The Real Estate market in Costa Rica: Present and Future
Some twenty years ago or so, few people could have predicted the real estate boom in Costa Rica. Those lucky enough—or prescient enough—to have bought large parcels of land back then were, as often as not, motivated by the desire to own land in a beautiful country. Some of these parcels of land (a famous example comes from the Dominical area) were huge expanses bought for pennies per square meter. In the ensuing years, especially in Guanacaste and other areas favored by foreign buyers, many properties have been bought and then resold for a profit a number of times. In order to extract more money from these large tracts of land, more recent owners have divided them up into smaller parcels and then sold those. Thus, until fairly recently, people have made money in real estate mainly through buying and selling raw land.
As Costa Rica’s real estate boom really started to heat up during the last five years, this kind of flipping activity intensified and prices in some parts of the country went sky-high as the global real estate boom brought investors looking for beach front property who couldn’t afford the even higher prices in California and Florida. In Costa Rica as in many other places in the world, real estate became a target for investors and speculators. From roughly 2002 to 2006, real estate prices in hotspots like Guanacaste and the Central Pacific doubled or tripled, mirroring what was happening in the rest of the world. As we now know, much of what fueled the global real estate boom was not sustainable. Easy credit turned out to have a dark side, and many homeowners in the U.S. who used their homes as cash machines are now underwater. As a consequence, housing prices have been deflating rapidly in the U.S., Spain, Dubai, and the U.K. And they’ve stabilized in Costa Rica.
So what does this mean for the near future of the Costa Rica real estate market? The slowdown in the global real estate boom is doing several things for Costa Rica. First, it’s bringing some much-needed sanity into a market that was starting to go a little crazy. Gold rushes are not sustainable and not good for long-term residents and retirees. With prices finally leveling out and demand cooling a bit, Costa Rica will go back to being something of a buyer’s market. Second, it’s clearing a lot of the garbage out of the market. Gold rushes attract many unscrupulous characters, and the Costa Rican real estate boom did just that, drawing crooked brokers, lawyers, and developers – many from abroad – who were just looking to make a quick buck and get out before the lawsuits started. Many of those characters will move on now that the easy money has dried up.
So what about investing? Is Costa Rican real estate still a good investment? Of course it is, but it’s no longer as simple as snatching up some cow pasture, splitting it into lots, and fighting off eager buyers with a stick. The market is maturing, which is bad for flippers, but good for overall stability, as well as for patient or well-funded investors. Short term profits are still available, but you must invest to add value to your property, rather than just trusting the market. Particularly in heavily developed areas like Guanacaste, the Central Pacific, and Escazú, land is so expensive that those looking for short term profits usually have to build a home or condo complex to get a quick return on investment.
Prospects are even better if you can buy now and wait for the medium and long term. We’ve talked to brokers in Jacó and Tamarindo who pointed out that many of the vacation developments advertised on billboards are never going to get built, but not because there’s no demand. Indeed, mid-range vacation homes (say $300,000 to $500,000) are still selling out as fast as ever. What’s happened, though, is that even big-shot developers have seen their international financing dry up and suspended construction. This means that what was looking like a glut of product will, in two years, turn out to be a scarcity. That is, with developers suspending projects now, there won’t be enough supply to meet demand in the near future, creating a great market opening for even small-time developers.
That said, prospects for demand continue to look good, years into the future. Consider that we are still a year or two off from the first group of early retirees from the baby boom generation (78.2 million in the U.S. alone). Many of these folks will be looking for a cheaper place to buy a vacation home and retire, especially considering the hit their investments have taken in this downturn. Costa Rica presents them with a better option than the closest competition. Retirees aren’t the only ones looking to settle in a place like Costa Rica. Demand for real estate is also fueled by younger people who have decided to abandon their fast-paced lives and careers in New York or Paris for a more tranquil existence in Costa Rica. In addition to foreign buyers, demand is also coming from the upwardly-mobile Costa Rican middle- and upper-classes, who are eager to own vacation homes or move into a bigger place in the Central Valley.
Other people question whether real estate in Panama and Nicaragua, which is generally priced lower than real estate in Costa Rica, will lure potential buyers away from Costa Rica. Few give much weight to this concern, however. Anyone who has ever visited all three places can attest to the fact that Costa Rica is a world apart from the other two, in terms of services, recreation, culture, infrastructure, and political and economic stability. The truth is that Costa Rica has a great brand and high international visibility, yet it’s small enough that – relatively speaking – its real estate product will always be scarce. For the medium- and long-term investor, Costa Rica will always be a stable and attractive place to invest.
