ECUADOR: Booming Economy, Controversial Politics

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The following article is reproduced from the Global Property Guide, a site specializing in residential property research from the perspective of residential rental yields and property fundamentals.

Driving across Ecuador or watching TV, one is likely to notice the government slogan “La revoluciòn ciudadana avanza!” (the citizen’s revolution moves forward!). Despite the populist mood, this slogan is appropriate. The country is enjoying rapid growth and prosperity.

People are moving towards big urban centers such as Quito and Guayaquil.

There is a rush to the Pacific coast, and the eco-tourism boom in the Andean and Amazonian regions. There is also a clear political will to provide better housing conditions for Ecuadorian households. Plus, cheaper money is boosting investment.

The property market is steadily growing. Ecuador’s National Bureau of Statistics does not calculate a house price index. A general construction price index, which measures producer prices in the construction sector, helps in understanding the price dynamic in the property sector.

Ecuador’s general construction price index fell from 229.54 in August 2008 to 210.79 in May 2009, in the aftermath of the international financial crisis. But since then construction prices have reached a historical peak of 234.569 in January 2012. Construction prices rose by 6.88% in 2011 (+2.18% in real terms), after 1.95% rise in 2010 (-0.53% in real terms)

The price dynamic is mainly a result of:

  • economic growth, as the country is enjoying a rapid development
  • urbanization programs
  • increasing flows of migrants returning home
  • American expatriates choosing to settle in places such as Quito and Cuenca
  • relatively low interest rates

Key fact: the price of houses is rising in US$ terms. Though domestic inflation largely parallels nominal house price increases, this is not relevant for foreign buyers who benefit from the fact that the dollar is legal tender in Ecuador. In a rapidly-growing emerging economy becoming more productive, one would expect either an appreciation of the currency against the US$ (assuming similar inflation rates), or domestic inflation (the Balassa-Samuelson effect). What is happening is a kind of inflation that reflects greater productivity, a rise in prices in the non-traded goods sector, which includes housing.

“According to estimates made by real estate associations, the annual appreciation of property, nation-wide, has been running between 8% and 12% since 2007″, says David Morrill, author of ‘Ecuador: the Owner´s Manual’.

The economy is growing

Ecuador’s severe financial crisis in the late 90s led to economic hardship, and social and political tensions. Banks defaulted, and emigration rates skyrocketed. After losing 67% of its foreign exchange value during 1999, the sucre was replaced by the US dollar in March, 2000.

Inequality is still a big issue, but Ecuador is growing. Growth was 5.78% in 2011 (provisional), after 3.58%

in 2010. According to the Central Bank, the economy will grow by 5.4% in 2012.

Some IMF forecasts:

  • Public debt is expected to increase moderately from 20.7% of GDP in 2010, to 25% of GDP in 2015.
  • The current account deficit is forecast to stay stable at around 3.5% till 2015.
  • Unemployment is expected to stay stable at around 7.5%, from here to 2015.

Despite jitters in the wider global economy, Ecuador shows no sign of slowing. The combination of lower interest rates, a stable exchange rate and a growing banking system have been crucial in boosting investment in real estate projects. The Ministry of Finance says inflation is expected to reach 5.1% this year

The Ecuador´s national bureau of statistics collected times series of building permits until 2006. The general index of building permits rose from a value of 166.6 in 2000 to 350.6 in 2006.

 

People are moving to urban centers.

Since 1990 the urban population has increased at an average annual rate of 2.7%. By 2010, 67% of the population lived in towns.

“Besides construction in Quito and Guayaquil, Cuenca and Manta are also experiencing building booms”, says Morrill.

“In the residential market, Ecuadorians returning from overseas, to live or invest, mostly from the U.S. and Spain, are a major factor.”

Adds the Ecuadorian architect Dayuma Roman Jauch: “In the last ten years households have had easier access to mortgages to buy flats in urban centers. Also, big firms help to their workers to buy homes close the place of work.”

Not the best place in the world for doing business

However Ecuador is no Asian Tiger. The Doing Business Report 2012 (World Bank) ranks Ecuador 130 out of 183. In one of indicator, Starting a Business, Ecuador ranks 164. “An entrepreneur in Quito needs to complete 12 procedures, wait 56 days and pay the equivalent of 28.8% of the GNI per capita to start a business” says Alejandro Espinosa-Wang, of the World Bank.

In contrast, “the average number of procedures needed in the Latin American and the Caribbean region is 9. And in the OECD high income economies, only 5. The average time to start a business is 54 days, and 12 days, respectively.”

The political landscape is turbulent…

President Rafael Correa, an economist educated in the US, likes to define Ecuador as an anti-Imperialist country and to define its politics as “revolutionary”.

Yet despite Correa’s personal friendship with Hugo Chavez, and some tensions with the US over economic policy, Correa’s foreign policy is less confrontational than Venezuela’s.

At home, Correa’s political strategy draws on a mixture of Latin social democratic tradition, and an autocratic left-wing political attitude. So one can see him taking initiatives to protect the environment or promote social housing as well as shaking hands to Iran´s diplomats. The government has taken measures to tackle poverty and inequality, for example increasing the share of oil revenues used for pro-poor spending programs.

Relationships with the media are an issue. Correa’s clashes with the national press have attracted international criticism. An example is the recently passed law that bans the media from directly or indirectly promoting candidates, or electoral preferences, or a political thesis.

Even if the political landscape raises concerns, the visitor who travels around the country can easily see that new roads have been completed, and public schools on the country´s periphery have been spruced up. Like many other Latin American countries, with all its contradictions, Ecuador is developing.

Cuenca and Quito are nice places live in

Ecuador is emerging as a haven for expatriates, especially Americans. Climate, breath-taking landscape and relatively low housing and living costs are the main reasons. Ecuador seems to offer an attractive mix of exoticism and services of good quality.

Cuenca, surrounded by green valleys, this colonial town has cobblestone streets, cathedrals, colonial parks and urban rivers. A city of 330,000 and a Unesco world heritage site, is home to about 5000 US citizens. Since 2009, International Living, a publishing company, has named Ecuador the world´s number 1 retirement country and Cuenca the number 1 retirement city.

Cuenca‘s expatriate community has grown by about 4 times in three years. However, real estate sales to foreign pensioners represent only 1% of total sales. By contrast, sales to Ecuadorians returning from overseas account for more than 30% of the total. Returning Ecuadorians are a major factor in price increase, particularly in the condominium market.

In addition to Cuenca, foreigners also look at properties in Manta, Salinas and Quito and the small towns of Cotacachi and Vilcabamba.

Quito has one of the better-preserved colonial towns in Latin America and in 1978 UNESCO declared Old Quito a World Heritage site.

The Andean Cotacachi and Vilcabamba are interesting alternatives to the fashionable Cuenca. Cotacachi is located in a beautiful green valley between two volcanic peaks close to the Pan-American Highway.

Vilcabamba, in the south, is blessed by an enduring spring and a temperature ranging from 19 to 25 degrees. Curiously, it has been studied for the surprising longevity of its 5000 inhabitants.

A completely different atmosphere can be found in Manta or in Salinas. These touristic coastal cities are located on the so-called Routa del Sol and are experiencing a construction boom.

The risk of over-exploiting coastlines

In Ecuador there are miles of empty beaches, with a broad range of climates and natural diversity. However, in absence of a proper regulation, the rapid development of real estate projects might seriously endanger the environment.

Hundreds of households of the emerging middle-class move from the Andean region to the beaches of city such as Tonsupa or Atacames for holidays. But the skyline on the coast is changing fast and the quality of projects is questionable.

“My impression is that – with the exception of natural reserves – proper regulation of building standards on the coastlines is totally missing,” says Roman. “All efforts to safeguard the environment seem focused on Amazonia. Ecuador policy-makers need to develop better regulation for the property market on the sea”.

Conclusion

Ecuador’s housing market benefits from a booming economy. Large urbanization programs are ongoing. The country is beautiful and attractive. Politics is a risk, as political instability could negatively affect the economy.

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