How will the debt crisis affect Colombia ?

debt crisis effect
How will the debt crisis affect Colombia ?
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What are you waiting for ?

     There is an old saying that only two things in life are certain, death and taxes. Actually that wasn’t always the case as my grandfather told me that the income tax in Canada was imposed during WWI to assist the war effort and the government promised that the tax was only to be temporary. Almost one hundred years later, that has to be the greatest lie perpetuated by a government.

I have always said that there should be a 20th century corollary to the first saying that states, ”remember the Titanic couldn’t sink and the stock market couldn’t crash.”

That being said where does the current crisis in the USA leave us ? Not only is the government 17 trillion dollars in debt, a bankruptcy court in Detroit just liberated the city of Detroit from most of its financial obligations. Numerous other American cities are also teetering on the edge of bankruptcy with their pension plans desperately underfunded. My question is when is this Titanic going to sink ?

My colleague in Ecuador, Hector Quintana has written two pointed and well thought out articles about this crisis and how he perceives that it will affect the real estate market in his adopted country. Here is the latest of his articles.

I have extracted the part below because I believe that this is how the debt crisis could affect Colombia as well.

The point to this is that we can close our eyes and click our heels, but we aren’t in Kansas anymore. These public pension shortfalls are real. The Detroit ruling has all the earmarked signs of the onset of a “domino effect”, where bankruptcy may appear an attractive alternative to financially troubled USA cities. Additionally, if you don’t think this will have an impact on lifestyles in Ecuador (and Colombia), particularly on the real estate market, think again.

Those planning for a comfortable retirement, with a nest egg to by an oceanfront condo and live on $2,000/month, may now need to dip into that nest egg to survive, as their pension payments are cut in half. Whether this happens in 2014 or 2016 or 2018, the impact is coming Ecuador’s (and Colombia’s) way, as it will to any global retirement hot spot. This latter development will particularly hit hard those original buyers in the $150,000 and under price range, which represent the bulk of “bargain buyers” living on fixed incomes.

While many industry colleagues continue to shovel the sunshine, I am here to warn that this submarket could be in for some difficult times. I know many current owners, who were shoved into $125,000, 30+ year old fixer-upper condos that may have a hard time getting a decent return on investment any time soon, if the incoming pension buyers can’t afford to pay. The current owners, in this market sector, likely don’t have the residual funds for an extensive rehab. Even if they did, they are competing with a rising inventory of newer units. What if in addition to a dwindling resale market, the current homeowners in the $150,000 and under submarket also take a hit to their own pocketbooks, if they are under public pension plans? Caveat emptor when buying this asset class. You will need to work with the right professional, buy in the right location and pay the right price to avoid substantial risk.

Lastly, any continued erosion of the USA public and/or private pension systems will make it harder to relocate, for expats who continue to play the “waiting game”. The future odds do not look favorable and time does not appear to be on the side of the retiree. If this matter gets serious enough, will the USA come looking for other retirement funding sources, such as IRAs, in order to balance the growing pension shortfall. Ridiculous? No more than my saying in Detroit’s auto “heydey” that the city was doomed to bankruptcy. If retirement funds dwindle and more and more USA residents, which currently make up the bulk of buyers in Ecuador (and a large number in Colombia), are financially trapped inside the USA, then Ecuador’s lifestyle market and real estate sector will suffer.

Two other points to consider. Facta is due to be implemented starting in 2014. If you are comfortable with the fact that you have sufficient proof that your taxes have been paid, then there is no worry. If however there is any doubt, you could face a withholding of 30% of your funds. This will prove be be disastrous if you have not prepared for this eventuality, especially if you are in the middle of a real estate deal. With a deadline to meet and being short 30% of your transaction will very possibly cause a default or at least a very awkward and uncomfortable situation.

Lastly the dollar currently stands at one of its strongest levels against the peso, at least over the past couple of years.

Truly, if you are really considering buying, what are you waiting for ? The Price is Right  said it best. ”Come on Down !”

David is the Chief Editor and CEO for EscapeArtist Colombia.

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