Evaluation of alternative mortgages designed to reduce the negative effects of inflation on the affordability of homeownership: a case study in venezuela

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Evaluation of Alternative Mortgages Designed to Reduce the Negative Effects Of Inflation On The Affordability Of Homeownership:
A Case Study in Venezuela


José Rafael Velásquez Betancourt

B.S. Urban Planning, 1981

Universidad Simón Bolívar

Submitted to the Department of Urban Studies and Planning
in Partial Fulfillment of the Requirements for the Degree ofMaster of Science in Real Estate Development

at the

Massachusetts Institute of Technology

September, 1996

Copyright 1996
José Rafael Velásquez Betancourt
All rights reserved

The author hereby grants to MIT permission to reproduce and to distribute
publicly paper and electronic copies of this thesis document in whole or in part

Signature of Author_______________________________________________________
Department of Urban Studies and Planning
July 31, 1996

Certified by ______________________________________________________________
Dr. Franco Modigliani
Institute Professor, Emeritus
Thesis Supervisor
Accepted by _____________________________________________________________
William C. Wheaton
Chairman, Interdepartmental Degree Program in RealEstate Development

José Rafael Velásquez Betancourt
Submitted to the Department of Urban Studies and Planning in Partial Fulfillment of the Requirements for the Degree of Master of Science in Real Estate Development


As in mostcountries over the world, in Venezuela homeownership is considered a social good, but in spite of the efforts made during the last 50 years to improve the homeownership affordability, the number of houses produced every year is smaller than the population’s growth and the housing deficit increases every year.

During the last 10 years, the basic economic conditions in Venezuela, have severelyaffected housing affordability as inflation rates rose and interest rates became more volatile.
In order to fight the volatility of interest rates and support the housing affordability, the Venezuelan government have created by law, a pool of resources nurtured by private and public obligatory contribution, that is used to lend money at subsidized fixed interest rate, creating in consequence,negative net present values from these operations.

This thesis explores the governmental housing policies implemented in Venezuela during the last 10 years to raise homeownership rates and improve housing conditions. It also examines the interest rate as the component that maintains the buying capability of money in inflationary environment and the different results of the theoretical applicationof alternative mortgages designed to reduce the negative effects of inflation on the affordability of houses.

Results of simulations for the 1976 to 1995 period are presented that demonstrate that there are at least three different mortgages designs that surpass Venezuelan current housing financial system. MIT and Mexican Dual Indexed Mortgage proved to be the best alternatives for protectinglenders’ interest in an inflationary environment, providing at the same time

Thesis Supervisor: Dr. Franco Modigliani
Title: Institute Professor, Emeritus

Acknowledgments and Dedication

My deep gratitude to Professor Franco Modigliani for his wise and cordial guidance. His patience, modesty, sense of humor and profound knowledge of the topic made this thesis a pleasurable and challengeexperience. I also wish to thank Professor Donald R. Lessard for acting as reader for this thesis and providing me with valuable suggestions along the study. Of course, I remain solely responsible for remaining deficiencies of fact or interpretation.

I am indebted to Gustavo Izaguirre and Omar Pernía who actively cooperated searching and sending me from Venezuela the necessary information to...
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