes an extension for households with an income lower than 2 minimum wages, known as Mi Casa Ya para Ahorradores.
House values limits are defined in number of minimum wages. For 2016, the values are converted using the official monthly minimum wage of US$230.