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ARQ (Santiago)

versión On-line ISSN 0717-6996

ARQ (Santiago)  no.102 Santiago ago. 2019 


Are We Facing a Real Estate Bubble in Santiago? A real Estate in Santiago? Indicators and practices

Javier Ruiz-Tagle1 

1 Profesor asistente, Instituto de Estudios Urbanos y Territoriales (IEUT) Pontificia Universidad Católica de Chile, Santiago, Chile.


The strong demand for urban housing in Santiago has resulted in a recent increase in high-rise buildings. Such densification has mainly affected the districts surrounding central areas of the city. However, paradoxically, the increase in supply has not kept the price of the units from continuing to rise. In the light of such phenomenon, in arq we ask, how can such an increase in price be explained? Does it come from speculation?

Keywords: speculation; city; development; planning; debate

In Santiago, the price of housing has escalated. According to a recent study by the iEUt, nominal prices have risen between 90 % and 150 % over the last ten years, while nominal income has only gone up by 25 %. This price increase has set off the alarms for a potential real estate bubble. The most highlighted causes among academic studies are: (1) the reduction of the size of the household (forming a vicious cycle with the decrease in size of the dwelling unit); (2) the entry of financial capital for the purchase of land, as well as for financing and purchasing the project; (3) the increase in the purchase of housing as a form of investment; (4) the deregulation of the land market and rent (deriving in intensive densification); (5) State investments that do not recover capital gains (i.e., new Metro subway lines); (6) real estate reinvestment in derelict areas; and (7) infiltration of rent for tourism (i.e., Airbnb).

The Chilean real estate world indicates that such increases come from rises in land value (which they claim corresponds to a shortage of land available for development), higher building costs, and new taxes and regulations. However, these actors do not mention their key role in the intensive exploitation of land (via higher densities and smaller dwelling area); in the promotion of housing investment packages (including their assistance for investors to take several mortgage loans at the same time); the disinformation of proprietors in derelict areas in order for them to sell at lower prices; and the constant pressure exerted on the State to provide them with further royalties, via the extension of urban boundaries, increases in density, tax reduction, subsidies and a long etcetera.

Literature defines real estate bubbles as a two-phase process: a period of dramatic price increases, driven by speculation, and an equally dramatic recession period. Other definitions point to periods involving speculation or involving price increases that cannot be justified by the variables that determine prices. That is, when investors expect sale prices to be higher in the short term (i.e., before they return to their real value). A simplistic explanation of bubbles indicates that when housing demand is high and access to mortgage loans is easy, many people purchase houses to sell them later at a better price. The recession period experienced by the United States between 2007 and 2009 was explained as the outcome of a real estate bubble, although the issue was not only the massive access to credit loans, but also the emergence of a series of new (and ‘innovative’) financial instruments. In Chile, despite not having as varied or sophisticated financial instruments, events similar to those in the United States happened during 2012 and 2013. Several banks began offering credit loans for over 75 % or 80 % of the real estate value (reaching in some cases at 100 %, which implies that there was no initial downpayment) and allowed them to take dividends for over 25 % of their income. At the same time, many purchasers began taking more than one mortgage at a time (thanks to a lack of updating of the banking system) while the State continued to inject subsidies. Therefore, the Central Bank asked the banks to tighten the requirements needed to get a loan (despite the low interest rates), which made the renting sector grow, covering thus the apartments purchased by investors.

This year, the Central Bank has warned about the increase in people buying homes for rent through mortgage loans, especially those with medium incomes. However, it rules out the existence of a bubble, since strong increases have moderated. Strictly speaking, thus, it cannot be said that we are facing a real estate bubble. But one of the worst mistakes in the social sciences is to treat phenomena as monolithic objects or entities that switch from white to black. Many of the processes that found the phenomenon of real estate bubbles have been present. The Central Bank itself has indicated that prices in the real estate sector should be monitored, since they rose at rates higher than the historical ones - representing a bubble hazard. Moreover, recent studies indicate that there have been important signs of speculative elements in price escalations over the last decade. Thus, both in economic indicators as in institutional practices there are elements of concern. No developer has ever gone bankrupt due to the effect of any real estate bubble in Chile up till now, but both purchasers and housing tenants have suffered with the continuous rises in prices and the difficulties that this represents for the access to a vital good.


Javier Ruiz-Tagle Assistant professor at the Instituto de Estudios Urbanos y Territoriales (IEUT) and associate researcher at the Centro de Desarrollo Urbano Sustentable (Center for Sustainable Urban Development) (CEDEUS), Pontificia Universidad Católica de Chile. PhD in Urban Planning and Policies, University of Illinois at Chicago (2014).

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