Shiller’s Bubble Warning Turns Prophecy for Banker: Andes Credit

In June, Yale University’s Robert Shiller said Colombia’s housing market reminded him of the emerging U.S. bubble a decade earlier.

Nine months later, the South American nation is showing plenty of froth, according to Sergio Clavijo, a former Colombian central bank and International Monetary Fund official.

After home prices soared an inflation-adjusted 78 percent since 2003, they’re poised to drop as much as 20 percent in the next two years as a reduction in stimulus by the Federal Reserve causes emerging-market borrowing costs to surge, he said.

“Undoubtedly this is a real-estate bubble,” Clavijo, a central bank board member from 1999 to 2005, who is now president of the Bogota-based National Association of Financial Institutions, said in an interview. “Given the effect of tapering, at a global level, we know that interest rates are going to rise and therefore it could worsen this home affordability by increasing borrowing costs.”

Mortgage rates in Colombia fell to 10.76 percent last month, within 0.03 percentage point of a record in July. The drop may be short-lived as a 2.3 percentage-point surge in 10-year peso bond yields since May, when the Fed signaled it would taper, prompts banks to lift rates, according to Citigroup Inc.

Average borrowing costs in developing nations rose 1.04 percentage points in that span as the Fed’s withdrawal of stimulus throttles demand for riskier assets.

‘Strong Demand’

The central bank didn’t reply to an e-mailed request for comment. Finance Minister Mauricio Cardenas said Feb. 21 that he doesn’t see signs of inflated property prices.

“We don’t see a bubble in house prices that doesn’t correspond to the economy’s fundamentals,” he said. “We can’t take macroeconomic decisions based on home prices in high-class neighborhoods, where there’s strong demand.”

Three-bedroom apartments in a new project designed by renowned architect Richard Meier in the upmarket Chico district in Bogota are selling for $1.6 million, according to Icono Urbano, the company responsible for construction.

A two-bedroom apartment on Manhattan’s Upper East Side advertised on Homehunts, a luxury property specialist, is selling for $1.325 million.

Colombian used home prices rose 11 percent in the first nine months of 2013 after climbing 15 percent in 2012, according to data gathered by the central bank.

Home Prices

The S&P/Case-Shiller index of U.S. property values, which Shiller co-created, rose 16.2 percent in 2004 and 15.5 percent in 2005, leveled off in 2006, then crashed in 2007 and 2008.

Shiller wasn’t available to comment because he’s traveling, Yale’s Department of Media Relations said.

Colombia’s peso rose 0.4 percent to 2,032.1 per U.S. dollar today as of 1:22 p.m. in New York.

Banks will gradually react to the increase in peso bond yields by raising loan rates this year, according to Munir Jalil, the head analyst at Citigroup’s Colombia unit.

Some home prices in wealthy Bogota neighborhoods have risen to “ridiculous” levels, he said in a telephone interview from Bogota. “Perhaps we’re on the brink of a fall in prices in the most expensive neighborhoods. With that much money you can buy a nice apartment in Manhattan.”

The Fed has pared its purchases of Treasuries and mortgage-backed debt by $10 billion at each of its past two meetings, and economists surveyed by Bloomberg estimate the central bank will maintain that pace until it stops buying bonds in December.

Rate Boost

Colombia will lift its key rate by 1.25 percentage points to 4.5 percent by year-end, as inflation accelerates toward its 3 percent target, Clavijo said. Consumer prices rose 2.32 percent in February from a year earlier, the fastest pace in 14 months, the national statistics agency said yesterday.

Daniel Lozano, the head analyst at Bogota-based brokerage Serfinco, says it’s still too early to describe Colombia’s housing market as a bubble and that some of the increase in home prices corresponds to the strength of the economy.

“Prices are high, but there’s still really no definitive signal of a bubble in the market,” Lozano said in a telephone interview. “The country has definitely shown strong fundamentals during recent years.”

The housing market has helped propel growth as industry and agriculture have suffered from a strengthening peso. Construction was the fastest growing part of the economy in the third quarter, expanding 23.1 percent from a year earlier. Manufacturing contracted 1 percent in that span.

The economy grew 4.1 percent last year, according to the central bank’s forecast, from 4.2 percent in 2012. A cooling of Colombia’s mining and energy boom will also curb demand for housing, Clavijo said.

Mortgage Loans

While the drop in home prices will act as a brake on the economy, it’s unlikely to lead to a financial crisis as the nation relatively low levels of mortgage debt, he said.

Mortgages are equal to about 6 percent of gross domestic product in Colombia, according to Titularizadora Colombiana SA, the nation’s biggest issuer of mortgage-backed securities. That compares with 8 percent in Brazil and 55 percent in the U.S.

“It would be very good to have something of a correction,” Citigroup’s Jalil said. “It would be healthy, and we’re not looking at a correction that’s going to kill the market.”

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