Editors note: Hey guys, this is Bryan. Thinking about investing in the real estate market in Ecuador? In the following guest post, by Jesse Bayer of Abundant Living Ecuador, you’ll learn about the current state of Ecuador’s real estate market. I’ll turn it over to Jesse:
The Real Estate Market in Ecuador
Following the collapse of the Sucre in 2000, subsequent dollarization, and the election of current President Rafael Correa in 2007 – Ecuador has experienced nearly 10 years of both monetary and political stability.
These factors coupled with large-scale infrastructure improvements and a credit and construction cycle led to massive economic growth.
For a little perspective – in 2000, Ecuador’s GDP was $18.3B, by 2007 it had grown to $51B and $100.9B by 2015. From 2010 to 2014 Ecuador averaged 5% growth annually.
Improvements to infrastructure such as ports, airports, roads, healthcare, drinking water, sewers, electricity, education, police and fire played an integral role in Ecuador’s emergence.
From 2007-2014 Ecuador spent $8B on highways and roads alone.
In part, the government was able to finance this expenditure from oil revenue – aided by surging prices.
OPEC member Ecuador, like much of Latin America and emerging markets around the world is heavily reliant on oil revenue. In 2014, oil revenue made up 28% of Ecuador’s public revenue. With oil prices soaring in the mid to late 2000’s, the timing was perfect for oil dependent populist leaders such as Rafael Correa and Hugo Chavez to implement their big government, big spending policies. Although it could be argued that the exceptional growth was due in large part to government spending – during the best years of growth Ecuador’s public spending constituted as much 44% of GDP – it worked.
Factors Affecting Ecuador’s Economy
However starting in 2014, a confluence of events created what are now significant headwinds for Ecuador’s economy, which has in turn affected asset prices – specifically real estate.
In July of 2014 oil prices began to plummet. At the same time banks in Ecuador tightened credit.
Ecuador experienced a massive increase in its money supply between 2007 and 2014. From January 2007 to December 2014, M2 Money Supply increased from $11.8B to $40B.
At the same time Ecuador’s banks (both private and public) were expanding credit. Loans, with interest often in the upper teens or low twenties and heavily collateralized became commonplace.
In late 2014, banks began to tighten credit. Lines of credit were pulled for builders, mortgages became difficult to obtain and personal and business loan standards much more stringent.
In part due to the credit contraction, the construction boom Ecuador had experienced for the better part of a decade slowed.
At the same time, the government announced budget cuts – 2016’s proposed budget was more than $5B less than 2015’s. Reduced public spending placed an additional drag on the economy.
Many would also argue the increasingly restrictive tax and regulatory measures implemented by Correa’s Alianza PAIS who have maintained firm control over the country’s politics since Correa’s election have played a significant role in Ecuador’s troubles as well. A decidedly anti business stance, including a 5% capital flight tax, a 14% value added tax, draconian policies governing the mining and lumber industries and extreme proposals on capital gains and inheritance taxes have lead to capital flight. Some wealthier Ecuadorians, business owners and entrepreneurs have left in search of greener pastures.
These events were reflected in GDP as well as money supply growth – both essentially flat in 2015.
Then, in April of this year, with the IMF already predicting a negative 4.5% GDP for 2016, a major earthquake struck the northern coast causing significant damage. This has put increased pressure on the budget and economy.
What Does All This Mean for Real Estate in Ecuador?
It means falling prices. With all these factors at play, capital in short supply and many leveraged property owners under pressure to repay high interest loans, prices are falling.
In Loja, where I run a real estate and relocation services company, we have seen prices come down significantly off of the 2012 highs.
This is true for all types of real estate.
Large Fincas, lots in places like Malacatos or Vilcabamba, land in Zamora and houses and apartments in the city.
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For example, in 2012 flat lots with all the amenities in Vilcabamba and Malacatos were selling for around $20-30/m2. Now the sales price is likely to be closer to $10-15/m2.
As people like to say ‘no hay plata’.
Brand new, high-end apartments in Loja, which were being sold for around $900-1,000/m2 just a couple of years ago are now commonly going for around $800/m2 or less.
With oil prices beginning to recover, banks starting to lend a bit more and continued international interest in Ecuador, it is impossible to predict if this price decline will continue.
As an expat or investor, it is certainly an interesting time to snap up properties at a discount.
The story remains intact – an abundance of pure water, fertile soil, clean air, friendly people, political stability, great infrastructure and exceptional quality of life and cost of living benefits are some of what has attracted many to Ecuador.
Read more about Ecuador real estate.
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With things like BREXIT dominating the news and the world awash in central bank created debt, we shall see what the future holds for Ecuador and the world, but certainly there is some opportunity here now to own valuable assets such as farmland or simply invest in the lifestyle you desire at prices we may not see again anytime soon.
About Jesse Bayer: Jesse was a New York based real estate investor who relocated to Ecuador in 2013 and is now the Co-Founder and Managing partner at Abundant Living Ecuador, a Real Estate and Relocation Services Company based out of Loja.
Read more about why Jesse decided to move to Loja, Ecuador.