Puerto Rico’s house prices continue to rise strongly, despite weakening demand caused by increasing interest rates and reduced homebuyers’ purchasing power amidst surging inflation.
During 2022, the seasonally-adjusted purchase-only house price index rose strongly by 8.59% (2.41% inflation-adjusted), at par with the previous year’s 8.49% increase, according to the Federal Housing Finance Agency (FHFA). In Q4 2022, house prices increased by 5.89% as compared to the previous quarter, and by 4.86% when adjusted for inflation.
Puerto Rico’s house price annual change
The Puerto Rican housing market has suffered tremendously for most of the 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.
In recent years, the housing market showed some signs of recovery, despite the Covid-19 pandemic. The total number of housing units sold in Puerto Rico surged 30.2% y-o-y to 13,289 units in 2021, following an 8.3% fall in 2020, based on figures from the Office of the Commissioner of Financial Institutions (OCIF). However, housing demand weakened again last year, mainly due to rapidly increasing interest rates. During 2022, home sales fell sharply by 17.8% y-o-y to 10,915 units – lower than the annual average of 11,400 units recorded in the past decade.
The surge in interest rates caused lending to be more expensive and even though the housing market has not come to a grinding stop, activity has declined dramatically.
“If we compared interest rates today with 2020’s and 2021’s increments are very significant. We must remember that back then you could get a mortgage at 3.5 percent. Nowadays a regular mortgage has a 7.5 percent interest rate,” said Luzmarie Vélez-Miró, president of the Puerto Rico Mortgage Bankers Association (PRMBA). “It is not just that interest rates have increased, but that they have done so very quickly.”
With the prospect of more interest rate hikes in the near future, activity in Puerto Rico’s housing market is expected to remain subdued.
The overall economy performed strongly last year but will likely slow sharply this year. During 2022, Puerto Rico’s economy grew by about 4.8% from a year earlier, according to the International Monetary Fund (IMF), following a 1% growth in 2021 and a 3.9% contraction in 2020 caused by the pandemic as well as regular earthquakes. Before the Covid-19 pandemic, Puerto Rico’s economy has been contracting for most of the decade, except for the 1.5% growth in 2019 and zero growth in 2012.
Puerto Rico’s economic growth is projected to slow again to 0.4% this year, based on IMF estimates.
Demand is weakening again
During 2022, the total number of houses sold in Puerto Rico fell sharply by 17.8% y-o-y to 10,915 units, following an increase of 30.1% in 2021 and a decline of 8.3% in 2020, based on figures from the Office of the Commissioner of Financial Institutions. This is slightly lower than the annual average home sales of 11,400 units recorded in the past decade (2011-2021).
Over the same period:
- For existing houses, which accounted for 91% of total demand, sales plunged by 18.8% y-o-y to 9,962 units in 2022, after increasing strongly by 32.5% in 2021.
- For newly built houses, sales dropped 6.5% y-o-y to 953 units in 2022, following a 7.4% growth in the prior year.
In terms of value, total home sales fell by 15.8% y-o-y to US$2.02 billion in 2022, in contrast to a 105.2% increase in 2021, according to figures from OCIF.
- For existing houses, sales value declined by 17.3% y-o-y to US$1.78 billion in 2022, after increasing by 43.5% in 2021.
- For newly built houses, sales value dropped slightly by 3.2% y-o-y to US$242.79 million in 2022, following a 15.1% growth in the prior year.
U.S. mainlanders account for a substantial share of property demand in Puerto Rico. Foreigners can freely buy property on the islands. 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 yields are good, but the rental market remains volatile
Rental yields in Puerto Rico remain good to excellent, according to research conducted by the Global Property Guide in November 2022. Average rental yields on apartments in San Juan, Puerto Rico are on average at 7.89%. But overall the city’s rental yields are good, with them being between 3.90% to 13.20%. The highest rental yields are in the Rio Piedras district, averaging 9% to 10%.
Despite good yields, Puerto Rico’s rental market has been paralyzed by the pandemic. But even before the global health crisis, the islands’ rental market had already been weak with a vacancy rate of about 12.3%, up from 10% in 2010 and 7.4% in 2000, mainly due to continued population loss, according to the U.S. Department of Housing and Urban Development (HUD).
“Continued population loss in Puerto Rico has led to increasingly soft rental market conditions and rising vacancy rates,” said HUD.
San Juan’s average monthly rent for 2-bedroom apartments currently ranges from US$700 in Rio Piedras to US$3,200 in Isla Verde.
Round-trip transaction costs, i.e., the costs of buying and selling a property, are very low in Puerto Rico.
Tourism continues to improve
Puerto Rico’s tourism sector continues to recover, despite the adverse impact of Hurricane Fiona, which struck the islands in September 2022. Accordingly, travel and tourism generated about US$8.9 billion in revenues for the islands during 2022, surpassing the previous high recorded in 2019 by a huge 39%, based on figures from Tourism Economics.
During 2022, the total number of group room nights booked doubled from a year earlier. Likewise, short-term rental revenue also surged US$1.8 billion last year, up by 25% from the previous year.
“Tourism continues to lead the economic resurgence of Puerto Rico and, together, we’re setting records along the way,” said Brad Dean, CEO of Discover Puerto Rico. “Visitation, spending, and employment continue to reach or exceed 2021 levels, which…was our best year ever in Puerto Rico tourism. In comparison to other Caribbean islands and states in the U.S. mainland, Puerto Rico continues to outperform our peers.”
Other indicators also point to the recovery of the tourism sector:
- More than 5.1 million passengers arrived at the Luis Muñoz Marin International Airport in 2022, up by 6.5% from a year earlier.
- Cruise ship visitors also increased to 542,600 in Jan-Nov 2022, up 500% from the same period last year, according to figures from Puerto Rico Ports Authority. Though it remains just about a third of the figures seen in 2019 before the pandemic.
- More than 91,500 people are now employed in travel and tourism-related jobs – the highest ever recorded.
About 55% to 65% of visitor arrivals in Puerto Rico in the past four years came from the United States.
Tourism accounts for about 7% of Puerto Rico’s GDP.
Residential construction indicators mixed
Cement production and sales, the construction industry’s key indicators, showed mixed results.
- Cement production rose by 11.6% y-o-y to 8.3 million bags in 2022, following annual declines of 29.5% in 2021, 14.6% in 2020, and 6.7% in 2019, according to the Office of the Commissioner of Financial Institutions (OCIF).
- Cement sales, on the other hand, fell by 6.8% y-o-y to 14.5 million bags in 2022, after increasing by 12.5% in 2021 and 2.8% in 2020 and declining by 5.8% in 2019.
Residential foreclosures falling again
In the first three quarters of 2022, residential foreclosures in Puerto Rico dropped 15.9% to 1,927 units as compared to the same period last year, according to the Office of the Commissioner of Financial Institutions (OCIF). The total amount of residential units foreclosed during the said period totaled US$212.99 million.
As of September 2022, there were a total of 355,986 delinquent mortgages in Puerto Rico, down by 4.4% from a year earlier.
During the onset of the Covid-19 pandemic, residential foreclosures dropped sharply due to the imposition of moratoriums to help struggling homeowners. As a result, the number of foreclosures in Puerto Rico plunged by almost 78% y-o-y to just 911 units in 2020, in contrast to the 31.3% rise in 2019 and the lowest level recorded in recent memory. However in 2021 when the moratoriums were lifted, foreclosures surged again by a whopping 235.5% y-o-y to 3,056 units.
The pre-pandemic level of residential foreclosures averaged 3,800 from 2008 to 2019.
Economic crisis, natural disasters, and the housing market
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%.
After huge annual house price increases in the early 2000s, the housing market came crashing down in 2008. But then the market continued down. House prices fell by more than 31% (41.3% inflation-adjusted) from Q2 2007 to Q3 2018.
There’s been high unemployment, massive emigration, and a near-catastrophic national debt crisis credit rating downgrades. Puerto Rico has lost about 20% of its jobs since 2007. The population shrank by more than 19% over the past 18 years (2004-22). Nearly half of Puerto Rico’s population lives in poverty, and household income is about US$18,000 annually – less than half that of Mississippi, the poorest U.S. state. And public health and retirement systems were insolvent.
The loss of net worth among Puerto Ricans associated with the collapse of real estate prices in the past several years has been close to US$ 30 billion, according to economic consulting firm Estudios Tecnicos’s CEO, Jose Villamil.
Puerto Rico’s economic collapse was accompanied by a banking crisis, 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 filed for the equivalent of bankruptcy protection in May 2017, unable to pay its massive debt or provide its citizens with 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 in 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 to Hurricane Maria, 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 in 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 in 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.
In 2021, US President Joe Biden approved another US$10 billion relief recovery funding for Puerto Rico for housing and infrastructure reconstruction, among other social programs.
In 2022, more than US$947 million in U.S. Bipartisan Infrastructure Law funding has been announced to be allocated to Puerto Rico. About US$566 million of which will be used to invest in roads, bridges, public transit, ports, and airports, and over US$78 million for clean water.
The Community Development Block Grant-Disaster Recovery (CDBG-DR) plan for Puerto Rico’s reconstruction also presents a huge opportunity for the construction industry, particularly for new housing construction.
At least eight more hurricanes struck the islands from 2018 to 2022 but the damage was trivial when compared to Hurricane Maria.
The economy improved in 2019, registering a growth of 1.5% in 2019. However, it was immediately cut short by the pandemic, dragging the economy back to recession with a 3.9% decline in 2020.
The economy started to bounce back in 2021, registering a real GDP growth rate of 2.7%, according to the International Monetary Fund (IMF), followed by about 4.8% expansion in 2022.
Unemployment has fallen, reaching 6% in December 2022 – down from 6.2% and 6.5% in the past two months but remains far above the U.S. unemployment rate of just 3.5%. The jobless rate in the islands dropped to an annual average of 8.5% in 2017-22, from 16.4% in 2010 and 15.9% in 2011. Many of the new jobs are in rebuilding, which has created many construction jobs, and much of the improvement is in fact due to the emigration of labor. And we should remember that these additional jobs in construction are mostly temporary.
The Housing Stimulus Act
To rescue the island’s plunging housing market, former Governor Luis Fortuño implemented the stimulus program “Impulso a la Vivienda” (Act 152) in 2010. The idea was to cut home inventories and stimulate new housing construction. Even before the ratification of Act 152, a “combo program” allowed people to buy second homes at a reduced rate, through a US$25,000 incentive, plus a US$10,000 voucher covering closing costs.
Act 152 provides:
- Loan-to-value mortgage ratios of 105%
- A 100% exemption from net rental income tax, for a 10-year period.
- A 100% tax exemption during a 10-month window, plus a 100% exemption from capital gains tax at the time of resale of the new property, and a 100% exemption from fees, stamps, and vouchers. There also is a 100% exemption on temporary property tax and a five-year exemption from property taxes.
Effectiveness of Acts 20 & 22 disputed
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 (now Chapter 3 of the Puerto Rico Incentives Code 60) offers tax incentives to export services.
- The Individual Investors Act 22 (now Chapter 2 of Code 60) provides a total exemption from Puerto Rican income taxes on all passive income realized or accrued after becoming a bona fide resident of Puerto Rico. Aside from this, other benefits offered to residents include tax exemption on gains from sales of property acquired after becoming a resident. However, the tax exemptions will apply only if the individual is a bona fide resident of Puerto Rico and if they start the process of becoming one before January 1, 2036.
Then in December 2014, the government expanded the coverage of both Acts 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. In 2020, the two laws were consolidated into Act 60.
Recently, the government introduced a new “Test” in Act 60. According to the new Act 60 program, an individual with a tax exemption decree must purchase real estate property within two years of obtaining it. This property must also be the individual’s primary residence throughout the term of the decree.
However a decade since their introduction, some claim that these two laws have not generated the expected investments and job creation in Puerto Rico, causing them to lobby for their repeal.
But the Economic Development Department (DDEC) remains supportive of the said laws. “Studies have shown that these laws have been positive for the economy of Puerto Rico,” said Carlos Fontán of DDEC. “They provide economic activity that we may not otherwise receive. Repealing these laws would give the false impression that Puerto Rico is not open for business.”
Based on a study conducted by Econometrika Corp. and commissioned by DDEC, Acts 20 and 22 created about 33,000 new jobs between 2012 and 2017. As of 2017, Act 22 attracted 1,332 individuals and their families to live in Puerto Rico while Act 20 approved another 781. The number of decree holders plunged in 2020 due to the pandemic but in the succeeding year, 579 additional decrees were approved under Act 22 and 710 under Act 20.
Moreover, Puerto Rico’s government has also reformed the business permits system, to attract more investment.
- Effective June 7, 2019, new and existing businesses on the island can obtain a single permit, consolidating all licenses, authorizations, and certifications;
- A Unified Information System for the filing and processing of permits, authorizations, licenses, and certifications for land uses and operation of businesses.
- Time limits for the issuance of permits. Before the pandemic, getting building permits take only 20 days, on average, instead of 98 days three years ago.
- Something’s Got to Give: Offer and demand in Puerto Rico’s real estate market (The Weekly Journal): https://www.theweeklyjournal.com/business/something-s-got-to-give-offer-and-demand-in-puerto-rico-s-real-estate-market/article_eeae2fbc-562c-11ed-afc0-e3db630edba2.html
- Residential Foreclosed (Office of the Commissioner of Financial Institutions): https://ocif.pr.gov/DatosEstadisticos/Datos%20Estadisticos/Foreclosure%20Unit%20Residential%20by%20Institution.pdf
- Cement production and sales (El Instituto de Estadísticas de Puerto Rico): https://estadisticas.pr/en/inventario-de-estadisticas/produccion_y_ventas_de_cemento
- Rental incomes in San Juan, Puerto Rico are good to excellent (Global Property Guide): https://www.globalpropertyguide.com/Caribbean/Puerto-Rico/Rental-Yields
- Comprehensive Housing Market Analysis Puerto Rico (U.S. Department of Housing and Urban Development): https://www.huduser.gov/portal/publications/pdf/PuertoRico-CHMA-19.pdf
- Economy at a Glance: Puerto Rico (U.S. Bureau of Labor Statistics): https://www.bls.gov/eag/eag.pr.htm
- Jamaica, Puerto Rico Report Strong Tourism Numbers for 2022 (Travel Agent Central): https://www.travelagentcentral.com/caribbean/jamaica-puerto-rico-report-strong-tourism-numbers-2022
- Rays of ´Sunshine´ brighten Puerto Rico´s tourism outlook for 2023 (Travel Weekly): https://www.travelweekly.com/Caribbean-Travel/Insights/Puerto-Rico-tourism-outlook-2023
- Puerto Rico Reflects on 2022 as Strongest Year in Tourism History, this National Plan for Vacation Day (PR Newswire): https://www.prnewswire.com/news-releases/puerto-rico-reflects-on-2022-as-strongest-year-in-tourism-history-this-national-plan-for-vacation-day-301734786.html
- Registrations and Occupancy Report by Region (El Instituto de Estadísticas de Puerto Rico): https://estadisticas.pr/files/inventario/puerto_rico_tourism_company/2022-10-04/CT-MonthlyStatisticsReport-2022-07.pdf
- Relief Funds Accelerate into Puerto Rico (Coatings World): https://www.coatingsworld.com/issues/2021-04-01/view_latin-america-reports/relief-funds-accelerate-into-puerto-rico/
- Puerto Rico Tax Incentives (Sotheby’s International Realty): http://puertoricotaxincentives.com/
- Puerto Rico Act 20 and Act 22 (Alpen Partners): https://alpenpartners.com/insights/puerto-rico-act-20-and-act-22/
- DDEC Supports Acts 20/22 (The Weekly Journal): https://www.theweeklyjournal.com/business/ddec-supports-acts-20-22/article_2d008f08-e40f-11eb-b622-ffad64ab661e.html
- Puerto Rico Tax Incentives: The Ultimate Guide to Act 20 and Act 22 (Relocate Puerto Rico): https://relocatepuertorico.com/puerto-rico-tax-incentives-the-ultimate-guide-to-act-20-and-act-22/
- Puerto Rico, getting building permits now take only 20 days on average instead of 98 days (Puerto Rico New Comer): https://puertoriconewcomer.wordpress.com/2019/05/12/puerto-rico-getting-building-permits-now-take-only-20-days-on-average-instead-of-98-days/