Define a real estate market crash
How to understand a forever shifting market
COVID brought about a significant boom in real estate as we sheltered in place and our homes became very important to us. Baja experienced the long-awaited boom that had been talked about since my very first visit here over 8 years ago. Sales in the US & Canada soared, and demand allowed sellers to earn lucrative profits while buyers were competing fiercely to pay 10% to 15% over asking price. Economically this is unsustainable and problematic when analyzing from a macro economic standpoint, the value of tangible assets needs to be versatile enough to survive a shift in the market. The versatility of real estate has always been its strongest feature and it is the backbone of our history and economy, ever since princes and kings waged war for more land.
?Why do banks raise interest rates?
It is important to understand how interest rates affect the economy: low interests’ rate is to motivate spending within the economy, while higher interests’ rates are to reduce the amount of spending. The raising of interest rates does not mean that there will be an economic crisis it means that it is trying to slow the amount of public spending and ultimately lower inflation. The reason behind US & Canadian banks raising interest rates is because the market was beginning to form a bubble where sales prices inflated and did not reflect the actual value of the property. The raising of the interests’ rates are the very same protocols and restrictions that were put in place in 2009 to avoid another inflated housing bubble.
?Inflated sales prices are an important factor for the market as it reduces the versatility of the investment, increases risk when there is a market shift and most importantly; negatively affects the buyer’s perspective on purchasing.
How did the real estate boom affect Buyer perspectives? And how did the market respond?
The markets shifted unexpectedly during the COVID lockdowns, and as time went on, the new market created an unprecedented amount of demand which drove sales prices up to an unsustainable level. As Buyers raced to purchase properties, they began to realize that their very own demand was driving up the sales prices, this factor along with the raising of interests’ rates has prompted Buyers to hold off from purchasing until the inflated prices lower to within market value. Markets are forever shifting and that is the essential beauty of them, they go up and down and being able to understand their trajectories is how you benefit from them. Those who were able to read the market and decided to sell during this time profited quite well. As the market shifts again, it is important to accurately analyze your position in the market.
?How has the US & Canadian markets affected the Baja markets?
?Despite the rumors, the US & Canadian markets have not affected prices here in Baja. The unique markets of Baja depend on foreign investment but are not as interconnected as many believe. The low cost of living and amazing quality of life while living next to some of the worlds famous beaches is the main reason why the market is experiencing so much demand. As the cost of living gets more and more expensive to live in the US & Canada more and more people are seeking to move to Mexico for a better life and at a more affordable price. Aside from the more affordable prices, Mexico has been attracting lots of foreign investment due to how lucrative and easy it is to open a business.
Is there going to be a real estate market crash?
The answer is no, the market is correcting itself to prevent another real estate bubble. Sales prices are being adjusted to reflect the actual value of the location of the land, the brick and mortar and the quality of the finishing’s. This does not mean that the market is declining, a decline would mean that sellers would be breaking even or suffering a loss when selling a property. As the market is shifting, we are seeing sales prices deflate into market value and selling shortly after.
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Baja’s real estate market continues to break records as the demand to live next to world famous beaches at a low-price grows. The limited amount of real estate inventory is Baja’s strongest asset. Buyers who are currently looking are mostly opting for pre-construction properties as for resales or built properties are extremely rare and are sold quickly. It has been interesting to see many developments with hundreds of units be sold pre-construction, built, and delivered to their owners and there are under 1% of units resold within years, showing us that no one wants to leave paradise!
Where do we go to from here?
We go back to basics! It is important to analyze the prices that the current market is supporting and adjusting investments to be within the market. Aside from the tangible value that properties in Baja possess and the location factor is the strongest, we must remember that we live at the beach and at a low cost. Pre-constructions properties are currently the most lucrative investment in Baja as they offer lower competitive prices and payment plans during the construction to allow the buyers to earn a nice appreciation once the property has been built. ?
The Baja market is not expected to slow down as Cabo welcomes another record-breaking number of visitors this season!
?Call me for any help with your investment or property needs!
?Gregory C. Bórquez
+52 612 228 0361
Investment Strategist with Diamante Realtors
Licensed Realtor and Associated with AMPI Los Cabos & AMPI La Paz?
Over 100+ Sold & Closed Properties