Today I was watching a YouTube video that talked about the price of real estate in Venezuela. The creator of the video was talking about the fact that homes in that country are too cheap in relation to the cost they have in the rest of Latin America.
What is cheap and what is expensive?
Now, this made me wonder if real estate (or anything we talk about) could really be considered cheap or expensive in a case like this. Because if the Law of Supply and Demand teaches us anything, it is that everything has a reason in the market. In other words, nothing is coincidence, and nothing is really cheap or expensive. Strictly speaking, it all depends on the perspective with which we see it and the side of the equation we are on in the matter.
Logically, it is understandable that to a person who goes from another country to visit Venezuela, and sees those prices for real estate (even furnished), they seem like "real bargains." But, as I already said, everything has a reason for being. The Law of Supply and Demand says that in situations where there is greater demand than supply, the prices of goods tend to rise. And the same applies to the opposite, that is, when supply exceeds demand, then prices tend to fall.
As simple as it is to understand this simple and basic principle of economics, it turns out that there are so many people who don't seem to understand it well. The issue here is that housing prices are nominally cheap. And "nominally" in this case means apparently in monetary terms.
But in cases like this, it is when truly experienced investors begin to investigate the why of things and realize if it is really viable or advisable to invest in that sense.
The golden questions
As I said, an experienced investor would know how to investigate the reasons why real estate prices in that country are apparently so cheap. And he would find many revealing facts that would clear his doubts.
But before talking about it, we must recognize that yes, it is true that real estate prices in the Latin American country are far below all prices in the countries in the region. We are talking about the fact that you can perfectly get apartments of good size and condition, in central areas of important cities and for amounts as small as $12,000.
And also houses at similar and even lower prices in fairly good areas. It is even curious because as I mentioned before, in many cases apartments and houses are also usually sold with furniture included, so whoever buys may be taking the property equipped.
Now, let's talk about what a good investor would see in these cases. And the first thing I would see is the fact of the political and economic situation of the country. According to statistics, more than 7,000,0000 Venezuelans have emigrated abroad in search of opportunities and a better financial situation. And it is most likely that these figures fall short, because in reality, Venezuelans have been emigrating from the country in question to many other countries for at least 20 years.
But even if we believed the figure that 7,000,000 people have left Venezuela, it is something scandalous and alarming, if we consider that said country has a population of approximately 30,500,000 inhabitants. If we know that this is more or less the size of the total population of a country like Paraguay and more than double that of a country like Uruguay, then we can realize the dimension of this whole matter.
Not all that glitters is gold
A seasoned investor would get to the heart of the matter and realize that housing prices in that country are so cheap because a good part of the population left the country. But also, because the enormous inflation that has devalued the purchasing power of the population, together with a ridiculous minimum wage and a country that is de facto dollarized, have made the supply of real estate much greater than the demand.
Still, a foreign investor might consider doing so, but he should examinate how likely it is that the current unfavorable circumstances that have driven real estate to these price points will change in the country. Furthermore, it must be considered that in Venezuela there are deficient basic services and problems at the level of health security, and at the level of road infrastructure, among many other problems.
So not all that glitters is gold, and as I already said, the investor must ask itself if the country's conditions can improve in the future. This is important to ask in such cases and especially with respect to the medium and long term, because the answer will be crucial to know how likely it will be that the real estate being purchased will increase in value in the future.
Because an asset that is easy to buy due to is too cheap, but difficult to sell unless you auction it off as a trinket, can have negative consequences for an investor who is simply seeking to obtain profits from its operations in the market.
If the goal is to live in Venezuela, then fine, but if it is to make money, an attentive investor will most likely decide in such cases to simply refrain from buying. Because as the saying goes "cheap can be expensive." So an investment in the purchase of real estate in a country with few guarantees of revaluation is extremely risky.
What do you think about the topic discussed? Please comment.
