Ecuador’s hot real estate market is cooling down.
Following more than six years of eight percent annual appreciation nationwide and double-digit appreciation in some markets, including Cuenca, real estate developers and agents say they are seeing a slowdown in both the rate of appreciation as well as number of sales.
Although most real estate experts don’t see a bubble similar to the one that burst in the U.S. in 2008, they say they are seeing a market top.
“We are beginning to see an oversupply of housing for middle- and upper-middle-class buyers,” says Roberto Vega, general manager of Smart Research in Quito. Vega describes middle- and upper-middle-class housing as that costing more than $80,000. “We are seeing this in the more active markets, such as Quito, Guayaquil and Cuenca, although there are other markets where there is still a shortage of housing and good demand.”
A Crowded Market, Declining Sales
Jaime Rumbea, director of the Ecuador Real Estate Association, says that there is a record number of properties for sale in most areas of the country and properties are taking longer to sell. “Eventually, this will stabilize prices and could even bring them down in some cases.” Rumbea also reports that the overall number of sales is declining nationwide and says this is a classic sign of a market top.
Real estate agents in Cuenca agree, and say that many properties on the market today could sit for a year or two before selling.
Ramiro Gonzalez, director of Banco del Instituto Ecuatoriano de Seguridad Social, or BIESS, which provides more than half of the mortgage money to the country’s reasl estate buyers, believes that speculators in the larger markets are partly responsible for driving up prices. “I worry that they are killing the hen that laid the golden egg,” he said, adding, “It’s not just speculators who are responsible, however. Many home buyers have become victims of the mentality that prices will always go up and that real estate is a very lucrative investment.”
Many, including Rumbea, point out that BIESS has played a major role in driving the market. BIESS was established to use social security funds to finance housing, particularly for lower income families, and has financed tens of thousands of home purchases since 2009.
Vega says that price increases in the last six years are not simply the result of speculation and expectations of long-term profit. “There has been an enormous run-up in the costs of materials, especially since 2006. Such things as concrete and steel have gone up almost 150% and this is a major factor in prices. Labor is also much more expensive.”
Another factor pointing to a market top is the reduction in mortgage money available. “In 2010 and 2011, the number of mortgages written by commercial banks was increased by 10% and 12% a year. In 2012 the increase was only 2% and it’s possible that we will see a decline in 2013.” He also predicts that BIESS will reduce the number of loans it is making.
The Cuenca Market
Although there are as many as 30 large condominium projects in various stages of construction in Cuenca, the number is down from 40 or 45 in 2011. The Cuenca Chamber of Construction reports that fewer building permits were issued in 2012 and it expects the number to decline further for 2013.
Both builders and real estate agents report a decline in the number of sales to Ecuadorians living or returning from overseas, particularly from the U.S. and Spain. “This group has been the real force behind condominium sales in uenca,” says real estate agent Juan Rodriguez. “Now we are seeing fewer sales and I think the trend will continue.” Rodriquez says that in 2010 and 2011, as much of 35% of all sales in Cuenca were to this group and those sales today have dropped by 30% to 40%. Rodriguez says that is difficult to figure an accurate number of purchases by Ecuadorians living overseas because many of them are made by family members living in Cuenca.
Rodriguez says that sales to North American expats have also dropped. “In 2010, we estimated that 1.5% of sales were to extranjeros but the number is probably less than 1% today.” He says that foreign buyers were not a factor in rising prices and they won’t be one if prices level out. “A friend from the U.S. tells me that gringos have an attitude that ‘it’s all about us’ and that they think they have a big impact on everything in Cuenca, especially real estate prices. I’m glad they feel self-important but they don’t have the impact they think they do.”
Gringos Shift to Rentals
One of the most dramatic changes in the gringo market is the shift away from buying real estate to renting.
Rodriguez believes that the growth in rentals for expats is due to two factors. “First, since Cuenca is considered a place for foreigners to retire, many of the people moving here are older and they’re not interested in buying. Second, I think many foreigners come here for the low cost of living and a lot of them cannot afford to buy.”
The increase in the number of Cuenca rental units available to foreigners has been dramatic. “Four years ago, I managed eight or nine apartments for foreigners and two or three of them were usually vacant,” says Graciela Quinde, manager of Rentals Cuenca, which specializes in renting to North Americans and Europeans. “Now, I have almost 50 and I’m fully booked much of the time.”
Quinde’s units are mostly furnished, short-term rentals with all utilities included in the rent. “I rent to people who are here to study, teach or to check out Cuenca as a place to live,” she says. “They need a turn-key situation where everything is provided and most of them understand they will pay more than for a regular rental. What we rent would be called holiday or vacation rentals in the U.S.” She adds: “We also provide full management services which is important because many of our clients are not fluent in Spanish.”
Monthly rentals for turn-key units range from $400 to $1,500 a month, with the average coming in at about $850.
Quinde says that unfurnished rentals with one- or two-year leases make more sense for people planning to stay in Cuenca for longer periods. “You can find nice unfurnished rentals for $300 and $400 a month. If you do the legwork, there are some real deals out there,” she says.
New Opportunities in Cuenca
Rodriguez sees a bright spot in the Cuenca market. “There are some great opportunities in the historic district and buyers are starting to take advantage of them. When the new train starts operating and when they rehab more parks and plazas and reduce bus traffic, I think prices will go up considerably. In five or ten years, El Centro will be transformed.”
He adds that several impressive projects are already being planned in the historic district. “An investor from Hawaii is renovating a building on Sucre, two blocks from Parque Calderon, and plans to build high-end rentals. These will be five-star apartments, built around a high-end coffee and wine bar, something that doesn’t exist in Cuenca now.”
In another case, a Cuencano who has lived in the U.S. for most of his life is beginning a rehab project on a large Calle Larga property. “He plans to have shops, rental apartments and a bar for the older crowd,” says Rodriguez. “I’ve seen the plans and I’m impressed.”
Why No Bubble?
The experts seem to agree that Ecuador’s real estate market will not suffer the same fate as the U.S. market in 2008 and 2009. “There are several reasons why,” says Vega. “We have never had mortgages here with 0% or 5% down payments. The standard down payment is 30% down and even more in some cases. Another factor is that most property owners own their property outright. This means you don’t have as many people desperate to sell.”
There are other factors as well. Rumbea says that real estate prices in Ecuador were flat for years following the banking crisis of 1999 and 2000. “In some markets, prices actually went down. So what we have seen since 2007or 2008 is the market playing catch-up.”
Rumbea adds: “Overall, I’m optimistic but I am also realistic. The appreciation will go down and it will take longer to sell properties but ultimately this will be good for the market.”
Photo captions: Although there is still plenty of condo construction going on in Cuenca, the pace is slackening; Rentals have become a hot market; Improvements to the historic disrict, including the new light rail system, could make the area a good investment.