Why Costa Rica Real Estate Prices Are Going Up

By
Services for Real Estate Pros with The Oaks Tamarindo

People who have never visited Costa Rica always ask me the same three questions. Is it safe? How is the medical care? Is the real estate market going up?

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

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

Existing-home prices... are still climbing in much of Latin America and the Caribbean. ... 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.

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. Available airline seats are up 26% over last year.

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. 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%.  The main newspaper, la nacion, calls for 15% construction price inflation this year, in colones.

U.S. dollar price inflation was historically low because of 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 1/2 of 1%, which would indicate an annual devaluation of about 2.5%. Informed sources tell me that this will pick up soon, with an additional devaluation of 5 to 10% coming in 2008.

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. Add to that a dollar devaluation of 5 to 10% more.

What does this mean for a developer? It is equally prudent to raise prices by 13% to 23% during 2008, just to stay even. And this 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. At my project outside Tamarindo, Costa Rica, The Oaks Tamarindo, prices are up 11% so far this year, with more price increases in future.

Does this make sense? If you are my age, 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.  info@greensealrealty.com.

 

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Rainer
83,602
Matthew Zgonc
Aksland Real Estate - Modesto, CA
Realtor, CFS, CVS
Very interesting information. I know Costa Rica is beautiful and with our dollar deflating, it can only drive up prices.
Jan 28, 2008 01:29 AM #1
Rainmaker
417,264
Debbie Malone
Londeree's Real Estate & Property Management - Lynchburg, VA
From Lynchburg To The Lake (434) 546-0369
Hi Robert, interesting post. I've often thought about investing overseas as part of a retirement plan and Costa Rica keeps coming to the top of the list. Thanks for the information.
Jan 28, 2008 01:33 AM #2
Rainer
69,826
Jonelle Simons
Windermere Real Estate - Park City, UT
Costa Rica is gorgeous... I think we will be seeing more and more boomers flocking there for retirement as well!   Thanks for the info...
Jan 28, 2008 02:04 AM #3
Rainer
74,658
Darryl Glade
RE/MAX N.O. Properties - New Orleans, LA
New Orleans Real Estate
Great info. I visited Costa Rica a few years ago and was curious about the real estate. Thanks again.
Jan 28, 2008 03:21 AM #4
Rainmaker
13,705
Robert Irvin
The Oaks Tamarindo - Igloolik, YN

Matthew - you are right, prices are going up at least 20% a year right now, in both U.S. and Canadian dollars now that the Canadian dollar has stabilized with the U.S. dollar for a while.

Debbie - You really should look into it, investing is a lot easier when the wind is at your back.

Jonelle - Thanks! Costa Rica is gorgeous. I think there are really two different types of boomers coming here, snowbirds and retirees. Beaches for the snowbirds, the moderate central valley mountain climate for retirees.

Darryl - Thanks, you should visit again. In just three years, I've seen enormous change in certain areas, not so much in others. The Pacific beaches and central valley are booming, though.

Jan 28, 2008 11:29 AM #5
Rainmaker
614,211
Sharon Simms
Coastal Properties Group International - Christie's International - Saint Petersburg, FL
St. Petersburg FL - CRS CIPS CLHMS RSPS

Robert - are you seeing more interest and appreciation in fractional interests, condo projects, or single family homes?

Jun 16, 2008 01:40 PM #6
Rainmaker
13,705
Robert Irvin
The Oaks Tamarindo - Igloolik, YN

Sharon - Trivial arithmetic tells you fractional interests usually are a bum deal for the buyer. Heavily marketed in Jaco, but.... Because of the importance of planned communities, including security when you are not there, condo projects and lots in high-end communities seem to have the best appreciation. Plus, if you are buying in one of the early phases, you have built-in appreciation if the developer is reliable.

Jun 29, 2008 02:26 PM #7
Rainmaker
614,211
Sharon Simms
Coastal Properties Group International - Christie's International - Saint Petersburg, FL
St. Petersburg FL - CRS CIPS CLHMS RSPS

Robert - ah, there's the rub - knowing which developers are reliable. That's where a local contact in Costa Rica is important. From what I hear around the world, fractionals through the St Regis or with a qualified, reliable destination club can have good appreciation and value. I'd stay away from single owners who want to fractionalize. Many people still associate them with time shares, which nearly always depreciate in value.

Jul 02, 2008 10:01 AM #8
Rainer
12,397
Lisle Head
2Costa Rica Real Estate - International, IT
Costa Rice Real Estate - Costa Rica Real Estate Investments

Pura Vida

Aug 28, 2008 08:48 AM #9
Rainmaker
614,211
Sharon Simms
Coastal Properties Group International - Christie's International - Saint Petersburg, FL
St. Petersburg FL - CRS CIPS CLHMS RSPS

We had a wonderful exploratory trip to Costa Rica this month. Indeed it was Pura Vida! It was only a long weekend, but we did get to Jaco.

Aug 28, 2008 12:37 PM #10
Rainmaker
13,705
Robert Irvin
The Oaks Tamarindo - Igloolik, YN

Sharon - Congratulations on your trip! If you do your homework and move forward step by step, you will be well rewarded. For what it´s worth, I receive a lot of offers each month from people wanting to sell land, and am able to keep my finger on the Guanacaste land market through these offers. Thanks to the U.S. market, there are a lot of land deals out there right now at prices half what they were asking last year. I am not talking about individual lots, but about larger parcels in the million dollar plus range. A lot of this land was purchased a few years ago by groups of investors, and now some of them need to sell. As far as condos and houses go, I think the market is holding up pretty well. The big variables are location and quality of construction. Good product is still selling, marginal product not. Kind of like in Florida, South Beach is doing OK, downtown Miami not.

Sep 01, 2008 11:24 AM #11
Rainmaker
614,211
Sharon Simms
Coastal Properties Group International - Christie's International - Saint Petersburg, FL
St. Petersburg FL - CRS CIPS CLHMS RSPS

Robert - thanks for the information. I had heard that the market for flipping large parcels is long gone - glad to hear good individual product is holding its own.

Sep 01, 2008 01:43 PM #12
Anonymous
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May 14, 2009 07:49 AM #13
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