Colombia’s real estate bubble, fact or myth?

Apr 1, 2013 posted by

Rich Holman

As record numbers of visitors, investors and business people visit Colombia and see the tremendous amount of new construction taking place, one of the first questions they ask is: “Is Colombia being overbuilt, is there too much inventory, is the property market overvalued and is Colombia having a real estate bubble?” The answer is no, not yet.

Colombia has received a lot of very favorable international press beginning in 2007 five years after Alvaro Uribe was inaugurated as president and who did so much to assuage urban security concerns that had plagued Colombia in the 1980s and 1990s.

In fact, beginning in 2002, real estate prices jumped around the country and in that year alone were up 20-25%. From 2003 to 2007 many parts of Colombia were seeing annual gains in the order of 10-15%. During the worldwide recession, where many parts of the western world were seeing real estate price declines of 30-50%, Colombian remained basically status quo. Its isolation for so many years from the international economy served it well during this traumatic time period.

In Medellin, where my real estate office is located, we basically saw a sideways market from 2007 to 2009. Sales were normal but prices did not really move up or down during this time period. In 2010, Medellin saw a price increase of 5.8%, followed by 6.2% in 2011 and 5.9% in 2012. This is pretty reflective of many parts of Colombia.

So is the real estate bubble coming?

I get 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 answer to Beverly Hills. Visitors say how can you keep building up this inventory? 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 there no bubble 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, etc. 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.

• Plus 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 more than 50% 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 moving into the boom phase. It has many phases left to go before the bubble occurs.

• In Colombia there is no leverage in the market place. Unlike Western economies where financing has been available with 0-20% down payment, interest-only loans, second mortgages, 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, five to 15 year amortizations and 30-40% down payment. Today the rates are in the 9-12% range with amortizations of five to 20 years and still 30-40% down payment for those who qualify. This is not the bedrock for speculation. There is no leverage in the Colombian real estate market place!

• Also a large number of real estate purchases in Colombia are cash transactions. Part of this is due to conservative savings practices, some is due to equity formation due to the market increases since 2002 and some may be due to movement of drug fortunes. But the point is, that cash markets are not characterized in bubbles.

• For Medellin, less than 1% of the real estate purchases are by foreigners. This begs the question, what will happen to prices if and when foreign buying becomes a factor? I believe this is representative of most Colombian markets with the exception of Cartagena which has substantial European and institutional investing taking place.

• If you grant Medellin as being a “cosmopolitan city”, which most people would agree, 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 nicest, newest and most modern buildings under construction – is cheap compared to the world cosmopolitan market. The secondary market, where we do most of our sales, prices are typically between $800 and $1400 per sq. meter ($74 – $130 per sq. ft). This certainly implies that Medellin and many other parts of Colombia are a bargain when comparing prices internationally. When have you ever heard of bargain prices in a real estate bubble?

• One hidden factor that further suggests Colombia is not in or near a bubble is that the “cost to carry” properties is so much lower than international markets.
  • Taxes here are around 1-1.5% per annum (paid quarterly) which is much lower than most international markets and sometimes the taxes are understated because the price on title is lower than the actual sales price (a discussion for another day).
  • Homeowner’s monthly association/administration costs are lower and tend to range, even in El Poblado, between $150-$300 per month. For lower income areas it is even less.
  • Utility costs are lower on average in many parts of this temperate country. In Medellin where heaters and air conditioners are not required, monthly utility bills are ridiculously 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 and the sellers motivated to hold onto their property.
  • 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 the country is vibrant offering sellers another option.
  • Thus there is very little pressure on sellers to sell and no indications that there is any panic or need to panic in this market with such low carrying costs.
  • The new construction market is helped along with strong demand for several reasons:
    • A new construction project offers many Colombians a way to finance over 1-2 years in the event they cannot qualify for a mortgage.
    • Culturally, Colombians love “new” so this is an additional component for new construction demand.
    • This gives new construction buyers time to sell their existing homes and move up the new housing ladder.

Thus I believe the Colombian “housing bubble” is uniformed diatribe. With a strongly emerging economy, a 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-electrical power and key agricultural commodities, an annual GDP increase of 4-6%, a low inflation rate and an expanding middle class, it appears that demand for real estate will continue to grow ahead of the ability for inventories to meet this demand. And again the “wild card” – what happens when the world wakes up and learns the truth about this great country and why it is wise to invest here and own assets denominated in Colombian pesos and not declining U.S. dollars?

I am convinced more than ever that Colombia’s best days are ahead of her. The “Colombian housing bubble” in 2013 is surely a myth.