Overheated Cuenca real estate market takes a downturn, but most professionals don’t see a U.S.-style ‘bubble’

Jun 15, 2014

Although there are dozens of construction projects underway in Cuenca, there will be far fewer new ones taking their places in the foreseeable future.

Some local professionals, citing a huge backlog of unsold properties, have suggested the possibility of a U.S.-style “bubble” but most say that won’t happen.

townhouseBuilders and real estate agents say there are a number of factors in the market slow-down, including unprecedented price appreciation in recent years as well as the large inventory of unsold properties.

“Cuenca has had a very strong run-up in prices since 2007, with many prices more than doubling, and the market cannot support this in the near future,” said Jorge Ramirez, a consultant who studies the Ecuador real estate market and advises developers and real estate companies.

Ramirez, who says that Cuenca and the coast have seen the largest price rises in the country, says there are other factors in the slowing Cuenca market besides the obvious ones. “The number of Ecuadorians returning from overseas has slowed down and this group was fueling much of the demand,” he says. According to Ramirez, between 30,000 and 40,000 Ecuadorians who had lived and worked outside of the country have come home or relocatedbldg to Cuenca within the last decade. “This group created a huge demand, particularly in the condominium market, and the results are clearly visible on Cuenca’s skyline.”

“Unfortunately, the market has continued to build as if the migrants would keep coming forever and this is one of the reasons for the current over-supply,” he says.

Besides the returnees, Ramirez says that increases in land prices, higher costs of building materials and labor have fueled the inflation.

According to builders, the cost of such items as concrete and steel have risen by more than 150% since 2007. Another factor has been increased labor costs due to government regulations and an increase in the minimum wage by almost 40% since 2008.

Pedro Medina, president of the Cuenca Chamber of Construction, says that new government rules that require developers to have all funding and permitting in place before they sell houses or condos will also have a dampening effort on the market. “This will put some small builders out of the business altogether and require much more planning and paperwork for larger builders,” he says. “Bottom line is that you will see less new construction.”

Medina says that higher land prices are are also slowing new construction. “The increases are unrealistic,” he says. “We have seen prices in Challuabamba, for example, go from from an average of $40 to $50 a meter to over $160. This is not sustainable.”

He adds: “It is impossible now to meet the need for $30,000 and $40,000 housing units, which is what most Cuencanos need and can afford. The demand simply cannot be met in this market.”

Real estate agents say that sales of all properties have dropped by at least 30% since 2011 and 2012. They say that sales to English-speaking foreigners moving to Cuenca have dropped by more than 50%. “Things are not good right now for agents and many of them have moved on to other work,” he said. He also said that many of the real estate companies that were focusing on sales to expats have either gone out of business or have shifted to the rental market, which remains strong and appears to be growing.

Some developers have adopted new strategies to combat the downturn. At least two Cuenca condominium projects currently under construction, are now allowing buyers to defer 70% of payment to closing. In the past, buyers paid on a monthly or quarterly basis during the construction cycle, with a hold-back of 10% due at closing.

Medina and Ramirez say they don’t expect a bubble. “We have not had the 0% downpayments and risky bank practices that led to the bubble in the U.S. and Europe,” Ramirez says. “Here, the standard down payment is 30% and we also have a much higher percentage of housing units that are bought outright, and have no mortgages at all.”

Although he doesn’t expect to see double-digit appreciation return any time soon, Medine says he expects prices for new and existing housing to continue to rise. “It may be in the 3% to 4% range and could even be flat,” he says. “For several reasons I don’t see prices declining.”

Ramirez says the new government requirements for developers may help to protect the market. “There will be less units built in the next few years which will eventually be good for demand.” He added that it will also help to relieve the back-log of properties for sale. “Long-term, the market will recover and do very well in Cuenca. This is everyone’s favorite city in Ecuador and that won’t change,” he says.

Photo caption: Cuenca will see fewer projects like these in the near future as the real estate boom ends.

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