Costa Rica's thriving housing market
Lalaine C. Delmendo | June 02, 2019
“They come here to vacation, fall in love and want to buy,” said Rodolfo Herrera, a real estate lawyer based in San Isidro, San José.
An extra benefit for investors is that San Jose houses yield surprisingly good rental returns, at 8.6%, with apartments yielding 7.5%, according to Global Property Guide research.
In San Jose, the country's capital, the average listing price of houses rose by 3.7% y-o-y to US$1,110 per square meter (sq. m.) in July 2019, according to encuentra24.com. Likewise, condominium prices increased 1.8% to an average of US$1,724 per sq. m..
Almost all other provinces in Costa Rica also registered rising residential property prices during the year to July 2019.
- In Guanacaste, house prices fell by 2.8% y-o-y to an average of US$1,158 per sq. m. in July 2019. But condo prices surged by 40.8% to an average of US$1,181 per sq. m.
- In Alajuela, house prices rose by 5.5% to US$997 per sq. m. in July 2019 from a year earlier. Condominium prices increased 5.1% to an average of US$1,051 per sq. m.
- In Cartago, house prices were almost unchanged at US$947 per sq. m. during the year to July 2019. Condo prices rose strongly by 15.9% y-o-y to US$1,149 per sq. m.
- In Heredia, house prices increased slightly by 1% y-o-y to US$1,038 per sq. m.. Condo prices soared 16.7% to an average of US$1,516 per sq. m.
- In Puntarenas, house prices rose by 1.7% y-o-y to US$1,162 per sq. m.. Condo prices fell 13.7% y-o-y to US$1,299 per sq. m.
- In Limon, house prices rose by 5.8% y-o-y to an average of US$622 per sq. m.
Property transactions have risen by double-digit figures since 2013, according to local real estate experts. This is not surprising given booming tourism. In 2018, the total number of tourist arrivals rose by 1.9% y-o-y to a record 3,016,667 people, according to the Costa Rican Tourism Board. Then during the first half of 2019, visitor arrivals increased further by 3.9% y-o-y to about 1.73 million people, thanks to the continued increase of tourists from North America.
The economy expanded by a modest 2.7% in 2018, after annual growth rates of 3.4% in 2017, 4.2% in 2016, 3.6% in 2015, 3.5% in 2014 and 2.3% in 2013, according to the International Monetary Fund (IMF). The economy is projected to grow by 2.9% this year and by 2.8% in 2020.
There are no restrictions on foreign buyers in Costa Rica.
Costa Rica: good returns for landlords in Costa Rica
There are good rental returns to be had in Costa Rica. San Jose houses generate on average 8.6% returns - surprisingly good!
Apartments and houses in San Jose Province, in San Jose city, Escazu and Santa Ana generate around 7.5% returns. There only appear to be minor differences in rates of return between houses and apartments.
Much the same applies in Heredia province, and in Alajuela. These returns are slightly below what one would have expected 5 or 10 years ago, but not much less.
Our research concentrates on the market's higher end. Rental returns are likely to be higher on smaller properties in less desirable areas.
Progressive income tax rates in Costa Rica
Rental Income: Rental income is taxed at progressive rates, from 10% to 25%. For tax year 2018-2019, the first CRC3,628,000 (US$6,479) income is not taxed.
Capital Gains: If capital gains are not derived from habitual transactions, they are tax exempt. Otherwise, capital gains are taxed at a flat rate of 30%.
Inheritance: Transfer of Costa Rican properties, even by way of inheritance, is taxed at progressive rates, from 1% to 2%.
Residents: Residents pay tax on their worldwide income at progressive rates. Income from non-employment sources are taxed separately from employment income.
Total transaction costs are moderate in Costa Rica
Total roundtrip transaction costs are around 8.75% to 14.75%, inclusive of the real estate agent's fee that ranges from 5% to 10%. It is customary for the buyer and the seller to share the costs equally. The buyer must be wary of buying a property with liens or squatters.
Costa Rica's tenancy law is still pro-tenant
Despite the passage of a new law aiming to strike a balance between landlords and tenants, the rental market is still pro-tenant.
Rent: Rents can initially be freely negotiated between landlord and tenant. If rent for housing purposes is agreed in US dollars or other foreign currency, no yearly increases are allowed. Rent increases are allowed only in the case of agreements in colones, the Costa Rican currency.
Tenant Security: The minimum lease term is three years, but the tenant can cancel it anytime by giving a three-month notice. Unpaid rent can be very difficult to collect.
Modest economic growth; high unemploymentCosta Rica’s economy expanded by a modest 2.7% in 2018, the slowest growth in five years, according to the International Monetary Fund (IMF).
“The slowdown reflects multiple shocks that affected the Costa Rican economy, including a three-month strike by state workers against fiscal adjustment efforts and the effects of the Nicaraguan crisis,” said the IMF.
Costa Rica had robust economic growth from 2003 to 2007, with annual average real growth of 5.6%. However, the economic growth slowed to 4.7% in 2008 and contracted by 1% in 2009, due to the global crisis. But the country bounced back quickly, with GDP growth rates of 5% in 2010, 4.3% in 2011 and 4.8% in 2012.
The economy is projected to grow by a modest 2.9% this year and by 2.8% in 2020, based on IMF estimates.
During the second quarter of 2019, unemployment stood at 11.9%, up from 8.7% in the same period last year, according to INEC.
Inflation picked up to 2.89% in July 2019, the highest level since March 2015 but still within the inflation target of 3% set by the central bank.
In January 2015, the BCCR adopted a managed float exchange rate regime, with a range of 500 to 800 colones per USD1, and vowed to intervene only when the currency shows excessive fluctuations.
Despite uninterrupted growth and manageable inflation, Costa Rica's fiscal deficit stood at 6% of GDP in 2018, according to the Banco Central de Costa Rica. The deficit is expected to fall to 5.8% of GDP this year and to 5.1% of GDP in 2020.
Despite this, the government gross debt widened to a record high of 53.5% of GDP in 2018, up from 48.6% in 2017, 44.9% in 2016, 40.9% in 2015, 38.4% in 2014 and 35.8% in 2013.
In 2015, Standard & Poor’s, Moody’s, and Fitch Ratings, all cut Costa Rica’s credit rating to junk status. In December 2018-January 2019 all three downgraded the country’s credit rating further. Standard & Poor’s downgraded Costa Rica's long-term foreign and local currency ratings to B+, with negative outlook. Moody’s downgraded long-term issuer ratings to B1, with negative outlook. Fitch Ratings lowered the sovereign long-term foreign currency issuer default rating to B+, with negative outlook.
“A high debt burden, poor debt management, a rising share of government debt denominated in foreign currency, and a persistently high level of dollarization in the financial sector highlight Costa Rica's external vulnerabilities,” said S&P.
In an effort to strengthen the country’s finances, the government enacted the Law on Strengthening Public Finances in December 2018.
Effective in July 1, 2019, the law focuses on four pillars:
- Replacing the current sales tax law with a value added tax (VAT)
- Amendments to the current income tax law and the inclusion of specific treatment for capital income and capital gains
- Reforms to the Law of Salaries of the Public Administration
- A fiscal rule to limit public spending
“With the approval of the reform, Costa Rica has avoided a crisis and takes a step that brings stability and confidence,” said Costa Rican President Carlos Alvarado Quesada.