One of the first questions foreigners ask when visiting such cities as Medellin, Cartagena, Bogota and Santa Marta and seeing all of the new construction is, “Is Colombia on the verge of being overbuilt and are we sitting on top of a real estate bubble?”
Colombia’s Real Estate Market – Over or Under Valued?
Up until 2007 about 99% of the international news reporting regarding Colombia was negative. However after that time the reporting has been mainly positive and Colombia now enjoys a record amount of tourism and greatly expanding FDI (foreign direct investment). Much of this good news was credited to former president, Alvaro Uribe, for his policies that assuaged many of the security concerns that had plagued Colombia in the 1980’s, 1990’s and in early 2000.
In fact in 2002 real estate prices jumped in Colombia about 20-25%. From 2003 to 2007 many parts of Colombia were seeing annual gains in the order of 10-15%. During the world-wide recession, where many parts of the Western world were seeing real estate price declines of 30-50%, Colombia remained basically status quo. Its isolation for so many years from the international community served it well during this traumatic time period.
In Medellin, where my FAR International real estate office is located, we basically saw a sideways real estate market for 2007-2009. Sales were normal but prices did not really move up or down during this time period. For 2010 Medellin saw an increase of 5.8%, 2011 6.2% and 2012 5.9%. This is pretty reflective of other major cities in Colombia.
So is there a real estate bubble coming to Medellin and Colombia?
I receive this question a lot in Medellin as there is a lot of pre-construction high rise development going on all over town, and especially in El Poblado, Medellin’s corollary to Beverly Hills and Bel Air, CA.
Visitors say “how can you keep building up these new units”? “I see a lot of for sale signs in the windows”. “Surely it cannot sustain itself and prices will collapse”.
Since I have to explain this to prospective buyers it is critical that my research be credible and believable. So here is why I think that not only is the real estate market not overvalued in Colombia, but that there has never been a better time to buy, especially in Medellin:
- Real estate bubbles have a number of characteristics some measured by numerous financial indicators such as price to income ratio, affordability index, deposit to income, housing debt to income and other income and affordability ratios. For Medellin, and I feel many parts of Colombia, we are seeing a reduction in poverty levels and an emerging middle class. Thus more people can afford homes and demand is going up.
- Wages are pegged to the annual inflation rate which from 2002-2008 ranged from 4-8% and from 2009-2012 ranged from 3-4%. Thus much of each year’s price increases in real estate are offset by higher annual wages that are pegged to the national inflation rate. So there are no signs of runaway price increases by this measure.
- The five characteristics of a real estate bubble are displacement, boom, euphoria, profit taking and panic. Colombia is just now enjoying the boom phase. It has many phases left to go before any bubble occurs, if at all. Hopefully Colombia has learned from the Western world’s mortgage lending mistakes of the past.
- In Colombia there is no leverage in the market place. Unlike Western economies where generous financing was available with 0-10% down payments, interest only loans, second mortgages, home equity loans, ARM’s, etc. there is nothing like that in Colombia. When I first arrived to Medellin in 2006 the mortgages (which are almost impossible for foreigners to qualify for) being offered to Colombian citizens, who had proven credit histories and income, were 14-16% interest rates, 5-10 year amortizations and 30-40% down payments. Today the rates are in the 9-12% range with amortizations of 5-20 years but still require 30-40% down payment for those who can qualify. This is not a climate for speculation. There is no leverage in the Colombian real estate market place and hence no artificial demand being generated by greedy speculators.
- Also many real estate purchases in Colombia are cash transactions. Part of this is due to conservative savings practices, some is due to equity creation attributable to the market advances since 2002 and some may be due to movement of drug fortunes. The point to be made is that real estate bubbles are not characterized by cash purchases.
- For Medellin less than 1% of real estate transactions is comprised of foreign buying. This leads to the question, what will happen to prices if and when international buying becomes a factor? I believe this is representative of most of Colombia with the possible exception of Cartagena which has substantial European and institutional investing taking place driven by the incredible amount of new mega hotels being constructed.
- For Medellin, if you define it as a “cosmopolitan city”, which most people do, then Medellin is the lowest priced cosmopolitan city in the world on a cost per sq meter basis. Even El Poblado, where new construction pricing is around $1800 per sq meter (about $167 per sq foot) for the newest and most modern buildings under construction, is cheap to the world market. The secondary market where First American does most of its sales, prices are typically between $800 – $1400 per sq meter ($75 – $130 per sq ft). This certainly implies that Medellin, and many other parts of Colombian, are a bargain when comparing prices internationally. When have you ever heard of low prices in an overvalued market?
- One other important factor that suggests Colombia is not in a real estate bubble is that the “cost to carry” for property owner’s is lower than in other international markets. For instance:
- Taxes in Colombia are around 1-1.4% per annum (paid quarterly) which is lower than most international markets and sometimes the taxes are further understated because the price on title is lower than the actual sales price.
- Homeowner’s monthly association dues are lower and tend to range, even in El Poblado, between $150-$300 per month. For less expensive neighborhoods it is even less.
- Utility costs are lower on average in many parts of this temperate climate country. In Medellin where heaters and air conditioners are not required, monthly utility bills are quite low.
- Many properties are purchased with cash so there are no mortgage payments. Where there are mortgage payments, large down payments help keep the payments reasonable. Thus sellers are less out of pocket when seeking to sell their properties and less likely to panic and create a buyer’s market.
- ROI’s from rental income tend to average 5-10% if outside managed and 10-20% for self-managed properties. The rental market in Medellin and most parts of Colombia is vibrant offering sellers another option as opposed to selling.
- Thus with such low carrying costs there is less pressure on sellers to sell therefore helping maintain a stable market.
- The new construction housing market is continues to be firm for several reasons:
- A new construction project offers Colombians a way to finance over 1-2 years in the event they cannot qualify for or do not want a mortgage.
- Culturally Colombians love “new” so this is an additional component for new construction demand. They choose “new” over a good value older apartment.
- New construction financing gives buyers time to sell their existing homes and move their equity into a new apartment.
Thus I believe the Colombian “real estate bubble” is really just uninformed speculation. With Colombia’s strong emerging economy, its top performing stock market, with Foreign Direct Investment growing each year 20-30%, by being a key exporter of gold, silver, oil, gas, coal, hydro power and key agricultural commodities, annual GDP increases of 4-6%, a low inflation rate and an expanding middle class, it appears that demand for real estate will continue to grow and absorb the new housing inventories in a timely manner. And again we need to factor in probable new demand when the world discovers the truth about Colombia and why it is wise to invest here and own assets denominated in Colombian pesos and not declining Western currencies like the US Dollar and the Euro?
I am convinced more than ever that Colombia’s best days are just ahead of her. The “Colombian real estate bubble” is surely a myth and the time to invest in Colombia has never been better.
The author Rich Holman is the founder/broker/partner of FAR International www.farinternational.com a firm which caters to foreign buyers, renters and investors of Medellin real estate.