Escape Artist on the Global Market
Since we are now living in Costa Rica, I'm on a few international email lists: International Living.com, Sam's Prima Panama blog and Escape Artist. This morning, I got a link to a very interesting article on Panama real estate. Panama used to be the #1 recommended outside-the-U.S. retirement destination, but recently slipped to #4 due to its skyrocketing real estate prices (sound familiar) and rise in crime.
There is much talk here in Costa Rica - mostly among the local real estate agents - on whether or not the housing decline in the U.S. will affect Costa Rica's market. The agents say, "No." (What a surprise.) Everyone else says, "Of course it will."
Of course it will. When the U.S. sneezes, the world gets a cold. Or vice versa. I found this morning's Escape Artist article (read the whole article at the link) particularly interesting from a global point of view. Since a lot of the article deals with moving to Panama, I've copied the pertinent real estate parts of the article here:
"Mark Twain once said, “History does not repeat itself, but it does rhyme.” So as time goes by, Panama’s housing boom is increasingly looking like its late American par, the bursting mother of all housing bubbles.
Boomers looking for well-balanced information about Panama will find out rather promptly that it is one very scarce commodity these days. The wizards of R.E.A. (a.k.a. real estate advertising) and their well-off Maecenas have managed to create, out of a country that could be beautiful indeed, a three-headed Dragon (developers, brokers and profiteers) that can devour almost anything crossing in its path.
Panama, long time renowned by its famous navigable canal and the good-nature of its people, has more recently been sold as the newest Gold Rush of the 21st century.
Unfortunately, current American history shows tangible proofs that the speculation beast, once freed by greed and deception, will sink its fangs into both men and nature, swallowing the whole landscape. As a result, our world could be awfully transformed in a gloomy realm of negative equity and amortization.
But reckoning days are coming!
An impartial observer neither should have any stakes in the game nor should he/she kneel to serve those with a vested interest. Regrettably, the great majority of “self-proclaimed” experts in Panama are somehow connected to the local real estate and tourism industries.
Sadly, Saint George is not out there slaying the Dragon. Like it or not, Big Money rules."
And further down...
"High-end real estate property at bargain prices? They should be kidding!
Three years ago, the average ocean front-side condo at Balboa Avenue was priced at $450 per square meter. Nowadays, prices have skyrocketed up to $3,500 and even higher in certain building complexes, up to $5000M2!
In a recent report analyzing Panama’s housing boom, The Financial Times warned about the fact that the median sales price of Panama City new condos is actually getting higher than the median sales price of existing single-family homes in America! According to the London’s newspaper, the “baby boomers” could start to lose interest in buying a second home or a two-bedroom apartment in Panama City for $224,500 or more, which not long ago could be bought for $60,000 or $80,000.The National Association of Realtors reported that US median national home price was $224,500 in August and prices are going down still further.
Link to WSJ article 9/26/07 (need to be a subscriber to read it all).
“One Prima Panama study looked at immigration trends from the US and residency visas issued to foreigners by Panama’s government as a proxy for end-user demand. Its findings suggest that the level of immigration might be insufficient to justify the building of so many luxury apartment complexes targeting foreign purchasers, and that the perception of foreign demand could be overly optimistic. There are growing concerns that the building activity is too much for Panama’s market to absorb, particularly as property values are rapidly rising. The activity is even larger than recent property development in Miami metro area, which is a wealthier and internationally oriented city and business centre for Latin America.” (Miami is actually a deflating bubble just waiting to burst!)
The easy dollar’s pump engine fueling Panama and Central America’s construction boom is badly sputtering. America’s subprime mortgage melt is just beginning and the landslide has yet a long way to go. US sales of existing homes slowed to their most sluggish pace in five years. Home prices fell for a record 12th straight month. The index that tracks signing of contracts for sales of existing homes tumbled 12.2 percent for July, to its lowest level in more than six years, the National Association of Realtors reported. New-homes sales tumbled in August to the lowest level in seven years, a stark sign that the credit crunch is aggravating an already painful housing slump. Sales of new homes dropped by 8.3 percent in August from July.
US house prices are likely to fall significantly from their present levels, the former Chairman of the Federal Reserve Alan Greenspan has told the Financial Times, admitting that there was a bubble in the US housing market. “We should be seeing, in some real estate markets, 30 and 40 percent declines in prices," said Joel Naroff, President of Naroff Economic Advisors.Link to MSNBC article on U.S. Housing 8/27/07
Rodrigo Rato, the Managing Director of the International Monetary Fund (IMF), considers that the real effects of the housing and mortgage crisis upon the broader US economy will manifest more obviously by 2008. Europe won’t be spared either.
Link to article on Rodrigo Rato 9/24/07 in Spanish
Panama’s housing boom is neither healthier nor more viable in the long haul than its doomed American par. Condos’ flippers believing that there is enough charm here to trap ten legions of baby boomers are truly delusional. The odds that 40,000 American families would decide to dwell here are as good as the chances for the US government to retake the Panama Canal at anytime soon. Besides, with so much inventory becoming available, price levels, currently being driven up by speculation, are very vulnerable to plunge hard. Profiteers are well set for one major disappointment.
Last August, Ivan Carlucci, President of the Panamanian Association of Real Estate Brokers (ACOBIR), denounced that around 30 unlicensed real estate’s brokerages were selling new projects not yet approved by the authorities. Mr. Carlucci referred critically to the lack of control by the local authorities, asking for stiffer fines. Like a plague of locust, illegitimate intermediaries, as well as local and foreign hustlers, have spread nationwide, trying to make an easy buck from unsuspected buyers.
Many local short-sighted economists and investors are bragging that the Panamanian economy is shatter-proofed against any major financial storm. But if a severe slowdown or a full-blown economic recession finally strikes America, unchaining a rippling reaction throughout the world’s markets, the Panamanian economy will hit the wall too. No country is totally shielded in a globalized economy.
The New Herald’s journalist Andres Oppenheimer, a respected specialist in Latin American affairs, recently wrote that in the event that the American economy could experience a prolonged slowdown, Latin American exports will tumble. Mexico and Central America, both closely tied to the US market, would be the most affected.Link to Nuevo Herald (Miami Herald Spanish edition) article 8/23/07
Actual economic grow rate in Latin America is too dependent on external factors… The region’s economy has mostly benefited from rising imports of raw materials by US and China, pushing prices up… but it’s poorly related to the region’s competiveness in Global terms. When the US economy slows down further, causing China’s to decelerate too, both world’s economic giants will reduce imports from Latin America and the region won’t be able to sustain the actual growing rates.
Link to Nuevo Herald article (in Spanish) 9/23/07
Jose Luis Machinea, Secretary-Executive of the Economic Commission for Latin America and the Caribbean (ECLAC), recently stated that “if the United States crisis drags down the world’s economy for more than six months, Latin America will be definitively shocked.”
The Wall Street Journal’s columnist E.S. Browning recently wrote, “The Federal Reserve cut interest rates… in order to address a pressing concern: the risk of recession and of a breakdown in credit markets. By lowering rates… however, the central bank has revived another fear that had been dying down: inflation… Which way is scarier?”"The global economy appears to be at a turning point," said Paul Sheard, an economist at Lehman Brothers, adding it had been hit by two related shocks. “First, the US housing recession has turned out to be considerably worse than we envisaged...Secondly; the subprime mortgage meltdown has triggered a broad sell-off across capital markets, with incipient elements of financial contagion and panic." He added that the key uncertainty revolves around how long and how severe the US housing recession turns out to be and whether it tips the US economy into, or close to, recession."
Link to Financial Times article 9/15/07
Fears that the troubled housing market and credit problems could short-circuit the six-year-old economic expansion have shaken Wall Street. The biggest worry is that people and businesses will cut back on their spending and investment, throwing the economy into a tailspin. Former Federal Reserve chief Alan Greenspan, in an interview with The Associated Press recently, said the odds of a recession are now higher than one-in-three but are still under 50 percent.
Kerry Killinger, C.E.O. of Washington Mutual (WAMU), the largest U.S. thrift bank, declared that America’s housing market faces rising delinquencies and foreclosures, higher borrowing costs, tighter underwriting standards and tough capital markets, "creating what we call a near-perfect storm for housing.”
Panamanian banks are not blind to the new realities. Capital Financiero, one local magazine, recently reported that the banking sector has established new conservative policies regarding construction financing. Before, they usually require 30% of a project’s pre sale at the time of providing financing. Now, they are requiring an average of 40% to 50%. Additionally, down payments for foreigners were raised up to 15%. Banks are carefully reviewing sales contracts and verifying foreigners’ incomes and nationality.
Furthermore, they are frequently limiting the sales price risk to $1,500 per square meter (10.7639 ft²). This is very bad news for flippers, because for more than a year now, due to the rampant speculation, prices have been pushed upwards, sometimes reaching up to $5000 M2 at certain locations with the highest appreciation rating. Logically, banks are not supposed to finance more than the real worth of any building project.
How many boomers will be prone to overpay for properties that could be losing value instead of adding it?
How many of them will be willing to overpay for condos in which they could not live for more than 30 days, unless obtaining a 60-day extension to their tourist visas or a pensioner’s residency? The 30-day limited tourist visa does not affect profiteers (Most flippers do not live in Panama), but it surely affects their favored prey: American baby boomers."
Panama's market seems destined for a big correction. I think Costa Rica's is not far behind and I believe these two countries will see an even bigger correction than the U.S. The amount of building here is unbelievable. Costa Rica is the size of North Caroline and there are condos being built for every single one of the 77 million baby boomers. We shall see.
