Analyst senses a stiff correction in real estate market
The Costa Rican real estate sector over the next 18 months is going to go through a major correction, and will leave many foreign and local investors wondering what happened.
This sector was based on speculation and the belief was the market will continue growing unabated and at great multiples. Thus, again as everyone dreamed of making it rich or at least living a comfortable lifestyle hopes got ahead of the numbers. Several things clouded most real estate speculative investors rational thinking and allowed for today’s current overbuilding.
The housing market was moving along okay, but when the 2002 stock market correction happened this really changed the whole dynamics of the real estate market. The investor with money now needed a new place to park his or her cash, and of course real estate was the next answer. This opportunity also allowed small and new investors to enter the speculative market with interest rates at a 40-year low. To help matters, the industry introduced several new types of real estate loans to match any investor's needs.
Thus the gold rush was on!Capitalism worked great in this instance. It allowed many to get in early and flip the real estate investment, and the rewards were great. The problem is most are still holding on hoping for even greater returns, and, of course, some have just entered not knowing the cycle was nearing the downward spiral.
Why when it comes to money are humans so irrational? Did investors believe the market had no boundaries and would continue for years to come. The data was available for everyone to make a rational decision from rising interest rates, the median family income, to the labor and housing department data, consumer debit ratio, supply/demand, planning commissions, and sentiment on the street concerning personal finance (Michigan consumer sentiment index).
The speculation in markets like Miami and Las Vegas just shows how easy it is for one to lose sight of rational behavior. It was very evident that the market was providing too much supply and hoping for demand to continue. These markets have thousand of units just waiting for someone to purchase. The many months to come will be a great time to be a buyer of real estate here in Costa Rica. The problem is that the seller in some instances will take a terrible bath in the process.
Win-win is best, but that just isn’t possible in most situations. Mortgage companies also will begin to feel the pain. Foreclosure rates for this year alone vs. last year in the U.S. market are worth a look. Also new construction starts and the publicly trade home builder stocks are vital indicators.With the fear of increasing inflation (oil) and the uncertainty with the current geopolitical situations popping up around the world, one worries about placing one's assets.
The baby boom generation still has disposable income available for investing purposes, but the wealth effect they once felt has eroded, thus leaving them unsure of what to do next.
The market here in Costa Rica even as this is being written has seen large land transactions take place by foreign investors mostly from the United States.
They are currently taking big risks to continue growth in their portfolio. The best advice now is to wait and see how tourism moves forward and what potential exists for new real estate transactions. Costa Rica will see a flattening or decrease in tourism flow from the United States this upcoming season, which, of course, places even more burden on the market.
This isn’t all bad. The market here in Costa Rica was getting way ahead of itself with housing prices, and this correction will allow for a future with real estate values more in line with similar properties elsewhere.*Mr. Walraven, a San José businessman, has academic training in economics and is an observer of the regional financial scene. See another analysis HERE!
A guest editorial
By Christopher Walraven
*Special to A.M. Costa Rica
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