It is no secret Ecuador is facing significant economic headwinds. Massive government spending/borrowing, tax increases, falling oil prices, the recent earthquake and the end of a credit expansion and construction cycle have put Ecuador in a difficult spot.
These factors along with socialist leaning economic, tax and regulatory policy has caused a degree of capital flight.
While Ecuador is just entering the sweet spot as an international tourist and expat destination, the influx of the international dollar can only go so far to offset broader issues.
All this, as well as overleveraged consumers/property owners under pressure to repay high interest loans has lead to falling real estate prices.
As with any crisis, there are increased opportunities. For the contrarian or long-term investor, the current discount being offered in Ecuador on an extraordinarily valuable underlying asset is highly attractive.
Ecuador has everything; resource rich, climate, safety, beauty, quality of life, cost of living are all A++. And it’s early in the discovery process internationally, so the long term upside is tremendous.
Yet, already low real estate prices (internationally) are steadily going lower. Asking prices are falling, but in most cases, outside of truly desperate sellers, it’s the sale price as opposed to the asking price that demonstrates the degree of change that has taken place over the last year plus.
To sell property in Ecuador right now, you must be willing to accept a price that reflects the economic crisis the country is in.
There are many opportunities to buy at or below construction cost all over the country.
Another factor that has fed the flames of declining prices are the credit markets. Credit is very tight – banks have reigned in lending in a significant and unified way over the last year or so.
Lending in Ecuador was already a different animal than many more developed markets. The interest rate on a mortgage or personal/business loan in Ecuador is normally in the upper teens and can be higher. They are always heavily collateralized and guaranteed by multiple parties. So default often means losing everything, potentially including the trust and assets of friends and family.
All these factors make Ecuador interesting in a lot of ways. The political risk cannot be ignored. Yet, it is certainly priced in, and the upside opportunity is significant. It is truly a buyers market. It hasn’t gotten as bad here as it did in parts of Florida, Las Vegas and California when the housing bubble burst in the mid to late 2000’s, but there are some similarities between that and what is taking place here. It is on a much smaller scale, and has nothing to do with subprime or Collateralized Debt Obligations, but the price action, although less dramatic, is comparable.