Author: Rachel Williams
Topic: Exchange rates and housing affordability
Why is the Colombian Peso so Weak when Compared to the United States Dollar?
At the time of writing this article, 1 United States Dollar (USD) is equivalent to 4,391.52 Colombian Pesos (COP) (Money Converter, n.d.). When hearing that statistic many may ask why? Why is the Colombian Peso so weak compared to the United States Dollar?
The Colombian economy has been struggling for decades for three main reasons: it depends on the exchange of unstable resources, has a history of unreliable political leaders, and is currently facing a big fiscal and commercial deficit (Universidad Nacional de Colombia, 2021).
Regarding the Colombian economy’s dependence on unstable resources, the economy heavily relies on the exportation of a few products, especially oil (International Monetary Fund Western Hemisphere Department, 2023). Overall, this reliance is detrimental because the demand for these goods is variable and depends on seasonal trends and the economic situation of other countries. Since Colombia does not have a diversified export base, there is low global demand for the COP which weakens the currency.
In terms of Colombia’s history with unreliable political leaders, the leaders of the Colombian government have a history of committing scandals. Take the May 2024 embezzlement of disaster relief funds by the regional development advisor (Worldview, 2024) for example. The corruption within the government spills into other institutions. For example, it is thought that bribery, money laundering, embezzlement, nepotism, extortion, and drug trafficking run rampant in Colombia because the police, military, and total government hierarchy are deeply corrupted. The political turmoil within Colombia enables uncertainty which generates less trust and demand for the COP.
Concerning Colombia’s large fiscal deficit, after the COVID-19 pandemic, Colombia invested billions of COP into stimulus policies to decrease poverty, human capital, and climate challenges (World Bank Group, n.d.). The Colombian government did not have the funds to invest in such programs and is now facing a significant debt burden. The Colombian deficit situation further adds to the perception of instability around the Colombian economy which further decreases demand for COP.
Thus, Colombia’s current economy is unstable because of its reliance on a small number of exports, its political instability, and high fiscal deficit. Due to the country’s current state, the Colombian Peso has decreasing demand on the global market and is a weak currency.
What is the Impact on the Real Estate Purchasing Power of Colombians in Medellín?
Due to the instability of the Colombian economy and the weakness of the COP, the average Colombian makes a minimum wage of about 1.3 million COP or approximately 295.96 USD per month (WageIndicator, 2024). To give some context, the average American makes about 6,300 USD per month as a part of the middle class and the minimum wage is 1,300 USD per month. The average cost of a one or two bedroom house in Colombia is $376 – more than the average Colombian makes in a month. In tourist cities, such as Medellín, housing is even less affordable for Colombians as many Americans purchase homes with their stronger currency to profit from tourist Airbnbs or VRBOs.
For example, if one looks on realtorinternational.com (n.d.) for housing for sale in Medellín here is what they might find:
- A 6 bedroom, 7 bathroom house worth 1.18 billion COP or around 269,000 USD
- A 5 bedroom, 2 bathroom house worth 430 million COP or around 100,000 USD
- A 3 bedroom, 1 bathroom house worth 113 million COP or around 26,000 USD (the cheapest house on the site on November 23rd, 2024)
- A 3 bedroom, 2 bathroom apartment worth 3 million COP per month or around 700 USD per month
- A 3 bedroom, 2 bathroom apartment worth 770,000 COP per month or around 175 USD per month (the cheapest apartment on the site on November 23rd 2024)
As one can see, only the cheapest apartment at 175 USD per month on realtorinternational.com (n.d.) is affordable for the average 1 income Colombian making 295.96 USD per month or the average 2 income Colombian family making 591.92 USD per month. In contrast, the bottom 3 options are affordable to the average American making 6,300 USD per month. This affordability has been attracting more and more Americans annually as word gets out (Macia, 2024).
Thus, the USD to COP exchange rate significantly influences the dynamics of the Medellín housing market and in turn the affordability of housing for Colombians. It is essential that Colombian policy makers recognize this correlation and attempt to revise policies that either increase the value of the COP, decrease housing costs, or increase wages.
References
International Monetary Fund Western Hemisphere Department. (2023). Colombia: 2023 Article IV Consultation—Press release; staff report; and statement by the executive director for Colombia [IMF Country Report No. 23/121]. https://www.elibrary.imf.org/view/journals/002/2023/121/article-A003-en.xml
Stratfor Worldview. (2024). What another corruption scandal means for Colombia’s fragile government. https://worldview.stratfor.com/article/what-another-corruption-scandal-means-colombias-fragile-government
KKC. (n.d.). Corruption in Colombia. https://kkc.com/corruption-index/corruption-in-colombia/
World Bank Group. (n.d.). Colombia overview. https://www.worldbank.org/en/country/colombia/overview
WageIndicator. (2024). Minimum wage in Colombia. https://wageindicator.org/salary/minimum-wage/colombia
Realtor.com. (n.d.). Real estate listings in Medellín, Antioquia. https://www.realtor.com/international/co/medellin-antioquia
Medellin Buzz. (n.d.). Moving to Medellín: What to know before you go. http://medellinbuzz.com/moving-to-medellin/