El Salvador’s housing market has many problems
December 22, 2016
“In some areas, sales contracts are signed for US$12,000, then dropped to US$10,000 and ends up selling at US$7,000,” said to Estela de Dubon of Inmobiliaria Las Américas. saidDubon. House price falls are especially pronounced in gang-controlled areas such as La Libertad, Soyapango, Ilopango, and Apopa, added Dubon.
This was supported by Sara de Vasquez of property management firm Lotiversa El Salvador who said that in some parts of the country, land prices have fallen by as much as 40% in just a few months. For instance, a lot that was originally priced at US$5,000 is now selling for just US$3,000.
Vasquez noted that while violence has been a part of El Salvador’s life, it has increased dramatically in the last four years, frightening investors and property developers.
There are areas in El Salvador that clients and employees are afraid to enter because of the presence of criminal groups, added Vasquez. “Sometimes customers may be interested in a property, but they lose interest in seeing the area.”
As gang violence worsens, the demand for gated communities is rising and homebuyers are requiring more security. Property demand has also shifted to areas with relatively low crime rates. “In areas such as Santa Tecla and Santa Elena, houses are in greater demand and values are increasing due to their better location,” according to a local real estate expert.
Some construction projects have been either halted or abandoned. “Definitely, there is no execution of new housing projects in some areas because of extortion from gangs, exacerbated by customers’ demand for closed buildings and better security measures,” said Antonio Velasquez of El Salvador’s Chamber of Construction (CASALCO).
Many overseas Salvadorians buy property in their home town, but few foreigners have been attracted to buy here. Foreigners prefer to live in San Salvador, the capital, and its surrounding suburbs, protected by gated villages.
Other than violence and crime, foreigners are discouraged by frequent natural disasters such as hurricanes, earthquakes, and volcanic activity. The country is also haunted by memories of the bloody civil war from the 1980s to 1992 which left more than 75,000 people dead.
El Salvador’s small economy is extremely dependent on the US. After pegging the El Salvador colon to the US dollar in 1994, the US dollar was formally adopted as the official currency in January 2001. According to a UNDP study, without remittances, the proportion of households living in extreme poverty would jump from 6%, to 37%. More than 50% of all exports from El Salvador go to the US.
El Salvador’s economic growth has historically been sluggish. Massive reconstruction efforts after the end of the civil war pushed GDP up by an average of 6.6% from 1993 to 1995. But average annual GDP growth from 1996 to 2004 was only 2.6%.
From 2005 to 2007El Salvador’s economy grew by 3.8% per annum. But in 2008, GDP growth slowed to 1.3%, due to the financial meltdown and economic recession in the US.
The economy contracted by 3.1% in 2009. The economy has remained weak since then, with average GDP growth of just 1.9% from 2010 to 2015.
Foreigners can buy property, and can hold dollar accounts, and use these accounts when seeking local financing. There are no restrictions on foreigners buying urban land, but foreigners cannot own rural lands except for industrial purposes.
El Salvador: inexpensive housing prices
San Salvador is not an expansive city, and buying an apartment there is not pricey. An apartment would typically cost around US$1,200 per square metre (US$115 per square foot).
Gross rental yields are a generous 8.5%, which means it generally makes much more sense to buy than to rent, and to be a landlord than a tenanct.
Taxes are generally high in El Salvador
Rental Income: Nonresidents are charged 30% tax on net income derived from leasing properties.
Capital Gains: Capital gains earned by non-residents from selling property in El Salvador are taxed at a flat rate of 10%.
Inheritance: Inheritance is subject to income tax rates in El Salvador.
Residents: Residents are only taxed on their Salvadorian-sourced income at progressive rates, from 10% to 30%.
Total transaction costs are low in El Salvador
The total round-trip transactions cost is around 8.78% to 9.63 %, inclusive of the 5% agent’s fee. Five procedures are needed to register a property, completed in about 22 to 40 days.
Rental laws are pro-tenant in El Salvador
El Salvador’s rental law and practice are pro-tenant.
Rent: Although the rent and rent adjustments can be determined freely by mutual consent, the rent court may intervene if the rental contract is silent on these terms. The tenant may also petition the court to adjust the rent if the parties cannot reach an agreement.
Tenant Security: The tenant cannot be evicted upon the expiration of the contract as long as he pays the rent. The contract can only compel the tenant to pay the rent for the whole period stated. The court system is permanently saturated.
Sluggish economy growthEl Salvador is the smallest country in Central America with a land area of 20,720 sq. km. With a population of 6.1 million people in 2015, it is also the most densely populated country in the region.
El Salvador’s civil war during the 1980s was the result of the gross inequality which pits a small wealthy elite against the majority of the population. The war left around 75,000 dead and caused damage worth US$2 billion.
With the signing of the Peace Accords in 1992, the country began to recover. Massive reconstruction efforts after the end of civil war pushed GDP up by an average of 6.6% from 1993 to 1995. Yet after, GDP growth never exceeded 5%, and average annual GDP growth from 1996 to 2004 was only 2.6%.
The benefits of the adoption of US dollar in 2001 were felt only while low interest rates lasted, from 2005 to 2007, when El Salvador’s economy grew by 3.8% per annum. However in 2008, GDP growth slowed sharply to just 1.2% due to the financial meltdown and economic recession in the US. Then in 2009, the economy contracted by 3.1%. The economy had been sluggish since then, expanding by just an average of 1.7% from 201o to 2014. In 2015, the economy grew 2.5%.
During the second quarter of 2016, the economy grew by 2.52% from a year earlier, slightly up from a growth rate of 2.34% in Q2 2015, according to the Banco Central de Reserva de El Salvador. The economy is expected to expand by 2.4% this year, according to the International Monetary Fund (IMF).
Heavy reliance on remittances
About 2 million Salvadorians live and work in the United States (including illegal immigrants). These US residents are being encouraged by the government to invest in their homeland, to help its economic and social development.Thus, the economy is heavily dependent on remittances, which accounted for around 17% of GDP.
Remittances are the single most important source of household income in the country. About 22% of all households in El Salvador receive remittances.
Remittances grew by a staggering 260% from just US$962.5 million in 1994 to US$3.47 billion in 2006, according to the Banco Central de Reserva de El Salvador, the country’s central bank. This was equivalent to an average annual growth of 12%.
However, remittances have somewhat slowed in recent years. In 2015, remittances grew by a modest 3.3% to US$4.27 billion from a year earlier, slightly down from an average growth of 4.6% in the past four years. From January to October 2016, total family remittances amounted to US$3.73 billion, up 6.23% from the same period last year, according to the central bank.