Housing finance in Colombia

DISCUSSION PAPER Report No.: SUDD 34 HOUSING FINANCE IN COLOMBIA by Alvaro Pachon (Consultant) August 1983 Water Supply and Urban Development Department Operations Policy Staff The World Bank The views presented here are those of the author, and they should not be interpreted as reflecting those of the World Bank.  Dr. Alvaro Pachon is a consultant based in Bogota, Colombia. This paper was prepared in 1983 as part of an on-going review of the experience in housing finance in Latin America. It was prepared jointly for the Urban Division of the Latin America and Caribbean Regional. Office and the Urban Development Department of the World Bank.  ABSTRACT This paper presents a comprehensive overview of the housing finance system of Colombia in 1983. It provides a. brief 'description of the recent macroeconomic environment in Colombia, of the general structure of the financial system and of the place that hou.sing finance institutions occupy within that system. It charts recent trends in finairzial intermediation anxd provides a description of the role and significame of the major housing finanre institutions operating in the system. It cornluies with a review of some of the issues that are presently arising in the development of the Colombian housing finance system.  l',fi'LE OF CONTENTS Fage :~ I. INTRODUCTIOIN i II. OVERVIEW OF T'HE COUINTRY 5 A. Macro-Economic Overview 5 B. The Financial System I 5 1. Structure of the Colombian Financial System 15 2. Recent Developments of the System 21 Z. Interest Rates 28' 4. Resource Mobilization ;S; 5. Current Conditions 34t C. The Housing Sector .5 1. The Stock o+ Housing :5 2. The In+ormal Sector 41 3. Non-Financial Constraints 44 III. HOUSING FINANCE 47 A. Trendis in Level of Intermediation 47 B. The Land Credit Institute (ICT) 5i C. The Central MortgaFe Bank (BCH) 67 D. Housing and Saving Corporations (CAVs) 75 1. Indexation 78 2. Terms and Conditions 79 3. Assets and Liabilities 83 4. Relationships with the Central Ban k 86 5. Credit Allocation as E. Other Institutions 89 IV. ISSUES IN HOUSING FINANCE IN COLOMB4IA 94 A . Introduction 94 B. The role of HoLusing Finance 95 C. A+fordability 9 DJ. Rental Market of HoLusing 101 E. Public Sector Aaencies i 02 F. The Public and Private Mortnage Interest Rates 104 G . SuLb si d i es 106  L liDS OF LfA;LE S Tabl e No. F'a3e Nc'. 1. Construction Share in GDF Colombia 1970-1981 ............b 2. GDP G~o-owth by Sector. ................................e 3. Gross Capital Formation Colombia 1970-1981 ........... 10 4. ConstrLiction Economic Indicators .................. 11 5. AnnLual Urban Floor Space Building .................. . 12 6. Demographic Indicators o$ Colombia .................... 14 7. The Colombian Financial Sector ...................... 16 8. Financial Sector: No. of Firms and No. of+ Offices... 18 9. Financial Liabilities Colombian Financial System.... 20 10). Level of Intermediation - Financial System 1970-82 s 2 11. Selected Reser%a Requirements........................ 25 12. Distribution of Financial Assets Colombia 1970-82 ... 27 13. Financial Assets: Colombia 1970-1982 ............. . 29 14. Selected Deposit Rates Colombia 1972 - 1981. .........30 15. Housing Stock: Colombia 1950 - 1986 0............... 36 16. Estimated Urban Income Distribution Colombia 1982... 40 17. Housing Output by Financing Agency Colombia 1981. 42 18. Individual Mortgage Credit Colombia 1950 - 1981 ......4? 19. Construction Financing By Sources 1965 - 198 ....... 20. Distribution of New Resources Used in Construction.. 51 21. I.C.T. Revenues 1970 - 1981 ...................... 5 o: Z2. I.C.T. Revenues by Source 1980 -1981 ................. 57 23. I.C.T.'s Outstanding Loans 1978 - 1981 ............ 59 24. I.C.T. Expenditures 1977 -19.1 ....................... 61 25. I.C.T. Selected Housing Statistics 1942 - 1981...... 62 26. I.C.T. Sale Conditions by Program 1981.............. 64 27. I.C.T. Financing Conditions by Program 1961 .......... 65 26.. I.C.T. Profit and Loss Statement 1976 - 1979 ........ 66 29. Distribution of Construction Credit 1960 - 1981 .....6? 6 30. B.C.H. Liabilities 1l970 - 1981 ....................... 70 31. B.C.H. Approbals and Disbursements, 1982 ...............74 372. Housing Units Financed by the CAVsq 1973 - 7 86 .b :;. UPAC Financing Colombia 1973 - 1981 ................... 77 34. CAVs Effective Returns 1976 -1981 ................... 84 35. CAVs Assets and Liabilities i973 -1981.. .............. 5E 36. CAVs Profit and Loss Statement 1974 - 17.............-7 Z 7. F.N.A.. Sources of Funds 1971 - 190.. ................. 9 38. F.N.A. Financial Terms .............................. 39. fA+fordability of ICT Proqrams bv Tyoe of Prooram.... s 40. Relative A+fordabilitv of the UPAC System ........... .1 41. Implicit Subridies in the UFAC System ................. 108  StUdy wi IL I provi dE crne model o+ hou5a na f 1 nance devel opinert t- contrast with others that jave been used in other develocinc couLntries. The fLtnct.ions that a housing Finance system perform will be illustrated by the study of the Colombian case. The way ir: which financial intermediaries mobilize their resources will also be analy-Zed in the Colombian context. The important role of non-bank instittutions in the Colombian housing finance system will be explored. The ways to protect a housing finance system against inflation will be illustrated by the Colombian experience wiith indexed instruments. The mix of housing finance provided by specialized institutions and by general purpose financial intermediaries will, also be studied. Final-ly, the Colombian experience coutld be used to explore some o+ the following i SSUCes: Should housing finance institutions be run by the public sector? Should market lending operations and. government low-income hoLtSing programs be run through two windows of the same institution or two separate institutions ? It is also hoped that the study will help to clarify some o f the issues adressed in Colombia. The National Planning Department (DNP) in a recent document (198i), has mentioned the following 1 SsLtes: 1) Reducing the housing deficit while improving the quality of the stock o-f housing units, 2)- reducii6g the instability of housing finance f unds by reestructuring the capital market to provide adequate funds for housing, 3) improvi.ng access to low-income hoLoseholds. 4) minimizing the extent of low density and  The objective of this paper is to present a description of housing finance in Colombia and of the main issues' related, with the financing of formal housina units. DuLe to lack of quantitative information on the informal sector it has not been studied. It is hoped that the Colombian e>:perience with her varied institutions. and the relative sLuccess in coping with very rapid growth of Urban population, could help in uLnderstandi.M, ways to solve similar probl ems. The importance of housing construction in Colombia can be appreciated by the vaiue of its oLutput (Col 12,1C?5 Million in 1979), by its contribution to employment generation (183,365 man-years), by its contribution to gross capital formation (13.7%'. of the total) and by the share of savings going to the housing sector (46.9 '. of the total). Because of the multiplier effects of hoLusing in other sectors, housing construction has been considered in some development plans -as one of the. leading sectors of the economy. This study o+ housing finance in Colombia will contribute to illLustrate some of the main issutes identified by RenaLtd 1 Pi2) . It is hoped that the study will help to understand the di++erences between hoLusing finance and the financing of other sectors. the  1cJ >)-rif development, J cot-ntrolling the large i ncreases in 1 a.r, values,t 6) reducina the he.-,vy btrden on ptblic utilities dLue t- the rapid increase in Lurban population. A+ter this i ntrod ucti i the paper presents an overview of the Colombian economy and its firnance system. Looking first at macro economic conditions. then at the finance system, and finally at the housing sector. The paper continLies with a stLudy of hoUSiino finance. Lookcing at the trends in financial intermediatiorn in housing, at low income finance by the Land Credit Institute (ICT). at the r:,le of the Central Mortgage Bank , the Housing and Savings Corporations, and the rest of the institutions financing shelter. The paper concludes with a presentation of the main issuas in housing finance in Colombia. It studies the role of housinq finance, affordability by low income households. and ends with a study of implicit subsidies to housing. Given the limited scope of this paper, it does not pretend *to summarize all what is known about the development of Colombia, urban development, the +inancial sector or hoLusing. The World Bank. has made care+ul studies about all these topic!. in this context.1.f -------------- 1/ See for example, The Colombian Investment EBanking System and Related Financial Sector Issues. World Bank, 1i933; Urban Policy in Colombia Selected Issues and Some Directions for Change, World Bank, 1983; Colombian Economic Development and Folicy Report, World Bank, 1983; Strassman. Paul W. The Transformation of Urban Housing, 1982; and the work carried out unoer the City Study reserch project.  4 With its viork it has contributed to ae cl ea:rer Llnderstanding c, recerit Coiombiari development. This paper has benefited trom this wor k Colombian researchers have also contribbuted to advan'ce our knowledge aboLut recent economic ev,ents. Most of the qLanti tati ve information in the next two chapters come from careful work made by Colombians. Financial sector information comes mainly from the work done by Arango et al.v (1983) and by Carrizosa et al., (1982). Information on hoLusing finance comes from Carrizcsa ano associates., from Villate (19S1) and from BCH sp,nsored research undertak en by Sistemas de Informacion (1982).  11 UVERVlEW OF 1 IE CCOUNJIRY A. Ma.cro-Ecmnomic Overview The constrLlction sector has been considered in Colombia by the present Government as one of the main hopes for the reactivatior of the economy. As in other countries constri.ction has experie.nced more volatility in its growth than other sectors (table 1). the rate of growth of the construction sector during the peri od 1971-1982 has been 4./6%/ while the rate of growth of GDP was 5.2%. If one looks at four years periods, one can observe the rate of growth of both GDF and construction have declined ..GDP growth rate declined from 6.7'. in the period 1971-74, to 5.5%'. in the period 1975-78 to 5.3.% in the period 1979-82. Construct.ion's rate of growth declined from 5. 7% to 4.67. and to 3.57. in the three four-years periods mentioned above. Graph 1 presents the variation in money supply and prices; most c+ the variation of the money supply were caused by variations in foreign reserves, the largest variation was observed in i976, in a year of external bonanza. Prices have moved in the same direction than Money Suppl y. The shAre of constrLucion in total GDF in 1981 was .-.. 7 considerably less than its share in 1970 A--0.). i" slight recoverY  TABLE 1 CONSTRUCTION SHARE IN GNP COLOMBIA 1970-1981 ( 1970 Millions pesos) Ano GOP Construction Share % 1970 130 361 6,566 5.04 1971 137,889 6,897 5.00 1972 148,630 7,032 4.73 1973 159,195 7,884 4.92 1974 16B,786 8, 190 - 4.85 1975 175,226 7 830 4.46 1976 183,296 6 723 3.67 197.7 192 187 7 101 3.69 1978 209,369 7 379 3.52 1979 220,091 7 277 3.30 1980 229,294 7,981 3.48 1981 235,028 8 752 3.72 Source: Revista Banco de la RepCublica  'vE$.FFQ~ (J P..trtE P. lpL" AP.1 D P FR I';F 19e71 t 89m t 1973 19i74 1 97r: t1976 197. 1975 1 9X t 983ti l9l 19 ' .1-icm  in constrLuCtion nas been observed in the eighties (table 2). I- z-Th accordinc r-o a stLidy made by DNFP, the value added by the constrLuCtion sector was Cols 49qC)81 Millions or 4.17. of GDF ir cLtrrent pesos. In that year 3.51.495 man-years were labored ir construictions correspondi ng to 4.9 of the e-bnomy' s employment (table .3) . Construtction is one of the main components of gross capital formation. The share of constrLuction in GCF was 36.3% in 1981. hoLtsing represented almost half of construction or 17.2-% of the total GCF in Colombia (table 4). According to some estimates of DNP tor each peso spent in building construction 45 cents are spent in other sectors inputs and generate 117 7. of indirect. employment. Housino production is more than 75,' of total building in Colombia (table 5). Housing production is largely concentrated in the four largest cities: Bogota , Cali, Medellin, and BarranqLLilla. According to building permits information, 647. of the area was built in the four largest cities. In recent years. however. a relati'vely higher growth in intermediate cities has been observec ard consequLently the share of the XOLUt largest cities in constructicn has declined. Housing e>:penditures in Colombia. as in other coLuntries are e larae 'fraction of total household expenditures. Accordini to the  TABLE 2 GDP GROWTH BY SECTOR Anios GDP Agricul- Manufac- Trade Construc- Mining Finance Transpor- total tural turing tion tatlon 1971 5.8 2.5 8.5 6.3 5.1 0.7 15.9 5.6 1972 7.8 5.9 9.2 6.7 1;9 -7.4 11.0 7.9 1973 7.1 4.0 8.9 8.6 12.1 5.5 8.1 -9.4 1974 6.0 7.2 5.6 5.0 3.9 -7.0 15.4 10.8 1975 3.8 6.0 0.7 1.3 -4.3 -5.5 13.9 7.2 1976 4.6 1.8 7.1 6.3 -14.2 -1.9 10.0 9.0 1977 4.9 2.3 4.1 5.5 5.7 -3.9 9.7 8.8 1978 8.9 10.3 8.5 10.5 3.8 4.4 9.6. 10.9 1979 5.1 4.4 4.7 5.8 -1.4 -1.2 1.2 9.0 1980 4.2 2.9 2.0 2.8 5.2 7.8 8.1 7.7 1981 2.5 2.4 -1.1 -0.1 6.2 6.6 6.1 6.2 1982 J1.4 -0.8 -1.1 -1.4 4.0 7.5 -- 6.6 Source: Banco de La Republica  10 TABL E 3 GROSS CAPITAL FORMATION COLOMBIA 1970-198j ( 1970 Millions pesos) YearC Gross Hous irg Construc- capital tion formation 1970 26,441 4,475 16.9 13, 824 52.3 *1971 23,067 4,449 19.3 14,577 63.2 1972 27,786 3,826 13,8 14,724 53.0 1973 29,156 5,157 17.7 16,817 58.0 1974 31s,700 5,151 16.2 17,890 56.4 1975 31,844 3,729 11.7 16,363 51.4 1976 32,802 4,043 12.3 14, 400 43.9 1977 34,487 5,001 14.5 15 426 44.7 1978 38,737 5,771 14.9 16, 783 43.3 1979 39,719 4,781 12.0 16,020 40.3 1980 45,860 4,518 10.1 17,434 38,0 1981 48,005 8,250 17.2 17,436 36.3 Source: Revista del Barnco de la Rep6blica  TABLE 4 CONSTRUCTION ECONOMIC INDICATORS 1979 Share Values in the Economy I GDP Construction 49,080.6 100.0 4.1 a. Housing 15,404.1 31.4 1.3 b. Other construction 33,676.5 as*6 2.8 II Factor Shares of construction a. Salaries 35 ,901.9 73.1 9.0 b. Profits 13,178.7 26.9 - III Employment. (Man - years) 351,495 100.0 4.9 a. Housing 18 e,360 53.1 2.6 b. Other construction 165,135 4649 2.3 IV Gross Capital Formation (millon $) 103,067 100.0 41.7 a. Housing 33,914 32.9 13.7 b. Other Buildirg 9, 181 8.9 3.8 c. Other construction 59,972 58.2 24.2 V Financial saving going to 72,735 46.2 bultding Source: DNP (1981)  12 CUADRO 5 ANNUAL URBAN F=LOOR SPACE: BUILDING (000 SQ m) 1970 - 1980 Year Housing O Other Total bui tdirg 1970 4,0440.5 82.1 968.2 17.9 5,408.7 1971 4'309 .5 79.0 1.,143.2 21.0 5,452.7 1972 3,796.g6 7644 1,172.8 23.6 4,959.4 1973 5,151.3 79.7 1,310.6 20.3 6,461.9 1974 5,080.2 72.1 11972.5 27.9 7,052.7 1975 3,627.4 75.0 1,212.2 25.0 4,839.6 1976 3,864.7 74.6 1,1308.4 25.3 5,174. 1 1977 4,972.9 77.3 1, 463.8 22.7 6,436.7 1978 5,795.6 80.0 1,447.9 20.0 7,243.5 1979 4,717.7 77.4 1,376.0 22.6 6,093.7 1980 4,468.8 78.5 1 223.9 21.5 8,692.7 Source: 0. N. P. 1981 Banco de la Rep6blica. Cuentas NacionaLes y Revista del Banco de la Republica (varias); Dane, Soletin Mensual de Esta- d(sticas; Albert Berry, "W La Industria de la ConstrucciOn en la Deca- da de los anos Sesenta"l, Economta Colombiana, No.92 (abril, 1972), pags . 16 - 30.  National Gtatimticil 0+fice (DAcNE), blUe collar wqrrkers sporrd +i