Living in Peru : your everyday companion

Concern Peru's real estate could suffer same mortgage crisis as the U.S.

Living in Peru
Israel J. Ruiz

Peru's real estate explosion over the past few years and the approval of a massive number of mortgage loans, especially in the country's low-income sectors, has worried a real estate association in the country.

According to Augusto Peñaloza, president of the Asociación Peruana de Empresas Inmobiliarias, there is a concern that Peru is headed towards the same mortgage loan crisis the U.S. is experiencing.

Peñaloza argues that loans have been granted to people that cannot guarantee long-term payments, explaining that it is not just because of them but because of the country's volatile situation.

"I see a lot of long-term commitments but there is also long-term instability as well, and this is because there is always a political juncture in the country that can cause an unexpected change of plans in obligations as well as financial and work conditions," said Peñaloza.

For example, Peñaloza explained that no one could guarantee that a 40-year-old person who committed to paying a 15-year loan would actually be able to do so in the next 10 years because their income may not be the same.

"The agreement would collapse and the property bought would go back on the market," said Peñaloza, stating that this would create a crisis if it happened on a large scale.

Enrique Espinoza, on the other hand, assured that there was no reason to believe that a crisis was ahead, explaining that the Peruvian real estate market was still young and growing.

The president of one of CAPECO's committees explained that the U.S. and Peru were two very different cases.

In addition, ASBANC, Peru's Bank Association, affirmed that the loan approval process in the country was very strict and not just anyone was approved, thus, eliminating the possibility that a crisis would erupt because borrowers would not be able to repay loans.

Banks in Peru approved over 8.2 billion soles worth of mortgage loans in February 2008, 14 percent higher when compared to the same month in 2007.

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# CapitanDan says :
8 April, 2008 [ 18:36 ]

Mr. Augusto (Pessimist) Penaloza, It is people like you that the people in Peru suffer so much. Your pessimistic outlook generates fear and unwarranted concern among the lenders. Thank god for more people like Enrique Espinosa who has confidence in Peru and its people. Also Augusto ,Who can say that we will all be dead in 5 years by some renegade asteroid or plague.  Can anyone guarantee anything but that they will die someday. Did anyone ever here of Mortgage insurance ,that would cover the loss of one's income through illness or loss of work. It's these little things that can spread out any loses if they happen. Peru needs leaders and lenders with foresight and guts , not spinless pessimists.

# jack sparrow says :
8 April, 2008 [ 19:38 ]

An interesting parallel in the phenomenal growth of the credit card business in Peru.I have seen unemployed folks get credit cards and then run up debts of Soles 3 to 4 thousand. Probability of payback with interest rates from 24% to 35% - your guess is as good as mine!!!

And with provincial towns showing faster credit card usage than Lima, something has got to give.

If you are in a  fast checkout counter in a supermarket in Lima, just observe the number of folks using their credit cards for small purchases. No small bills in their pockets!

# m. elisa says :
8 April, 2008 [ 19:58 ]

I certainly do not doubt of Mr Penaloza's expertise..... in the PERUVIAN real estate market, but is evident his lack of knowledge of the american real estate system.  The "bubble" exploded due to several reasons, not only the unpaid mortgages but first and foremost the especulation and greediness of lenders, realtors, mortgage brokers, developers and investors who contributed in the massive approval of unfitted debtors and the unrealistic overpricing of properties, which finally led to the fall of prices and saturation in the offer of properties.  This is not the case of the peruvian market, and if the (high) level of risk is a concern for some, well, I recommend a change of career or area of business.

# Sucker For Adjustables says :
8 April, 2008 [ 22:45 ]

The recent bail out for all the dummys that bought into adjustable rate mortgages, and the morons that sold the arms in the U.S., deserved what happened to them. If that is going to be the case here in Peru as well, shame, shame. Only I hope Peru's politicos are not dumb enough to milk the tax payers for stupid mistakes as is the case with the current U.S. crises. The people I feel sorry for are the folks that were smart enough to buy into housing hedge funds. These people saw the writing on the wall. They lost their shirts when the fed pumped billions in bail out money to rescue such blantant stupidity. So much for investing. I bet these hedge fund folks lost what ever faith they had in their own government. Let the maket fix its own problems. Does it some times take longer than expected? Sure. When ever government gets envolved, you can bet your bottom soles that it will turn into the brown substance that exits the south end of a noth bound Llama. And more freedoms lost as a result, under the popular guise, We Know Whats Best For You.

# Big Government says :
9 April, 2008 [ 08:12 ]

Never fear Sucker, President Bush has a wonderful idea. "We need more government in the private sector to prevent this sort thing from happening again." Really, and if this isn't bad enough, the stupid feel good Democrats are suggesting, now get this; that Bush is not advancing this idea even futher? It is a double edge sword. But you are right. I hope Peru sits back and learns what not to do. More government is not the best idea.

# cuy_frito says :
9 April, 2008 [ 16:30 ]

This is a warranted fear.
The credit machine is beginning to roll in Peru,
and the general populace is not immune to it.

# Splaktar says :
10 April, 2008 [ 20:21 ]

Yep, a very warrented fear and something that banks and people need to keep an eye on.  I'm certain that there are some institutions that are doing the right thing, but equally certain that a number of them aren't being careful enough.

# George says :
17 April, 2008 [ 02:40 ]

1st, I think Mr. Carten needs to double-check some of these stories, Peñaloza "president of the Asociación Peruana de Empresas Inmobiliarias" is in fact president of an association consisting of himself and two friends. He does not represent any significant number of peruvian realtors.

2nd, Mr. Peñaloza does not have any kind of academic or economic practice credentials to assess the impact that the US financial crisis may have on financial and real estate markets in Peru. It is evident that he doen't understand some economic basics.