WHY COSTA RICA REAL ESTATE PRICES ARE GOING UP

On December 14, the Wall Street Journal reported on a phenomenon that Canadians also are beginning to discover.

According to the article: “The housing slump has sent many Americans shopping south of the border.

Existing-home prices in the U.S. dropped 4.5% in the third quarter from a year ago, according to S&P/Case-Shiller. But they are still climbing in much of Latin America and the Caribbean. Since 2003, annual home-price appreciation has been running at 20% in the Dominican Republic, and could reach 50% in the near future, according to Boomerang Unlimited, a Napa, Calif., real-estate investment advisory firm. In San Pedro, Belize, the average price of a 2,200-square-foot home was $697,500 in September, up 18.6% from a year ago, according to a study by Coldwell Banker; the price of a similar property in San Jose, Costa Rica, was up 20.7%, to $389,900, the study said.

Prices remain low compared with those in the U.S., particularly for waterfront properties. Because Americans generally buy and sell properties throughout the region in dollars, not the local currency, home prices don't fluctuate with the various exchange rates, as is the case in Europe. What's more, the dollar generally buys much more house in these countries than it does in the U.S., because labor and land are less expensive.”

Costa Rica has been popular for years because of its stable democracy, friendly people, beautiful beaches and stunning biodiversity. Starting with the 2003 opening of The Four Season Resort in Guanacaste, along the Pacific Northwest coast, direct international flights to the Pacific Northwest have increased exponentially, driving an investment boom.

What is new in 2008 is a policy change that looks to drive real estate values up even further. Real estate deals are transacted in U.S. dollars. Inflation in Costa Rica traditionally has been high when measured in the local currency, the colon, but low when measured in U.S. dollars.
The reason has been a creeping devaluation of the colon against the dollar. This devaluation ended in 2007; from January through November the colon was virtually unchanged against the dollar. On November 23, the dollar lost almost 4% of its value against the colon. In the less than two months since, the dollar has gradually lost another 4/10 of 1% against the colon, which would indicate an annual devaluation of about 2.5%.
In 2007, according to official government statistics, http://www.inec.go.cr/, Costa Rica’s general price inflation was 10.81%. Construction cost inflation (for construction of houses) was slightly higher, at 11.48%. These trends do not appear to be reversing.

What does this mean for a buyer who pays U.S. dollars? Just this. In order to purchase the same construction one year from now, it is prudent to count on annual construction cost inflation of 13%, plus or minus, measured in dollars. What does this mean for a developer? It is equally prudent to raise prices by 13% during 2008, just to stay even. And this inflation does not take into account inflation in land prices, driven by the same forces, plus supply and demand. No wonder, then, that prices were up 20% in 2007, according to the WSJ article.

Does this make sense? If you are as old as I am, you have been there before. When inflation was roaring in the United States in the 1970s, real estate was your refuge. The consumer price index was going up in double digits annually, and real estate was going up even more. In inflationary times, you want to own hard assets. Like real estate. And since real estate prices move in long cycles, you don’t want to bargain hunt in a falling market (trying to catch a falling knife), you want to buy in a rising market, with the wind in your sails.

What about a buyer who pays Canadian dollars? Economic Nirvana. A Perfect Storm.
The Loonie has risen by about 50% against the U.S. dollar over the past five years, from 65 cents to parity, making this an interesting time to buy Costa Rica real estate- priced in U.S. dollars. Combine this with no capital gains taxes and a ridiculously low ¼ of 1% annual real estate tax rate, and the Canadian investor’s stage is set. Now mix in a price of around $200 per square foot, compared to Canadian prices of around $500 per square foot. If you haven’t planned your exploratory trip, maybe you should. But before you go, there are pitfalls to be aware of. Is it possible to make mistakes in a foreign country? Oh yeah. Don’t leave your brain on the plane.

Ask us. www.millionairesecretscr.com. (The cr stands for Costa Rica).