The Winds of Change
By Paul McBride / Sam Taliaferro - Prima Panama Blog | Published: October 23, 2008;
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The Winds of Change
Will the Financial Crisis Limit Your Ability to Buy a Home in Panama?
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Dear Donna,
I usually restrict my commentary to things in Panama related to the residential real estate market. However, events unfolding due to the current financial crisis are having such wide spread effects that I feel compelled to share some of my thoughts about how these changes could impact your ability to purchase a home here.
The collapse of the financial and credit markets is without precedent in our lifetimes. I recently read an article by a well respected investor who said that in the future, people will frame their life experience in terms of how they lived before 2007 and how they live after. Make no mistake, life altering changes are coming and the standard of living in many countries will be significantly different in the not too distant future (and not in a good way).
Without boring you with too much detail, here are a few of my observations about things that are happening now and how they may affect the real estate market in Panama in the near future:
1. Credit markets. The credit markets have virtually collapsed as trust between parties in the system has evaporated. Banks are no longer willing to lend even short term money to other banks fearing that the borrower will default. Governments all over the world have had to step in and and act as a guarantor for these short term lending transactions. In essence, governments and central banks are now the lenders of first, last and only resort.
2. Government intervention. Led by the U.S. Federal Reserve, central banks from all over the world have injected TRILLIONS of dollars into the financial system. Although much of this money may ultimately be recovered, a substantial amount will be lost and taxpayers will be forced to cover the difference.
3. The economy. It's becoming clearer that the world is heading toward (if not already in) a global recession. With reduced consumption in the U.S., exporting nations like China are getting hit hard. This in turn will reduce demand for raw materials with commodity producing countries feeling the results.
4. Political change. By now it is almost certain that there will be a substantial change in the U.S. government come November 4th. Soon-to-be President Barrack Obama is already on record as saying that "we need to spread the wealth". Who's wealth do you think he's planning to spread?
5. Fundamental changes in society. Sam Taliaferro has a good take on what all this means moving forward. There's a movement to blame capitalism as the culprit in the current financial meltdown and a backlash toward more socialist policies is growing. Go to his blog to read more about this.
What does this mean if you're thinking about buying a home here in Panama?
Well, it could have a big affect.
Within the span of less than a month, the discussion about deficit spending changed from billions of dollars to trillions of dollars. The scale of spending is without precedent in human history. Somehow this money will need to be paid back (meaning much higher taxes) or will be printed away (resulting in runaway inflation). Either way, you lose from direct confiscation by taxes or through the devaluation of your money. If you've worked hard all your life to save money and accumulate wealth, these are not pleasant alternatives.
To protect their wealth, more and more people will be looking for places where they can move their money to avoid confiscation and devaluation. As luck would have it, Panama is one of those places.
However, governments are not stupid. They realize that if they begin raising taxes on income and assets, people will simply move their money to places with less taxes. To stop this, governments have a two pronged solution - put pressure on so called "tax haven" countries to restrict the untaxed flow of money into their nations and to implement outgoing currency controls against their own citizens.
Inflation, devaluation and currency controls could add huge costs to buying a home in Panama. For example, the recent run up in the value of the U.S. dollar has already reduced the buying power of Canadians by 20% (in other words, homes in Panama are now 20% more expensive in Canadian dollars than they were just 2 months ago!). Both the Brits and Europeans have seem similar drops in the value of their currency against the dollar. And it is logical to assume that a new U.S. administration, backed by a Democratic controlled House and Senate, will pass legislation that will tax U.S. citizens when they take money out of the country. Don't think this can't happen since legislation of this type has been proposed in the past but defeated in Congress. This could add up to 30% to the cost of buying property overseas for U.S. citizens.
What's amazing about all this is the pace at which events are unfolding. The entire economic condition of the world has changed dramatically over the past 45 days. Wild swings in the stock market of 400, 500 or 600 points are now not unusual. Although many people saw this coming, the events themselves took place over days, not months.
Historically, the causes of societal change develop over time. However, the actual changes themselves occur with frightening speed. Unfortunately, by the time the changes become apparent its already too late to act.
Seven years ago, in August 2001, the residential real estate boom in Panama began right here at Valle Escondido. Interestingly, Valle Escondido started just as another societal shift was taking place - the tragic events of 9/11. Then, as now, Panama was seen as a safe haven and a compelling place to live with a great climate, friendly people, strict privacy laws, low taxes, easy access and a low cost of living. As we head toward another period of uncertainty, we may witness a second housing boom fueled by people drawn by these same compelling features.
The bottom line of all of this is simple. If you've been looking at Panama as a potential place to live or invest, delaying your decision too long could be very, very expensive. Things are changing much faster than you think.
