#238 – The Real Estate Bubble in Latin America: A Warning from Johnny Mueller

Automatically transcribed from the original recording; names and wording may contain errors.

[00:00] South of the border down Mexico way That's where I fell in love when the stars above came up to play and now as I wonder My thoughts ever straight Hi everybody I'm Johnny Mueller and you're listening to the expat files Living in Latin America the show that tells you what it's really like to live work play and or retire in Latin America I tell it just like it is so let's get started Now today I thought I'd addressed a real estate bubble that's going on down here in Latin America in a big way As you might have figured I do get a lot of emails from people asking me about the property Situation because if you're gonna come down here to be an expat you gotta live somewhere, right?

[00:48] And of course all you guys up in the first world have heard just how cheap it is to live down here Except of course on the tourist trail like Costa Rica Panama Rio Cancun etc and all those places where cruise ships stop Well, let me tell you things have been changing rapidly in the real estate department over the past six months to two years And still the cost of living is very cheap down here third world cheap again I'm talking off the tourist trail and by the way pretty much 95% of all of Latin America's off the tourist trail But for now I don't recommend that you build or buy unless you're Deadset on buying and know how to find a desperate seller or two and I'll tell you how to do that in a few minutes So hang on and if you do have a piece of land down here and want to build you could easily build a first world style

[01:34] Structure for 50 bucks a square foot But why do that? Because soon enough when the bubble does burst and it will there will be unlimited amounts of real estate for sale at 25 cents on the dollar so let's talk about that bubble Now like I said people are always asking about building buying land and renting Well, if you've been checking out my past shows I've been talking about a mini real estate boom down here for a long time in various spots Mostly in the big cities down here the ones with a half a million people or so But now it seems it's spread in one way or another to all the cities in Latin America And I'll tell you the only place that land and finished construction are really third world cheap these days Is as you might have figured way out in the boonies meaning the price of good land and first world style

[02:22] Guarded subdivisions in business properties are no longer third world cheap like they were just a couple of years ago at least where the city populations are over 50,000 and I have to preface this by saying that the realtors down here and the builders and the property owners and the speculators are Absolutely clueless that they're in a bubble And it's just so damn obvious to anyone who lived through the bubble that burst back in the states in 2008 All you have to do is talk to any builder banker or real estate agent here, and you'll see they're clueless Even realtors who are affiliated with first world real estate franchises like century 21 and remax Agents that should be alert to the signs and really should know better They don't have a clue that they're living in a massive bubble either Obviously when these local latin realtors bought into the century 21 and remax franchises

[03:12] They drank the Kool-Aid and bought into that good old if it's gringo It's got to be good mentality too and by the way if you want to see how extensive that real estate bubble is Just go to the remax or century 21 site on the internet and look up properties in Panama City Cartagena Guatemala City Lima Peru and other big Latin American cities and see what I mean in many cases You'll see first world prices and then some only don't give those jokers your email address Or you'll never get off the mailing list And if you do happen to give it out get ready to die a slow painful death by spam And it's plain to see no one at the remax home office up in Atlanta Clued in their Latin buddies about real estate bubbles And these guys have such tunnel vision that when you bring up the fact that a bubble like this occurred in the states in

[04:01] 2008 they say oh, yeah, but it's different down here That's never really happened in Latin America except for Argentina But that's a different case because the government caused that Talk about denial and that's a sure sign of a bubble too And then they say well real estate's been moving up for the last 20 years with no end in sight Hmm, which is another warning sign. There's a bubble, right? Anyway, there are at least a dozen of the usual suspect reasons why you know the bubbles coming It's about the first like for example no money down Financing which always seems to come at the very end of a big bubble right when it's ready to blow That and near no money down financing like just a nominal down payment of 500 or a thousand bucks I can't tell you how many dozens and dozens of big subdivisions

[04:50] I've driven by all of them in various stages of construction with huge signs on billboards like Dominoes along the highway spelling out in gigantic letters something like this just 500 bucks down and you can reserve the house of your dreams and by the way the word for down payment here in Latin America is in ganché and you'll see that word and ganché in newspapers and on signs all over the place And you know, there's another big factor. That's Greece the housing bubble down here It's that very very low interest rate that you get when you put money in the bank these days People want to put their money anywhere else But the banks anywhere they can get a couple more points interest and these rich Latins and wealthy landowners

[05:35] Are no longer satisfied in keeping their money in the bank not with those interest rates Even though stashing their money in a bank was what they traditionally did, but now they're convinced they can get much better returns So how'd that happen how'd they turn from conservative land barons to big-time real estate developers and speculators? Well, it's like this those big wealthy latin families that own beer companies and sugar plantations and coffee plantations and stuff Well, they've sent the latest generation of their kids to expensive private first-world universities And some of their young kids are graduates of finance banking and econ programs and they come out of those schools Naturally with much more aggressive first-world style investment strategies and ideas And so when they get out of school they come back to work for daddy and they say hey

[06:25] why let that money sit in the bank at one two or three percent when we can build our own subdivisions and housing projects and Offer finance plans to the buyers ourselves That way we can make our money selling the units and we could be the bank making our money off the interest on the financing So that's what's been happening in the last few years in a very big way Anyway, it's nothing for one of these big coffee plantation guys to build a subdivision develop it and construct 500 even a thousand houses on spec Or just take a big chunk of land close to a medium or big city Put in roads and develop residential lots with sewer and water and electric and then just sell the lots and provide financing for those And how do they justify that well, that's because in their lifetimes anyway real estate has never really gone down

[07:13] It's only increased in value slowly, but surely Latins as a rule think real estate is the perfect investment perfect legal investment That is the only place it's really tanked in the last generation or two has been in Argentina But there's 20 Latin countries, you know, so besides Argentina There's no precedent in Latin America for an irrational bubble that finally burst However, no one told these idiots that Latin American real estate has not been a great investment. It's just kept up with inflation Traditionally, that's all it's been able to do that is until the recent bubble and now that models been set on its ear And of course again, I'm referring to places off the tourist trail Because on the tourist trail the bubbles been expanding for 20 years or so

[08:01] Nothing recent about that phenomena Prices our first world all the way well ahead of inflation and really an absolutely terrible investment In fact, I can't think of a worse real estate investment than to put your money into land houses or buildings in Panama or Costa Rica Or any place the Disney or Carnival cruise lines might happen to stop but idiots are still doing it all the time Just look at those international living real estate promotions where they pack them in and no matter what they call them And that's all they really are. You know real estate sales jobs People email me about that stuff all the time, too And I say you might as well take a carnival cruise because at the end you'll have nothing to show for it either But at least the drinks were included. Okay, so what else is contributing to the big real estate bubble down here? It's not only because a bunch of rich guys don't want to get one or two percent parking their money in the bank

[08:52] Well, the fact is there are a lot of narcos and thieving politicians down here, too That don't want to put their money in the bank either for obvious reasons until recently they used to use bank accounts But very few of them can get away with it these days Because when you walk in the door with two or three million bucks in a suitcase banks and regulators can't easily Shuffle that stuff and hide it in with the regular accounts not like they could do just a couple of years ago Not that bankers wouldn't just love to have that money deposited They would after all until just a few years ago when international banks signed agreements called the know your customer laws Remember, that's what's changing everything down here Laws that of course the US banking system shoved down foreign and international bankers throats

[09:42] And we all know that story because if banks didn't sign that know your customer law They wouldn't be able to do wire transfers through New York banks, and that's the big financial clearinghouse for international transactions So basically if you don't sign you lose the wire transfer business which would be the kiss of death for any bank Now that's not to say banks still don't take suitcases full of money once in a while because I've heard stories And I know cases of people who are able to park some millions of dollars in banks if you know somebody important on the inside Of course, but it's not nearly as easy as it once was So anyway that real estate bubbles getting pumped up daily by millionaire narcos and thieving politicians, too They know they can't use banks much anymore But they know nearly everyone will accept cash for land

[10:31] And they also know that no contractor will ever turn down a cash deal on a building project either Not to mention the outfits that sell the materials the concrete the bricks the windows in the steel They'll never turn down a cash deal either. Why should they? And it doesn't even matter that there's 10 times as many properties as qualified buyers out there since these project owners and property developers think somehow the market and the numbers will catch up because they believe all that government propaganda about a growing middle class in Latin America and I'll have to concede that point but to a small degree It's basically a flawed assumption It's a hard fact that what they call middle class down here is not by any stretch of the imagination What we'd call middle class in the first world yet a huge percentage of these new subdivisions and housing developments are what we'd call

[11:24] Middle to lower middle class housing up in the first world starter houses, basically But still they're well beyond the reach of the average Latin American middle class completely unaffordable for about 90% of the population So I'd have to estimate that the average middle to large-sized city down here in Latin America has two to five times as many housing units under construction or being completed then there are Eligible buyers a very very bad sign for anyone thinking about buying into this market It's the very definition of a massive real estate bubble and what's worse? There's no sign of it abating all over Latin America and any medium to large-sized city There are dozens and dozens of brand new residential towers and new corporate towers, too

[12:13] Many 20 or 30 stories high with only two or three floors actually occupied even two three and four years after they've been built And even crazier there are just as many of these projects under construction right now and on the drawing boards with signs on empty lots offering pre-construction discounts Yep, still more signs of a bubble ready to pop and you know us long-term expats down here discuss this bubble a lot amongst ourselves But we don't much bring it up in front of the Latin locals They think we're nuts for not jumping on the bandwagon, too Every Latin is totally convinced that real estate is the only way to go So when locals say the growing middle class will absorb that housing easily I say there is a growing middle class

[12:59] But did you know that a family that earns a thousand bucks a month down here is considered middle-class and you know up in The states that would be dire poverty, right now suppose a middle-class person down here making a thousand bucks a month wanted to buy a house How much house do you think he could afford to buy now to figure that out? I just went to a mortgage calculation site on the internet And I plugged in that average 12,000 bucks a year middle-class income And when I filled in the rest of the data on this sheet I assumed the average guy were calculating this for has no other debts, which is a big assumption I'm sure is wrong, but let's go with it. Anyway. I also picked a six percent annual interest rate non-escalating and a 15-year term on the loan and I'm being really generous there too because almost no banks development projects or financial

[13:46] Institutions will give you more than ten years Anyway, I did the calculation being very generous in those numbers and the average middle-class guy making a thousand bucks a month Can't afford a house worth 26,500 bucks you got that 26,500 bucks which up in the states will get you a decent brand-new car or if you like the water at 25 foot Boston Whaler or a new 30 foot, Winnebago, but to buy a new house in the states for 26,000 bucks Not in your wildest dreams, bud Though you could get a used house or even two or three used houses for that money in Detroit But you'd have to hose the crack addicts off your front lawn every morning So anyway, what is 26,500 bucks actually buy the average middle-class latin american as a homestead?

[14:34] And obviously we're talking new houses here because there is that big construction boom aimed Of course, haha at the middle classes and you know what hate to tell you this But you can't even buy a brand-new house for 26,500 bucks here in latin america In fact the average price on a new house here throughout latin america is about 78,000 bucks Which I shouldn't have to tell you is three times as much as the average middle-class latin american can afford You heard me three times as much which means the average middle-class american could never in his wildest dreams Buy one of these new houses now compare that with the average new house cost i'm talking new houses now in the united states In 2011 it was about 220,000 bucks

[15:23] But you just can't compare the average new latin american house to the average new house up in the first world in the us For one thing the average new us house has 2300 square feet Whereas the average new latin house has about 1100 square feet half the us square footage or less Which is about the size of the average new american house built in 1950 and if that isn't a great example of the lifetime effect, I don't know what is So basically your average latin american new house would be comparable to what you'd call up in the states a cheap basic track housing unit But that doesn't really matter because the average middle-class latin family man Still can't afford to buy one and even to buy one of these things at the average cost of 78 grand

[16:09] Latin family man would have to be making triple what the average guy makes about three grand a month 36,000 a year then just maybe he'd be able to qualify for the financing But you see down here when a latin person's making three grand a month. He's not considered just middle class He's considered solid upper middle class Now compare that to a guy up in the states making 36 grand He'd be lower middle class and considered by some to be the working poor So I repeat there's a huge housing bubble down here and and the new housing units that have been built Or are under construction or on the drawing board right now are completely out of the purchasing range for the middle classes So there's a ton of that stuff out there and it's coming online all the time and who's buying well

[16:55] It's all about speculation You see when these projects are being advertised for pre-construction where you can get a discount of 20 or 30 percent Big investors rush in and buy a block of units thinking that when the project's done They'll just put their block of units up for rent, but they haven't figured out that the average latin guy can't afford the rent either Well, I take that back The speculators are just now figuring out that they've made some really bad decisions And they're going to have to lowball it to rent these units and let me give you a good example of that I have a very good friend that bought a condo unit pre-construction to get the discount for about $60,000 He's an upper middle class latin professional. So he has some extra money sometimes He doesn't want to live in it. He wants to rent it out

[17:42] And being a friend of his I did warn him about the bubble about two years ago And he didn't take my advice and actually tried to get me to buy into the project too, but I didn't buy it Anyway, that big condo project of about 150 units is done now It's been done for about six months and guess what in that time He's had his place up for rent without one single call or bite Now he started out by pricing it at 600 bucks a month and now six months later without a tenant He says he'll take 400 for it and I believe six months from now. He'll take 300 And guess what this house is a tiny three-bedroom unit of about 1200 square feet worth about 75 grand If you could actually find anyone to buy it precisely in the center of the range of new latin american houses that have been recently constructed

[18:32] And wouldn't you know it as soon as his unit was finished? He said johnny guess what they're building another phase another 200 units right next door How about you and I getting in on that one, too? And I said not in a million years and he couldn't understand why But now six months later and he still hasn't rented his first unit And as the cranes and cement mixers keep plugging away at the second phase What I hear now is there's even a third phase plan Now my friend is finally convinced and he wants no part of it. He knows there's a bubble He sees it. He feels it He's heard me say it a thousand times and now he thanks his lucky stars He never got in on that second phase meanwhile There's hundreds of gigantic projects still going up all over the city cranes everywhere

[19:20] Oh, and i'm talking about san salvador here But it's getting to be the same in all latin american cities over a hundred thousand population And there's been more fuel added to the fire in that these big projects are often self financing And it was never like that even five years ago back Then before the bubble it was bank financing only and you had to put a quarter to a third down But that was then nowadays You can drive into one of these projects where they'll have a model home and you'll sit down with a salesperson And work out a deal where you pay 500 a thousand or fifteen hundred down and you're a new homeowner And of course gringos and expats can do it too real estate project developers Just love to have us sign up, but i'm telling you don't do it

[20:06] Rent rent for six months a year or even more wait out the bubble and when it blows buy exactly what you want for 25 cents on the dollar Now that's not to say you can't get terrific deals on some real estate right now You can but you'll get no deals at all sitting at your kitchen table in cleveland Looking up stuff on the internet and forget about remax and century 21 You'll never get a deal that way they can see a gringo coming a mile away Now if you're really intent on buying there are some surefire ways to get a great deal How great well could be half of what the real estate guys are offering for the same property and how do you do that? Well, first of all, unfortunately, you're gonna have to know your spanish or hire a bilingual assistant for a couple of weeks Then hit the road and sort things out and the two best ways to find great deals

[20:54] Well in the local papers in the real estate classified ads for sale by owner, of course But there's even one better a lot of desperate sellers Post their properties for sale on bulletin boards placed in the entrances of every medium to large size supermarket That's very common down here Now you got to know that most of these people are desperate sellers because it looks like a lot of them don't even have enough Money to put an ad in the classifieds in the paper instead They put a picture a phone number and a price up on a bulletin board Now if by chance you came down here and contacted me, for example, if you said johnny, I want to buy a property A cheap property a good property Well, i'd advise you against it, of course But if you're really insisted I could take you by the hand and show you in one day at least

[21:43] 15 maybe 20 of such bulletin boards spread out all over any small medium or big city you choose And working off those bulletin board ads you're gonna find some very desperate sellers Of course to successfully get your rock bottom number you're gonna have to pay cash Though oftentimes because you're a gringo and you've got that gringo advantage You can make arrangements to pay the thing down in a few payments like over six months or a year Latins almost always assume gringos are good for their word honest and trustworthy Apparently they've never dealt with my brother Oh, and here's another way you can tell when you've got a desperate seller on your hands when you study that little ad He's got on the bulletin board often a desperate seller will say that he'll accept a vehicle in trade for partial payment or for the down payment

[22:30] Then you know you've got a live one on your hands And remember this if you're looking to rent Those local paper classified ads and those bulletin board ads are gold mines again I could take you around any city in latin america and in about a half a day Find you a beautiful apartment for around three to five hundred bucks a month off the tourist trail Of course and speaking of finding apartments down here I get a lot of emails from people asking if they can hire me to help them find an apartment or a house That's not what I do I'm not a real estate guy But i'll tell you this if you come down to one of my expat wisdom seminars And actually end up staying down here like a lot of people do i'll definitely hook you up with the right people the lawyer the translator And all that and set you up with an itinerary and a winning plan

[23:17] I'll show you how to hunt out things in the classifiers and exactly where to find the bulletin boards in the best locations Because that does make a big difference Anyway, you don't want to look like a green gringo going into something like that. You should be controlling the situation Not them Anyway, like I said a lot of these rich guys building these housing developments and such be they millionaire narcos or thieving big-time politicians Or actual on the level businessmen with big money like these sugar and coffee plantation owners Well, once again, the reason why they offer financing is because a very large percentage of latin's just won't qualify at a bank For one thing latin's aren't savers So they could never in their wildest dreams come up with a down payment that the bank would like which is a quarter to a third Down so the developer figures if he offers the property for little or no money down when someone defaults

[24:07] They get the property back and hook another sucker So they figure it's a win-win situation But it's not a win-win if the average latin can't afford the monthly payment And right now that's the problem. These big developers are running into it Just can't find qualified buyers even at no money down And if that isn't a cardinal sign of a massive bubble Then you tell me what is and speaking of massive real estate bubbles and other huge problems Let's talk about brazil for a second Well, the recent inflation news out of brazil is that it's running about six to seven percent a year and since Governments everywhere lie those are not by any means the real numbers brazil's real inflation numbers as calculated by private analysts Is 25 percent

[24:53] Which is an absolutely horrible situation to live under even if you're living there and your income is foreign based and you're getting paid In dollars or euros, for example And even though over the last few years the real Has held its own against first world currency and in fact has increased in value against most of them That doesn't matter internally. They've got 25 percent inflation a year And that's why now if you're an expat trying to live a first world existence in brazil You're finding that you're paying first world prices for almost everything except food, which is still very cheap Especially if you're out in the boonies And you can live very cheaply in the city if you go completely native But that's not necessarily recommended because you'll be kicking your lifestyle down a few notches and then some

[25:38] And by the way brazil's got that huge housing bubble going now, too Just like so much of the rest of latin america and that emerging middle class that everybody's talking about Well, guess what? They're all getting credit and debit cards and their lives are all financed to the hilt No one's got any savings in brazil either But that's pretty much true of all latin america as a rule the latin middle classes live on credit 90 of them couldn't scrape 500 in cash together if their lives depended on it on top of that If you visit any brazilian city at all, you'll notice that it's a very messy chaotic society Seems like they don't know the first thing about basic organization They just can't get their act together and they never will and all that propaganda you hear coming from the government saying That it's the next big superpower brazil is going to be the next china

[26:27] Well, i'll tell you they're kind of right about that because the chinese people are everywhere They're buying up the whole damn brazilian countryside and all the farmland and water and mineral rights They can get their hands on so I guess they are going to be the next china, but not in the way that they'd hoped Now before I close out today's show I'd like to remind you that me and the gang at expat wisdom are thinking about putting together some one-day fast-track seminars Specifically designed to jump start your perspective move to becoming an expat down here in latin america You know kind of spell things out in general answer some questions and give you a solid game plan So if you're interested in attending a short one-day seminar, just send me an email johnny at expat wisdom.com or the expat files at gmail.com

[27:13] And be sure to tell me where you live not your exact address, of course But tell me what city you're living or the city that's closest to you and that includes all you guys who are sick of living In europe too So just send me an email and if there are enough people interested There's a chance that some expat wisdom folks will be visiting a city near you You've been listening to the expat files living in latin america coming to you each week from somewhere south of the border And don't forget you can email me on anything at all about latin america the expat files at gmail.com See you next time Ah