Who’s Driving the Market?

Dear Friends,

Lief Simon has been a contributor to International Living since the beginning. He is a Real Estate guru and has investments all over the world. Here he makes some valid points and, I think maybe some not-so-good. Please read his article and my comments in red.

I am at your service!

Who’s Driving the Market?
International Living Postcards–Saturday Edition

Saturday, Sept. 29, 2007

Dear International Living Reader,

U.S. real estate markets are in crisis mode, and one big question on everyone’s mind as a result is: Will the rest of the world follow suit?

My response: Yes…and no.

Many of the economic factors so negatively affecting the U.S. housing market right now don’t exist in much of the rest of the world. While you can get high loan-to-value mortgages in some countries–and you can even get no-proof-of-income loans in a few–most banks in most countries maintain higher credit standards than have U.S. banks for the past many years.

[DanDannyDaniel Hussmann] www.drparadise.com 829-644-8094, or please use my Skype address: dlhussmann

In the Dominican Republic, cash is usually king. However, banks are coming on-line and offering “conventional” (30 year mortgages at competitive rates) loans. Like Mr. Simon says, higher credit standards are demanded…but they are really smart about it. For instance, one bank will make pre-construction loans but they require a one year “cross-collateralization”. This means the loan is guaranteed by property owned in the US, but just for one year until your construction is well out of the ground.

Furthermore, the rest of the world isn’t compelled to pull itself ever-farther up the housing ladder. In the States, people buy starter homes…which they intend to sell just as soon as possible for something bigger. And so on. In many countries, people aren’t concerned about owning at all. They’re content to rent. And, if they do buy, they buy once. They wait until they can afford the house they expect to live in the rest of their lives. The idea of buying, selling, buying, and selling your way to a McMansion leaves them shaking their heads in dismay.

DanDannyDaniel Hussmann] www.drparadise.com 829-644-8094, or please use my Skype address: dlhussmann

People here in the Dominican Republic are not buying starter homes. 

Much of this is cultural. But other, more practical factors play a part, too. Specifically, the big transfer taxes, fees, and stamp duties imposed in many countries (which, in some cases, can amount to 10% of the purchase price or more) help to keep people from playing the climb-the-ladder game.

DanDannyDaniel Hussmann] www.drparadise.com 829-644-8094, or please use my Skype address: dlhussmann

In the Dominican Republic, our transfer taxes are (    4%   ) there are no other fees, or Stamp Taxes…there are very little property taxes, and there are no capital gains taxes if purchased with the correct legal advice, if  purchasing in the name of an off shore company, or if purchasing more Dominican Land.

All of this creates generally more stable real estate markets, especially in Continental Europe.

DanDannyDaniel Hussmann] www.drparadise.com 829-644-8094, or please use my Skype address: dlhussmann

And the Dominican Republic, especially here on the Samana Peninsula

Back to the original question…and to get to the point: Housing markets in countries that have been offering easy and high loan-to-value mortgages are going to fall, maybe hard, just like the U.S. housing market is falling.

Countries, though, that have been more prudent in their lending practices needn’t necessarily follow suit…and I don’t think they will.

DanDannyDaniel Hussmann] www.drparadise.com 829-644-8094, or please use my Skype address: dlhussmann

Like the prudent lending policies and requirements here in the DR. We also prudently use title companies like Stewart Title and First American title. Lending companies want to see this as well.

The U.S. economy has been the world’s leader for more than a half-century. Everyone can’t help but wonder, now that it’s taken ill, how contagious the sickness. Certainly, some markets will catch what the U.S. has got. But I don’t think the epidemic or its symptoms will be as bad as many fear.

Indeed, foreign markets driven by U.S. speculators have already been hit. Some of these markets I’m invested in myself, so I’ve watched with interest. My conclusion? They continue to push ahead. The investor/speculator buyers may be thin on the ground  (as they are in the US!)…but the vacation-home and second-home buyers have continued in force. They’re coming not only from the States, but elsewhere, as well.

And this now becomes an important factor to consider when evaluating a property investment opportunity. Where are the buyers coming from? Is there a local market (as in Panama, for example, which I believe, as a result, is better immunized against what’s going on in the States than, say, Nicaragua…at least outside the frenzied pre-construction Panama City market)? And is there a non-local market beyond Americans (as there is in Argentina and Uruguay, both of which are of interest to European and Latino buyers…maybe more so than they’ve ever been of interest to American shoppers).

DanDannyDaniel Hussmann] www.drparadise.com 829-644-8094, or please use my Skype address: dlhussmann

Santo Domingo, capital city of the Dominican Republic is one of our best markets. A local Century 21 realtor told me three days ago that rich Dominicans (and there are very many) make up 70% of her clients! 

There are also many Dominican Construction companies here in Las Terrenas. They are building condo projects, homes, and commercial space and they are selling mainly to Dominicans from the capital. We have many beautiful new beachfront condos like Palmarie and La Fenice, Another new project is going in right next to our Casino. We have beach front land, mountain sea-view lots and more…and all of these have been bought, built and/or sold to Dominican´s from the capital and all around the country.

Dominicans are investing heavily in their own future!

Investor buying in U.S. property markets was down in 2006. However, the percentage of housing sales in the U.S. attributed to vacation homes last year increased. This makes sense. Vacation-home buyers are typically thinking longer term. They’re not looking to flip, as a speculator would be, in a matter of a few years. They’re buying, generally, something to enjoy through retirement.

All this is to say that foreign real estate markets and buyers are changing. They are not, however, disappearing.

The key is to think long term.

Taking this perspective, you’ll notice (as I am noticing) that many countries make good sense right now for a vacation home buy. Places where there isn’t a local housing crisis, as there is in the U.S. Places where the U.S. market doesn’t drive the local market. Places where there is the possibility, say, of renting out your house or apartment when you aren’t using it.

DanDannyDaniel Hussmann] www.drparadise.com 829-644-8094, or please use my Skype address: dlhussmann

Here in Las Terrenas, we have several “Condo-Hotel” opportunities as well. Alisei www.alisei.com and Colibri www.colibri.com just to mention two. These folks have everything in place and are actually cash-flowing and are seeing returns on monthly income. All this and not mentioning that you get to come, stay, and enjoy your unit a couple months out of each year.

These are condo-hotels where all rental income goes into a pool, and is divided up by owner per sq. ft. owned and amount of available time in rental pool.

We sold apartments to several people last year for $120,000 USD preconstruction and now, those same units are selling for $250,000 USD. We do not advocate “flipping”. In fact, that is the last thing we want to see here…an over-heated market due to a bunch of speculative buying, selling and flipping!.

There are built in fail-safes for us here. For instance, inventory is VERY low. Demand is VERY high. It takes longer to get things built here, and, there is not that much good land (buildable and/or with good title) available to add more inventory. This will likely keep inventories low.

Two places in particular that come to mind may seem unlikely recommendations right now: Paris and Croatia. Even with the euro at an all-time high, these (and other) European destinations can make sense…especially if you can qualify for a local mortgage and are able to earn short-term rental income in euro, as you would be in both Paris and Croatia, for example. (The European can give you further updates on these areas.)

DanDannyDaniel Hussmann] www.drparadise.com 829-644-8094, or please use my Skype address: dlhussmann

This makes no sense to me. The dollar is being devalued more each day. Even Canada has passed us! Why would anyone from the US go to Europe?! The Dominican Peso has stayed steady at about 32 Pesos per Dollar for 4 years.

Other spots to think about include Morocco, where prices are low and foreign mortgages are available; Romania, where ski properties are particularly appealing and inexpensive; and northeast Brazil, which boasts the world’s most prized commodity–inexpensive beachfront.

DanDannyDaniel Hussmann] www.drparadise.com 829-644-8094, or please use my Skype address: dlhussmann

As for these, the only safe place for American’s is maybe Brazil. The Dominican government is staunchly pro-America. Not to mention, the Dominican Republic is only a short 1.5 hour flight from Miami! It’s a “no-brainer”!

Why these markets? Because they’re not driven by U.S. buyers. And, right now, that’s a big deal.

DanDannyDaniel Hussmann] www.drparadise.com 829-644-8094, or please use my Skype address: dlhussmann

Again, he’s lost sight here. It’s not the US buyers that are driving any market. It was and is cheap money with imprudent credit lending practices. You all know what is going on with the sub-prime lending market!

Lief Simon,
For International Living

DanDannyDaniel Hussmann] www.drparadise.com 829-644-8094, or please use my Skype address: dlhussmann

Thanks so very much for your time. My comments are my own and no one else’s. If you would like to see the DR in all its glorious (natural and economic) beauty, please give me a call!

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