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 LIMA: Falling mortgage costs, robust growth and confidence in President Ollanta Humala's economic team are propelling a real estate boom in Peru as more people pursue the dream of home ownership.

Several years of sharply rising prices and construction activity have prompted skeptics to say they fear a bubble is forming.

But policymakers and builders contend prices are still reasonable, the sector is not overrun by speculators and there is plenty of pent-up demand stemming from decades of underinvestment amid the instability of the 1980s and 1990s.

After a sharp contraction around June's presidential elections, when building screeched to a halt and apartments were left vacant, dynamism is now returning to the sector. The market had paused until the former leftist radical Humala appointed a market-friendly economic team and pledged to promote investment.

Peru's central bank says the construction sector will grow just over 8 percent in 2012, compared to the 4.5 percent expansion it is expected to track this year and the 17 percent surge in 2010.

Peru's economy has soared over the last decade, initially driven by rising prices for its mineral exports, but more recently by the construction and housing sector. The economy is forecast to grow around 5.5 percent next year after expected growth of nearly 7 percent this year.

Builders in Peru plan to increase the number of homes they offer by 18 percent in 2012 from a year earlier. Despite a global economic slowdown, 65,000 units are to be built next year. Some executives say demand fueled by rising incomes and better access to credit is growing faster than new housing supply, meaning the market should be strong for years.

"New supply today is minimal and does not cover demand in the sector, which is why 2011 has been good and 2012 will be even better," said Carlos Chuman, General Manager of Shamrock, a real estate firm.

Local consultancy Tinsa estimates there is still an unmet demand for 400,000 homes from people in Peru who could afford to buy them.

That number is expected to grow by 50,000 each year, particularly as more people join the middle class. The Andean country's poverty rate has fallen sharply over the last decade to around 30 percent from above 50 percent.

Enrique Espinoza, the director of the construction chamber CAPECO, said the foundations of the housing boom are solid. Year after year Peruvian purchasing power has improved as access to credit improves in the fast-growing economy.

"Families see a very good chance of saving and fulfilling their dream of having equitable housing," Espinoza said.

The volume of new home loans issued will continue to grow around 20 percent in 2011 and 2012, three times faster than projected economic growth, according to Banco de Credito, Peru's largest bank.

The cost of taking out a loan has also dropped.

The average interest rate for mortgage loans in Peru is around 8 percent, about half of the 15 to 20 percent rate found a decade ago. It is likely to keep falling though, because rates are still high compared to neighboring Chile, which has an annual interest rate on mortgage loans of 4 percent.

The Peruvian central bank's product manager Lussiana Villena confirmed that 32,000 mortgage loans would be issued in Peru next year compared to 28,000 expected in 2011 for up to $7 billion, nearly 4 percent of gross domestic product.

"The level of family income has increased over the past eight years by 80 percent and that improves people's credit rating and helps lower lending rates," said Villena.

Some analysts fear the fast uptick in housing prices, expected to grow 12 percent in 2011 and 2012, is forming a bubble that could burst at any moment.

"The possibility of a bubble is greater all the time," said Juan Jose Marthans, the former head of Peru's banking and insurance regulator. "Peruvians are aware of how property prices, mainly urban, are increasing," he said.

But Central Bank President Julio Velarde disagrees.

"Those who have bought houses to speculate are still under-leveraged, and the mortgage loan portfolio is still a small part of total bank loans," he has said.

Those who work in real estate, including Chuman of Shamrock, firmly deny the existence of a bubble and say the price rise is due exclusively to the scarcity of land in Lima. Land is still much cheaper than in other countries, they say.

Property prices in Peru are the second cheapest in Latin America according to the Global Property Guide, a real estate newsletter, at around $1,000 square meter. Land in Lima costs 30-45 percent less than in Santiago and Bogota, Chuman said, despite a doubling of prices in wealthy neighborhoods.

Copyright Reuters, 2011

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