International Real Estate, STAFF NEWS & ANALYSIS
The Real Estate Bubble That Ate the World
By Daily Bell Staff - October 12, 2015

Here's what $66 gets you in Medellin … Last night after a flurry of legal meetings and property tours throughout the day, I had drinks with a Canadian real estate developer who set up shop here in Medellin a few years ago. Medellin's mountainous geography constrains growth, and this is likely going to heavily influence prices over the long term. So for now, this place is one of the most attractive residential property markets I've seen in the world. I can almost guarantee this won't last. – Sovereign Man Notes from the Field

Dominant Social Theme: Western real estate is the best. Sleep well at night; all is Okay. Just don't read about nasty bloodthirsty moments in history like the French Revolution before tucking in.

Free-Market Analysis: When we think of real estate bubbles, we often think of Manhattan and London, because that's where the most egregious bubbles often emerge.

We are informed by the media, as well, that these areas are most "in demand." And this perspective is fueled by reporting about apartments selling for US$100 million and houses going for twice that.

But as Simon Black points out in a recent article on Medellin, some of the most desirable real estate may not be in areas that have been traditionally highlighted.

Anthony Wile commented on Black's article in his Saturday editorial, highlighting a statement Black made: "Peace has a funny way of showering a country with prosperity. And it's going to make Colombia one of the most interesting places to be in the world in the coming years."

The "peace" Simon is referring to has do with the continued diminution of violence in Colombia, most notably between FARC and the Colombia establishment. This, too, must be factored into real estate prices.

Wile wrote:

Simon couldn't be more correct, in my opinion. I have witnessed the country's transformation from a war-torn region of the world into one of the brightest – if not the brightest – places on the planet for wealth creation and a high standard of overall living. But I'll leave the specifics for later …

The specifics here – as Anthony Wile is referring to them – have to do with Colombia's promise from an investment and lifestyle perspective. Unlike other countries in the West and certainly in Latin America, Colombia's growth remains moderate, with the central bank estimating 2.8 percent this year, down from 3.2 percent.

Moderate growth should help de-accelerate price inflation in Colombia, and this goes for the real estate sector, too. This stands in contrast to what media outlets like CNBC are saying about US real estate.

A recent article portrayed US prices as providing "plenty of evidence that … home prices are gaining steam again, fueled by tight supply amid growing demand."

The article went on to point out that, "Nationally, home prices were nearly 7 percent higher in August compared to a year ago, according to a new report from CoreLogic. That is a bigger annual gain than we saw during the spring market in May and June. Other monthly reports have shown the same phenomenon."

There are naysayers, of course, and CNBC points out alternative arguments as well:

California-based real estate analyst John Burns, of John Burns Real Estate Consulting, called Hanson's premise "ridiculous." He said you cannot compare affordability today to the heady days of the housing boom when anyone could get a loan with no money down and artificial — now illegal — teaser rates.

Burns's analysis is interesting but does not take into account Western real estate prices that are powerfully driven by the availability of credit within a monetary context. The "teaser rates" that Burns speaks of may have had an influence on the parabola of the market but ultimately the central bank business cycle will create a real estate bubble no matter the commercial parameters.

Colombia's real estate bubble will grow a good deal more slowly than the US's because rates in Colombia hover on the short end (where they are set by the central bank) around 4.5 percent. Also, Colombia's business cycle may be moderate compared to the hyper-cycles of the US, Britain and the West generally, because Colombia is not directly linked to central bank stimulation of these markets.

The Western business cycle is going full-bore due to the impossible-to-comprehend amount of currency that has been injected in the past six years, something like US$50 trillion. Apartments, cars, yachts, art, even stamp collections are beginning to command dangerously high prices.

The bubble likely has not peaked yet – or at least not as of this morning, anyway! We've been of the opinion there is at least another year to go. But before this latest market mania finally deflates (probably with a terrible crash), asset bubbles will be apparent to all.

Meanwhile, the bubbles in countries like Colombia may be less pronounced because they have not been drenched with Western-style central bank liquidity. And within Colombia's landscape are regions where local agrarian economies are virtually totally dislocated from the global economy and have been for many generations.

It's not just Colombia, of course, but developing-world real estate generally. There will be real estate bargains aplenty, certainly compared to what is bound to happen in the West.

Due to the West's vast stimulation, we are probably looking at yet another real estate bubble that will "eat the world." But that world will be "developed" more than "developing."

After Thoughts

Colombia offers a tremendous lifestyle protection option as do other countries that are not entirely in sync with Western monetary inflation. Savvy investors will therefore look to places that don't fully partake of the West's inevitable asset-based price (hyper) inflation and have an abundance of natural food supply, excellent weather with no need for heat or air conditioning and vistas that rival Switzerland.

Posted in International Real Estate, STAFF NEWS & ANALYSIS
  • Bill Ross

    “pop” goes the weasel…

  • Same goes for Morocco – there will be substantial growth in the local economy (if not the local housing market), but it is a different world and it is full of clever, talented, resourceful local people who know the local market implicitly. So it will not necesserally be ‘easy pickings’.
    http://www.rightmove.co.uk/overseas-property/property-43922023.html

  • When the crash comes, it will be somewhat less profound in Colombia because, folks down here usually pay cash, when they buy. Mortgages are a relatively new thing down here. In fact, you’ll have a very difficult time finding a lender, who will finance a house that’s more than 12 years old and a hefty down payment is required. For the most part, it’s only homes in new, guard gated communities, that get financing. Frequently, the financing is provided by the developer, not the bank. So, when the crash comes, you’ll probably be able to get a pretty good deal on nice homes in some of those guard gated community.

    BTW, you’ll pay a lot more (double or triple) for a home on a normal lot in a guard gated community, than for a nice two hectare farm, for which you’ll pay in cash.

  • TG Molitor

    Columbia’s corruption ranking is 94th out of 174 countries. https://www.transparency.org/cpi2014/results
    Heritage’s Index of Economic Freedom has Columbia ranked 28th out of 178 countries. http://www.heritage.org/index/ranking
    And Columbia’s public debt as a percentage of GDP is 40.2 percent.https://en.wikipedia.org/wiki/List_of_countries_by_public_debt
    (The US is at 72 percent.) Haven’t looked into the rule of law, but as a real estate investor, Columbia’s high corruption ranking would be cause for pause.

    • These rankings are inevitably nonsense. One would assume that the US’s six million individuals subject to incarceration are not considered part of a corrupt system but the result of an efficient judiciary. Corruption is in the eye of the beholder.

      • TG Molitor

        Good point. I’d rather get swindled in a land deal than incarcerated. Can you address the subject of property rights in Columbia?

        • Again one needs to look broadly at such hypotheticals. One can question items having to do with Colombia property rights, but such questions can also be asked of the West and especially of the US where police can literally confiscate vast sums of “drug” money without a warrant or even a written pretext. Also it is COLOMBIA, with an “o.”

        • DB would choose to participate in an opportunity only after our own beyond-thorough due diligence has been conducted. And, as we often remind readers, YOU are responsible for conducting your own due diligence, same as we do (on everything you do, frankly). Investigating property rights in Colombia is a fairly obvious first step, especially if you think you’d be “swindled” if you made a purchase, before you would even consider purchasing real property there. Same holds true for any investment in infrastructure or anything else … there or anywhere else.

  • Bruce C.

    The only Columbians I know live in the US and only return grudgingly to visit family members. Everyone’s situation is unique but I don’t see why some little country in South America is going to be some kind of safe haven when the SHTF.

    • Sorry to hear you know of such a lot. It is Colombians BTW … so how well do you know them? Ever been there? Another armchair quarterback??

      • Bruce C.

        Probably guilty. Never been there. And I can’t say I know them well except our main discussions are about how dismayed they are about US politics. They say they don’t know where else to go, so I infer from that.

        I’ll probably reserve comment on things like this from now on because I really don’t know that much about it.

    • Impending Sky

      Many professionals who migrate are not innovators or entrepreneurs, but employees. They take what I would call the ‘institutional’ view. Usually they will come to the US for an education and continue working there. We all have our place in this world. If these people prefer to work in the US and send money back home, I won’t condemn them. However, that kind of lifestyle does not suit me.

      • Bruce C.

        I suppose. I don’t know that much about it. Never been to Columbia. However, the only way I can see other countries being safe havens when the SHTF is if the people there understand and believe in inalienable rights, objective law, etc. Not many people do. Everyone can seem nice when things are going well. We shall see.

        • Impending Sky

          Fair enough.

          In the practical sense the ideological stuff may not be as important as we might like. Personally I like to discuss those ideals and explore them, but unfortunately life rarely lives up to the ideal. That goes for the US or anywhere else.

          My experience has been that life is about what you can get away with. After the fact people like to dress events up with flowery justifications. Sometimes the chore of rationalization seems tedious. On other occasions it can seem absurd or irrelevant.

          Throughout history people have been announcing themselves as correct. If we took any given instance at face value then many others would have to be incorrect. Some of those individuals were opportunists, and others were simply claiming a zenith beyond the reach of humanity’s fallible experience. A good proportion were most likely combinations of the two.

          Where are we on that scale? I’d like to view the precepts of liberty as allowing for people to avoid that contention. My instinct tells me that we are also most likely making an error somewhere along the way.

          As you say: ‘everyone can seem nice when things are going well’. I agree with that observation.

          This does not mean that we should not put our best foot forward and attempt to live up to our ideals. But before we can live up to an ideal, we must be able to live period.

          Taking this view, there is a strong case to be made for jurisdictions based on the incompetence of the state. Your guess is as good as mine as to how that applies to Colombia. I doubt that we would find a region anywhere that embodies all of the principles of individual liberty. Pragmatically, we can hope to find a region that allows us to slip through the cracks mostly unmolested.

          What I take away from the article is that DB views Colombia as offering a reasonably priced alternative which may flourish in the atmosphere of a collapse.

          • Bruce C.

            I can see that. But another thing that comes to mind are the widely varying individual experiences of people who live in “dangerous areas.” During WW 2 people in cities getting physically bombed still went to work and lived a relatively normal life. I know that doesn’t sound ideal, but until I saw footage of that (in England and Germany in particular) I figured life in a city under a bombing siege was measured in minutes, not months or years. (I guess I’ve seen too many nuclear bombing simulations, so my perspective is skewed by a few orders of magnitude.) Similarly, people living in most other parts of the world who weren’t in the line of fire may have been oblivious to most of the wars’ affects, other than material shortages maybe. I suppose that makes a case for lil’ Colombia then, huh?

  • TG Molitor

    I think a Columbia investment play might be to invest in Columbian infrastructure companies because a 50-year
    guerilla war before 2006 has left it very short of infrastructure and the current business-friendly government just might wish to launch huge public works projects like Panama has this last decade.

  • Impending Sky

    I have very little knowledge about what goes on in Colombia, so the upcoming articles should be informative for me. I also have an interest in Guyana and Belize. From what I have read, I suspect the situation in those two English speaking countries is much like what I describe below.

    My experience in this corner of the ‘developing’ (or perhaps just stagnant) world has been that many industries remain backwards because of cronyism and nepotism. The incentive for innovation has been reduced or eliminated under the current situation. This is where the main opportunities are in my view.

    I’ve watched several other expats loose their shirts and their minds after becoming entangled in the mess. Even if I could wield those kinds of finances, I would not feel secure in putting them at stake here. I’ve seen too many people make that mistake.

    Specific to this region, there are certain castes who have the ability through family connections to make any kind of license or business happen. Others, and especially outsiders who try this are usually shot down within the year. Capital controls mean that funds they brought into a local bank as part of a bureaucratic stipulation are effectively parked.

    My strategy has been to invest my time and perspective by partnering with people who I share a connection with. I let them handle the local issues and put up the funds. For my end I demand a percentage of the entire endeavor. I never go on board with a non-compete clause as that is my leverage. There are always jokers who think they can take the preliminary diagrams I have proposed and run with it. So far that has not worked out for those individuals. Either way I feel confident that I have enough ideas to keep going into other areas.

    Probably not as grand as what High Alert has achieved with larger resources, but I must start where I am.

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