Market in Depth

Momentum gains thanks to surging demand

Lalaine C. Delmendo | January 18, 2022

Puerto Rico's housing market continues to strengthen, after several years of house price falls, thanks to surging demand. During the year to Q2 2021, the seasonally-adjusted purchase-only house price index surged 15.4% (12.4% inflation-adjusted), a sharp acceleration from the previous year's minuscule growth of 0.2%, according to the Federal Housing Finance Agency (FHFA). It was the second highest y-o-y growth ever recorded since FHFA started publishing data in 1995.

During the latest quarter, house prices increased slightly by 0.9% in Q2 2021, almost unchanged when adjusted for inflation.

“There is no inventory to supply the demand, which makes prices soar,” said Francisco Díaz Fournier, owner of Luxury Collection Real State. He noted that residential prices in Puerto Rico have reached more than US$1,000 per square foot, almost similar to Miami, New York and San Francisco.

Demand is rising strongly, mainly driven by wealthy Americans attracted with Puerto Rico's tax haven status. In the first half of 2021, the houses sold total soared 84% y-o-y to 6,593 units, following an 8.3% fall during 2020 due to the pandemic, according to the Office of the Commissioner of Financial Institutions. Existing houses, which accounted for 92% of the total number of houses sold, saw a 91.4% y-o-y increase in sales in H1 2021 while sales of newly built houses rose by 26.1%.

Yet construction activity remains weak, with the total value of housing construction in the islands falling by 3% to US$516 million in 2020 from a year earlier, following a 9.4% increase in 2019, according to Puerto Rico Planning Board.

During the past decade the island has experienced a prolonged economic crisis, massive debt, high unemployment and continuing population loss. With US$70 billion in debt and US$50 billion in pension liabilities, Puerto Rico's bankruptcy filing in May 2017 was the biggest in the history of the United States.

Puerto Rico house prices
After expanding by 1.2% in 2019, Puerto Rico's economy contracted again by 7.5% during 2020, mainly due to the pandemic as well as regular earthquakes. The economy slumped by 4.7% in 2018, 2.9% in 2017, 1.3% in 2016, 1% in 2015, 1.2% in 2014, and 0.3% in 2013. The economy is expected to remain volatile, with projected GDP growth of just 2.5% this year and 0.7% in 2022, according to the latest projections released by the International Monetary Fund (IMF).

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.

Analysis of Puerto Rico Residential Property Market »

Rental Yields

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.

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Taxes and Costs

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.

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Buying Guide

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.

Read Buying Guide »

Landlord and Tenant

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.

Read Landlord and Tenant »


Economic crisis, natural disasters and the housing market

Historically, 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 2018, with an exception in 2012 when the economy grew by a meager 0.03%.

Puerto Rico real gnp
Puerto Rico has lost about 20% of its jobs since 2007. The population has shrunk by about 17% in the past 15 years (2005-20). The poverty rate is now at about 45%. And public health and retirement systems became 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.

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 USD 30 billion, according to economic consulting firm Estudios Tecnicos’s director, Jose Villamil.

Puerto Rico’s banking crisis was also a major concern, with non-performing loans at elevated levels. Most of the problem was 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 general government gross debt
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.

As if Puerto Rico’s economic woes were not enough, Hurricane Maria struck the island on September 2017 – killing an estimated 2,975 people, severely damaging the island’s infrastructure, adversely affecting thousands of small businesses, and destroying nearly all agricultural production. The category 4 storm caused an estimated US$90 billion in damage. A total of 357,492 homes in Puerto Rico were damaged, according to the Federal Emergency Management Agency (FEMA). Overall, about 23% of the island’s housing stock was affected, with around a third of them located in the San Juan metropolitan area and other coastal counties.

In response, the US Department of Housing and Urban Development (HUD) approved US$1.5 billion for the Community Development Block Grant-Disaster Recovery (CDBG-DR) Action Plan in July 2018 to assist rebuilding. The grant includes US$1 billion for housing projects, US$ 100 million for infrastructure and US$ 10 million for rental assistance to vulnerable households and the elderly.

Then in March 2019, HUD allocated another US$8.2 billion funds to the program – the largest funding approved by HUD for the recovery after a disaster. Of which USD 2.85 billion is allocated for housing.

Just recently, US President Joe Biden approved another US$10 billion relief recovery funding for Puerto Rico for housing and infrastructure reconstruction, among other social programs.

Puerto Rico Unemployment
The economy showed some improvements in 2019, registering a growth of 1.2% in 2019. However, it was immediately cut short by the pandemic, dragging the economy back to recession with a record 7.5% decline in 2020.

Puerto Rico’s tourism had been adversely affected by the imposition of Covid-related travel restrictions and lockdown measures worldwide. During 2020, the total number of tourist arrivals plummeted by 21.3% y-o-y to 3.88 million people, in stark contrast to the annual growth of 15.7% in 2019, according to the Puerto Rico Planning Board. Likewise, total visitor expenditures fell by 19.1% to US$2.92 billion in 2020 from a year earlier, following a 9.3% growth in 2019.

While unemployment has fallen, gradually reaching 8.4% in August 2021 - down from 16.4% in 2010, and 15.9% in 2011 - it remains far above the United States’ 5.2% jobless rate. Many of the new jobs are in rebuilding, which has created many construction jobs. These additional jobs, however, are temporary.