Probably nowhere else in the world do cities matter as much as in Latin America, highlighted by the statistical fact that four-fifths of Latin America’s 589 million people reside in cities. In fact, according to McKinsey & Company, Latin America is more urbanized than any other region in the emerging markets world. The region boasts 198 cities harboring a minimum population of 200,000, generating 60 percent of all of Latin America’s GDP output. The urbanization trend is only moving forward, with the United Nations forecasting that by 2050, 90 percent of Latin America’s population will be living in cities or towns–an amazing phenomenon indeed, but with an unintended consequence: inadequate housing for the low-income population.
Rapid urbanization in Latin America is primarily attributed to the economic opportunity cities have attracted–and still do–spurring rural citizens to migrate to cities and lay their roots in shantytowns, slums, or favelas. As of 2012, 111 million Latin Americans were living in these slums, creating a Latin America of two faces.
Class and income inequality is still pervasive in the region, although it has improved dramatically in the last decade, especially in Brazil and Colombia. However, the Inter-American Development Bank (IDB) reports that Latin America has the highest prevalence of slums compared with countries with similar incomes in Asia. In addition, the IDB reports that a jaw-dropping percentage of families live in poor quality houses; for example, one out of three households in Latin America endure inadequate housing: 72 percent in Peru; 75 percent in Bolivia; 34 percent in Mexico; 37 percent in Colombia; 33 percent in Brazil; and even 23 percent in Chile—alarming for a country that is a few short years away from being classified as a developed country.
Latin America has a serious low income property shortage problem. It is estimated that Brazil has a property shortage varying from 5 to 7 million structures. Peru, on the other hand, is not as extreme, yet analysts project it does have a housing deficit of 900,000 structures. The housing problem is compounded even more due to aspiring homeowners possessing insufficient income to buy the existing housing inventory. Also, the inability to document income makes it even harder to secure a bank loan. It must be noted that Latin America has a thriving informal market–for better or for worse–thus, banks are reluctant, with good reason, to issue mortgage loans without proper documentation. Historically, banks in Latin America have had strict lending standards, requiring buyers to deposit at least 75 percent of the purchasing price, and with a lack of government programs (such as the U.S.’s FHA program), many people are priced out of becoming homeowners.
Governments have taken note how dire the situation is and have addressed the problem with government funded programs and subsidies. Unfortunately, the results have been meager. In 2008, the IDB approved a $2.8 billion financing package primarily to boost low-income housing in Mexico. Alongside this, when the Mexican conservative National Action Party (PAN) took power in 2000, they put forth an aggressive plan to increase homeownership via a government mortgage agency Infonavit (similar to Fannie Mae and Freddie Mac). The plan was quite basic: millions of Mexicans who lived in shacks or shantytowns would benefit tremendously by becoming homeowners of modest houses, improving economic growth and creating their own version of the Mexican Dream. In 12 years, Infonavit was behind a whopping 75 percent of Mexico’s mortgages, handing out 4.4 million loans, double the amount of loans issued from 1972 to 2000. One problem: the low-income housing plan was a horizontal based endeavor instead of vertical, creating unsustainable urban sprawl. The Mexican government encouraged homebuilders to create new towns far away from the city centers, creating difficulties in terms of transportation, utility services, and law enforcement. The housing bubble in Mexico popped, however it was limited to the low-income sector, unlike in the U.S.
New towns faced an exodus after property prices dropped, and homeowners preferred to live near their jobs instead of commuting 60 to 90 minutes each way. As such, the low income housing plan failed due to many reasons, but primarily because a lack of adequate urban planning.
Mexican President Enrique Peña Nieto has overhauled the previous low-income housing scheme and proposed a new one anchored on urban development and high-rise buildings, with a direct aim at limiting urban sprawl. Interesting enough, the same movement is occurring in the United States, where suburbia is receding due to the distaste of long commutes and sprawling developments, and American people are opting to live in more urban areas (see Leigh Gallagher’s book The End of the Suburbs: Where the American Dream is Moving).
Brazil, where a 2010 census found 11.4 million Brazilians living in favelas, launched in 2009 a federal program to fund housing for Brazil’s poor and middle classes. The program, named Minha Casa Minha Vida (My House My Life) had an initial aim to build 1 million homes behind an investment of $18 billion. The plan is noble in its intentions, but the outcome has been spotty. Problems prevail: it can take a family up to 18 months to finally move in to their new home due to bureaucracy, mortgage approval delays, and lack of planning and managing costs by the homebuilders. In addition, Brazilian news agencies have uncovered many Minha Casa Minha Vida developments that have sloppy finishes, plumbing issues, lack of electricity, and, similar to Mexico, developments are being constructed far away from the city centers. Dissimilar to Mexico, Brazil’s President Dilma Rousseff has, to her credit, upped the ante by setting a goal to build an additional two million low-and middle-income houses by the end of 2014 under the program.
While slums continue to grow in size and crisis, Latin America’s middle and high-end real estate market has been going through a five-year boom, mirroring Latin America’s unprecedented economic growth. According to Forbes, home values in Brazil have risen by approximately 14 percent in the last year. Real estate valuations in Colombia increased by 8 percent in 2012. In 2011, mortgage originations in Peru are being issued at an unprecedented rate–a 50 percent increase compared to the previous year. Chile has developed a well-oiled mortgage system, projecting to show stable growth, especially in Santiago. Moreover, per Forbes’ “Hottest Real Estate Markets on Earth,” Colombia ranks 10th and Brazil 3rd, behind Dubai and Hong Kong. All great news for Latin America, but in order to have sustainable and long-term economic growth, all segments of the economic and social spectrum must be addressed.
The bright side is that government leaders are at least trying to tackle the scarcity of quality affordable housing. Former Venezuelan President Hugo Chavez claimed to have invested $12 billion in 2011 into housing projects, although the final result of the housing developments have been concerning and well below predetermined benchmarks, to say the least. But at least the intent is present. Government leaders in Colombia last year announced last year that $583 million will be invested towards low-income houses, with the goal of constructing 100,000 homes. Recently Ecuador has received more than $100 million in credit facilities with the sole aim of assisting approximately 16,000 families by providing more adequate housing.
The challenge now is to develop sustainable and long-term effective policies and strategies that improve the quality of lives for the citizens and also the investments of governments, multinational institutions, and private businesses.
This article was originally published in the Diplomatic Courier`s November/December 2013 print edition.
