Post image for Events Up North Put Chill on Real Estate Here

Events Up North Put Chill on Real Estate Here

by Garland M Baker on June 19, 2006

Overbuilding, speculation begin to take toll

The five-year real estate sales boom is winding down fast in the United States. Costa Rica’s real estate market is slowing too. Skyrocketing property values may be a thing of the past there and here.

Many speculators in the United States are now walking away from their deposits or trying to wiggle out of their contracts and losing substantial money in the process. Others are stuck with their investments because they did not see the reversal coming.

As home equities soared up north, many owners borrowed heavily against their holding there to buy property in Costa Rica. Usually this is the case in fast moving markets. People get overconfident and borrow, margin, or otherwise overextend themselves to chase increasing values.

Buyers of property up and down the Pacific coast here found a feeding frenzy during the last few years. Most of them were unaware that frenzies usually signal a top and that they should watch out and not dive into the coming quagmire.

Panamá and Nicaragua have added to the problem by diluting the real estate market in the region. Land values are lower in Nicaragua and are attracting buyers who do not want to pay exorbitant prices for a parcel of land overlooking the water. Panamá offers other benefits to expats, including different kinds of residency and tax incentives that draw new residents there.

Tourism markets follow the laws of natural growth. They have a life cycle taking the shape of a bell curve. The cycle begins with the intrigue of a new place. It continues through a growth phase and then reaches maturity, peaks and then declines. The Costa Rican real estate market is tied strongly to tourism.

Real estate values have increased for a variety of reasons in Costa Rica. Here are a few:

One. The real estate roller coaster ride of the United States and some places in Canada provided buyers with cash and/or equity to play the real estate market here.

Two. The increase in tourism to Guanacaste because of Daniel Oduber international airport in Liberia and the Puente Tempisque Amistad Taiwan or Tempisque Friendship Taiwan Bridge jump started the growth phase of the tourism cycle in the region.

Three. Professional real estate investors, knowing the workings of markets, bought up land and turned it over quickly to newcomers artificially causing the feeding frenzy. They reaped incredible profits in the process.

How do the rich get richer and the middle class stay middle class?

Savvy investors are pulling out of real estate in United States and Canada for the time-being, selling instead of buying. They know from experience that those second and third mortgages people used to buy property in Costa Rica will soon have an impact on the market here. The rich get richer by waiting for those who over-extend themselves to sell, and then they gobble up the deals.

The seller’s market is probably over here. A buyer’s market may replace it sooner than most people expect.

Too many factors point in this direction.

Many people took huge hits in the stock market lately. Interest rates are rising. Many people used adjustable-rate mortgages to refinance or borrow. Fears of inflation are in every financial analyst’s nightmares. The dollar is weakening, and there is talk that the euro will replace it for pricing oil in world markets, ending its dominance.

Many tourists coming to Costa Rica last year said they would not come back because of the horrible roads, escalating prices of everything, not just real estate, and fear for their security. Crime is on the rise throughout the country. This fact signals the turn over the top of the bell curve in most tourism cycles and the new direction is downward, directly affecting the real estate market.

The question is, will Costa Rica find a soft landing or crash and burn with a thunderous decline in real estate values?

The good news is property values as a whole over time have a positive trend. Today there are over 6 billion persons on earth, a number which could rise to 9 billion by 2050. Population grows geometrically, rather than linearly which is why the numbers can increase so quickly. The Costa Rican population is expected to grow 33 percent in the next 24 years.

As populations rise, finding one’s place on earth becomes harder and harder. Costa Rica, Nicaragua and Panamá are attracting baby-boomers finding property now for retirement to escape the hustle and bustle of the world.

These are arguments supporting a soft landing. However, all markets that overgrow usually overcorrect before returning to some normality.

Leave a Comment

Previous post:

Next post: