Posted by Steve Linder on Fri, Sep 03, 2010
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With the colon's increase in value this year topping 11%, it was the second highest appreciating currency worldwide. In a reaction by the central bank to control the astonomical increase in the value, the bank has announced plans to purchase up to $50 million dollars per month in foreign currency to curb the rise in value of the colon. The rapid rise in value of the colon will make both tourism and exports more expensive. The central bank has traditionally allowed the colon to float in a range between 500 and 640 colon to the dollar but this week the colon approached the upper ranges in value, at 504 colons to the dollar.
By purchasing foreign currencies, the central bank hopes to decrease the value of the colon. The higher value of the colon makes real estate and exports more costly to international investors. This is a good thing for the many North Americans who have already purchased property there, as the value of thier property increases. It does make real estate more expensive for new buyers unless the property is priced in dollars, not colon. Fortunately our prices at Pacific Lots are priced in dollars but as the dollar continues to lose money worldwide, there is pressure to change our pricing system to colons. For those who have purchased property using a self directed IRA, the gain they realize over time reflects the increase in the value of the colon as well as the increase in value of the property. As the dollar continues to lose value, more Costa Rican real estate, home sites and lots will be priced in colons.
China's interest in Costa Rica has much to do with the value of the colon. China has been spending dollars in Costa Rica and in effect converting dollars to assets valued in colons. A savings account in colons this past year would have gained over 11% against the dollar, just from exchange rate flucuations. The only currency that outperformed the colon this past year was the Columbian peso. Again the stability of the Costa Rican economy is apparent in the increasing value of it's currency.
As tax breaks put into law by George Bush expire at the end of this year, we can expect to see further losses in value of the dollar and a continued weakening of the value of both assets and savings of baby boomers in the US. Smart money managers are moving their assets out of the dollar and into other currencies. This has added additional pressure on the colon as currency traders seek to buy currencies that are appreciating. The colon and other assets (real estate and homes) in Costa Rica continue to appreciate from this pressure. The market for property in Costa Rica is an international market and buyers continue to come from around the world.
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Posted by Steve Linder on Thu, Apr 08, 2010
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I predicted a while ago that the dollar would start to lose value versus other countries. Many countries that many of think have fairly robust economies and stable currency have suffered in the past few years. One country that has not suffered has been Costa Rica. Unfortunately for us in the US, that is driving up prices in Costa Rica as the dollar slips against the colon. This is both a good thing and a bad thing. It is a good thing for anyone who'd taken their dollars and bought property in Costa Rica since as the dollar slips, the value of the land does not. In fact those who own property there effectively make money when the dollar slips since the real estate market in Costa Rica is an international market and unless you are selling your property in dollars (most people don't) you are now getting more dollars than ever for your property. I suspect you will quickly see developers in Costa Rica move away from pricing their properties in dollars since as the dollar drops, so does their revenue.
Let me explain a bit more about currency changes and the effect they have on people living there.
- As a currency value increases, imports get less expensive
- As a currency value increases, exports become more expensive
- As a currency value decreases, your purchasing power erodes
- As a currency value decreases, the value of your savings are less
- As a currency value decreases, seniors on fixed income become poorer.
- As a currency value decreases, foreign travel becomes more expensive
Most people within a country whose currency is losing value, do not realize it right away. That is because both earnings and expenses are in the same currency and the lowered value of the currency is vis-a-vis other currencies. What happens as a currency devalues is inflation tends to increase. Prices rise to offset the lose in value (purchasing power) of the currency. Imports become more expensive so for a country like the US that imports lots of goods and services, prices rise over time. In theory however as a currency devalues, exports from that country become cheaper.
Why is the US dollar likely to devalue in the near future? As you print more money and borrow more money, you dilute the value of the money already outstanding. the US government stands to benefit however since as the value of the dollar drops, the value of our debt to nearly every other nation in the world costs less to pay off. As long as the debt was agreed upon in dollars, we can then use cheaper dollars to pay off the debt (dollars that are worth less).
Who gets hurt as the dollar drops in value? We all do. Our savings is diminished as the value of it declines. Our ability to leave the country, either for travel or relocation, becomes more expensive. That is part of the reason why we have seen a huge spike in the value of gold. People are fleeing from the dollar, trying to protect that value of thier assets and savings.
What can we do? Many financial advisers are telling us to get out of dollar denominated investments. Owning investments in other countries is a good way to hedge against further loss in the dollar. The issue however is in what country are we liable to be safe versus having a similar issue with the currency of that country losing value. This is international business and therefore we need to apply sound international business theories. Look for countries with growing economies, good historical performance, sound fiscal policies, good political and economic policies and a stable currency.
Costa Rica is just such a place. In the last 6 months alone, the dollar has lost over 10% of it's value in Costa Rica. That's bad for us using dollars to invest there but good for those who already did. Fortunately we price our properties in dollars so the change in value has had no effect yet on prices. However as I just said, the dollar has lost 10% of it's value in Costa Rica in the last 6 months. That means we have been getting 10% less revenue on sales priced in dollars for our property based in Costa Rica. When we try to turn those dollars into Colon, we get 10% less. It is pretty apparent that we will soon have to either raise our prices by 10% or start pricing our properties in Colon (the Costa Rican currency). Since all of our expenses are in Colon, our revenue is falling while our costs remain the same. We pay for our workers, supplies, etc in Colon.
Anyone who has already bought property in Costa Rica has in effect made a 10% return on their property in the past 6 months just for not having their money in dollars. As the dollar continues to drop, the sooner you move your dollars offshore into hard assets like property, the sooner you will stop the erosion of your life savings.
All countries are not alike. You want to be sure you invest your money in a country that is performing well economically, socially and politically. If you invest your money in a country that is not doing well, both the value of your investment and the value of the currency it is denominated in may go down.
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