Puerto Rico: house prices are now surging, buoyed by strong demand
Lalaine C. Delmendo | November 03, 2019
It was the highest y-o-y growth ever recorded since FHFA started publishing data in 1995. During the latest quarter, house prices increased almost 5% (3.76% inflation-adjusted) in Q2 2019, in contrast to a q-o-q decline of 6.7% (-7% inflation-adjusted) in the same quarter last year.
During 2018, sales for newly built houses surged 78% from a year earlier while existing home sales rose by 17%, according to Estudios Técnicos, Inc. (TSI). Home sales are projected to continue rising this year.
Demand is rising sharply, thanks to new initiatives, including tax incentives and other housing stimulus measures. Insurance and federal aid money are pouring in, coupled with growing interest from Americans looking for a bargain. The top three municipalities with the highest number of home sales included Ponce, Mayagüez and San Juan.
The momentum is expected to continue this year, with total home sales rising by 3.5% to 5,393 units in the first half of 2019 as compared to the same period last year. Likewise, The total value of home sales rose by 16.1% to USD 845.35 million in the first half of 2019 from a year earlier.
Yet construction remains weak, amidst low investor confidence. In 2018, the value of residential construction fell 28.2% y-o-y to USD364.5 million, according to the Puerto Rico Planning Board - far below 2007's USD2.33 billion. Private and public residential construction fell by 27.9% and 34.2%, respectively.
The housing market is expected to remain fragile, given the island's prolonged economic crisis, massive debt and continuing population loss.
The economy is projected to contract by 1.1% this year and by another 0.7% in 2020, after almost 14 years of depression, according to the International Monetary Fund (IMF). Puerto Rico filed for the equivalent of bankruptcy protection in May 2017, unable to pay its massive debt or provide its citizens effective services.
Foreigners can freely buy property in Puerto Rico. It is important to hire a real estate agent as knowledge of Spanish is essential. A foreigner can alternatively buy through a corporation (US$300 for Corporate Resolution). Registering a property by a corporation can be completed in around 15 days.
Rental incomes in San Juan, Puerto Rico are good
Average rental yields on apartments in San Juan, Puerto Rico, are again slightly down on last year, at 7.1% on 2 bedroom apartments, and 7.3% on 3 bedroom apartments.
This year, like last year, we were unable to gather sufficient data on apartments in coastal areas of Puerto Rico such as Condado, Miramar and Dorado, but two years ago they had much lower rental returns at 3.8%.
Round trip transaction costs, i.e., the costs of buying and selling a property, are very low in Puerto Rico. See Property transaction costs analysis for Puerto Rico and Puerto Rico transaction costs compared to other counties.
Taxes may be high
Rental Income: Nonresidents earning rental income effectively connected with business are taxed at progressive rates. Income-generating expenses are deductible when computing taxable income.
Capital Gains: Capital gains taxes are imposed at a flat rate of 29% for nonresidents.
Inheritance: Inheritance taxes are levied on the net asset’s value, and imposed at progressive rates from 18% to 50%.
Residents: Residents are taxed on their worldwide income at progressive rates.
Buying costs are low to moderate in Puerto Rico
Roundtrip transaction costs range from 6% to 10.50% of property value. The real estate agent's fee, at around 4% - 6%, accounts for the greater part of the costs. Maximum notary fee allowable is 1% of the property value for the first US$500,000 plus 0.5% of the amount in excess of $500,000.
The law is pro-tenant
Rent: Rents and rent increases can be freely negotiated. The tenant must pay the rent on time and the landlord must maintain the property for the tenant’s use.
Tenant Security: Expiration of rental agreement, non-payment of rent, breach of contract, and misuse of the premises are grounds for eviction in Puerto Rico. The renewal of the contract is one year for yearly rental agreements and one month for monthly rental agreements.
Puerto Rico’s prolonged economic crisisHistorically, Puerto Rico’s economy has closely mirrored trends in the United States. However the latest economic downturn has been more intense and has lingered longer in Puerto Rico.
After huge annual house price increases in the early 2000s, the housing market came crashing down in 2008. House prices fell by more than 31% (41.3% inflation-adjusted) from Q2 2007 to Q3 2018.
Puerto Rico’s recession began in the fourth quarter of 2006. GDP has grown very little or declined over the past decade, contracting every year from 2005 to 2017, with an exception in 2012 when the economy grew by a meager 0.03%.
Puerto Rico has lost about 20% of its jobs since 2007. The population has shrunk by about 13% in the past decade. The poverty rate is now at 45%. And public health and retirement systems are insolvent. There’s been high unemployment, massive emigration, and a near-catastrophic national debt crisis and credit rating downgrades.
Nearly half of Puerto Rico’s population lives in poverty, and household income is about US$18,000 annually – less than half that of Mississippi, the poorest U.S. state.
In 2018, Puerto Rico’s real GDP contracted by -2.3%, after falling by 2.4% in 2017, 1.3% in 2016, 1% in 2015, 1.2% in 2014 and 0.3% in 2013, according to the International Monetary Fund (IMF).
While unemployment has fallen, gradually reaching 7.7% in August 2019 - down from 16.4% in 2010, and 15.9% in 2011 - it remains far above the United States’ 3.6% jobless rate. Many of the new jobs are in rebuilding, which has created many construction jobs. These additional jobs, however, are temporary.
The loss of net worth among Puerto Ricans associated to the collapse of real estate prices in the past several years has been close to USD30 billion, according to economic consulting firm Estudios Tecnicos’s director, Jose Villamil.
Two laws, which came into effect in early 2012, provided significant new tax benefits to foreign individuals and businesses relocating to Puerto Rico:
- The Export Services Act 20 offers tax incentives to export services.
- The Individual Investors Act 22 provides total exemption from Puerto Rican income taxes on all passive income realized or accrued after becoming a bona fide resident of Puerto Rico.
Then in December 2014, the government expanded the coverage of both Act 20 and 22, expanding the period of tax exemption. On July 11, 2017, Act 45 further expanded Acts 20 and 22, adding “medical tourism services” and “telemedicine facilities” as eligible services under Act 20; abolishing the minimum number of employees required for most Act 20 businesses.
However so far none of these incentives have been sufficient to pull Puerto Rico out of its decline.
Puerto Rico’s banking crisis is also a major concern, with non-performing loans at elevated levels. Most of the problem is in the housing market, which represents about two-thirds of total loans, according to Scotia Bank. In 2006, before the crisis, the prime interest rate stood at 7.26%. It dropped to 3.25% in 2009 and remained very low since, but despite this about 80,000 families have been unable to refinance their loans and risk losing their homes.
Puerto Rico filed for the equivalent of bankruptcy protection in May 2017, unable to pay its massive debt or provide its citizens effective services. With US$70 billion in debt and US$50 billion in pension liabilities, Puerto Rico’s bankruptcy filing was the biggest in the history of the United States, dwarfing Detroit’s US$18 billion bankruptcy filing in 2013.
The economy is projected to contract by 1.1% this year and by another 0.7% in 2020, after almost 14 years of depression, according to the International Monetary Fund (IMF).