The great moment of Colombia real estate market: Learning the lessons from the past.

A few days ago one of my foreign clients asked me, surprised with the large number of construction projects he saw that were taking place at each corner, Where did so many buyers came from?.

The truth is that even being part of this business on a daily basis, the question also took me by surprise. The fact is that those (including me) who are dedicated to the development and marketing of real estate, sometimes we forget to think about how much absorptive capacity the market has at some point, and maybe sometimes we let ourselves be carried away by the euphoria of the business gains we tend to believe that this is going to last forever.


In Colombia, real estate investment has always been profitable in the long term. Real estate ownership has been associated with prosperity and people's desire of overcome. In addition, economic conditions in recent years have been favorable to create the moment we are passing through, with high returns on real estate investment.


One of the most obvious primary reasons is the growth of the economy. The Colombian economy has enjoyed an steady growth over the past 5 years with average rates above 6%. In the first quarter of 2007 , our country reached 8% of growth !, the highest rate since the past 30 years.
As the local economy grows, real estate prices go up, and when it decreases prices fall as well. It makes sense, Isn't it?


An important factor has been stability in long term interest rates . The average interest rates for social housing loans ( those ones subsidized by the government), currently are at 16%, one of the lowest since 2002.


Another way to analyze the behavior of the real estate market, is keeping an eye on unemployment levels. Although until June 2007 at nationally level the unemployment rate has had increased from 10.5% to 11.1%, in the 13 major urban centers of the country, it declined from 12.5% to 11.7%.

This largely explains booming cities such as Bucaramanga, Pereira and Cúcuta which had the largest decrease in the unemployment rate, and in larger cities like Bogota, Medellin and Cali with a moderate decline.


Economic growth, low unemployment rate, stable interest rates, increase in foreign investment, all these are good signs. This would partly would answered the question of my client. But then comes the big question: Until when?.


Just take a look at what is happening in the United States to compare and analyze our experiences with the common factors in cycles in which normally moves the construction business.


When I started investing at the end of 2004 in the US real estate market, southern Florida, annual appreciation rates since 2000 were on average 20% to 25%. Many projects were sold 3 or 4 times in absurdly short periods of time and each time new projects were pulled out to the market for sale.


Even the most renowned experts and analysts in Colombia, who were also investors in this market, predicted that this situation would last forever. What happened? In 2006 prices slowed their rise, thanks to the "flexibility" of banks many investors leveraged on future appreciation of the properties, but later they realized that they were not able to pay their mortgages, triggering a fall in prices which consequences that we have not seen yet.


We the Colombians learned this lesson at the end of the nineties, when after enjoying also a speculative boom years between the 90 and 95, the increase of long-term interest financing rates made the system to collapse, leaving serious problems to the financial system, to developers and in a bigger proportion to the final buyer. The hangover lasted at least 4 years.


At this time there are more favorable than unfavorable factors to assume that the rise in real estate market in Colombia can be kept about two more years. A recent report from Fedelonjas suggests that “investing in real estate in 2008 is still a good business, because the total income ( value increase plus rental income) will exceed the 16 per cent per annum”; However we must not forget the lessons of the past and the one is living our northern neighbor, so that the actual moment not lead us to make the same mistakes as before.

Comentarios

adrin ha dicho que…
Great articles. Interesting read.

Boise real estate

Entradas populares de este blog

Economic slowdown: Is it Good or bad for the real estate market in Colombia?.

Ley facilitará el retorno de los colombianos que viven en el exterior

Estan los Precios de la finca raiz en Colombia sobrevaluados?