Cuba’s Real Estate Market: Booming Speculation
Emilio Morales* (Café Fuerte)
HAVANA TIMES —When, at the close of 2011, after more than fifty years of restrictions, the Cuban government opened the Pandora’s box of Cuba’s real estate market, many experts predicted that the country would experience a veritable boom in home sales and purchases. Rather than a mad spiral of sales, however, this incipient and atypical market has given rise to a speculative phenomenon.
There are approximately 3.3 million homes in Cuba (houses and apartments), 57% of which are in poor condition. The country’s current household deficit exceeds that of 700 thousand homes. This rather dilapidated real estate panorama is coupled with the highly limited average purchasing power of Cubans who are dependent on their State salary, which is about 20 Cuban Convertible Pesos (CUCs) a month. (One CUC equals around 1.10 USD).
At first glance, the development of a real estate market with so few charms strikes one as a pipe-dream as delirious as the 10-million-ton sugarcane harvest of 1970. However, for the first time in 50 years, Cubans feel that they have finally come into possession of a financial asset: their own homes.
An Ads Epidemic
The right to sell a house or apartment and to freely establish its price has unleashed a veritable epidemic of on-line ads. Currently, over 100,000 houses are advertised in different web-sites and portals. It is worth pointing out that, even though Internet access is a privilege enjoyed by some State institutions and not the population in general, Cubans still manage to publish such ads.
What is most striking about these is that the majority of sellers lack the basic knowledge required to objectively evaluate their house and establish a price that is in accordance with its structural condition.
There is no real estate institution, in Cuba, which provides home sellers with a tool or formula that could help them calculate a price on the basis of the characteristics of the home. This explains why the advertised prices, in most cases, are extremely high and far from appealing.
How did this phenomenon come about?
Conservative Deregulation
To begin with, the deregulation of the real estate market, which the Cuban government undertook nearly two years ago, has proven extremely conservative and limited. Cuban citizens are entitled to a single home within city limits and to an additional property in a tourist area. According to the new Housing Law, Cubans living abroad or foreigners interested in settling on the island – the group of potential buyers with the greatest purchasing power today – may not legally purchase property.
We are witnessing the growth of a market whose sellers are still completely inexperienced in the valuation and sale of real estate. The fact most Cubans have no real sense of what household maintenance entails has a big say in the way a price is established and how the sale of a property is negotiated.
The limited purchasing power of the population – a condition which has not changed significantly in over fifty years – has turned entire cities into veritable ruins, and most have no notion of what it means to maintain a house in optimal or at least presentable condition, from a structural and aesthetic perspective.
In addition to this, because of the pressing material needs which the population has accumulated in the course of so many years, many a Cuban is desperate to obtain a considerable sum of money in the quickest way the law allows. This is a psychological factor which has turned Cuba’s real estate market into a highly speculative realm.
Inflated Prices
Many home sellers set a price for their properties without taking into account the major repairs that these households require, repairs which, in some cases, are valued at 50 percent of the established sale price. For instance, a four-bedroom, two-bathroom house located in Havana’s municipality of 10 de Octubre, valued at 60,000 CUCs, may require repairs of up to 30,000 CUCs. Thus, the buyer would ultimately have to pay 90,000 CUC to come into possession of a house in optimal condition.
The real value of the property, to use this same example, is probably 30,000 CUC. The initial sale price, thus, is inflated by 50 percent.
One of the greatest challenges faced by this nascent market is the re-education of sellers in real estate valuations and sales. The workings of the market itself will no doubt impel this process, gradually adjusting prices to real market conditions, but this transformation will require time and a series of conditions to become stabilized.
A recent study conducted by the Havana Consulting Group reveals the drastic disparity between the high average prices caught sight of in Cuba’s fledgling real estate market and the modest purchasing power of the population. The random sample selected comprised 1,094 homes and encompassed six of the country’s 15 provinces.
Province Average Price (CUC) Number surveyed
Havana 38,849.00 763
Artemisa 24,033.00 57
Camaguey 25,764.00 100
Villa Clara 27,432.00 50
Matanzas 44,731.00 88
Cienfuegos 29,450.00 36
Total 31,709.83 1,094
As can be appreciated above, the average real estate property price in the nationwide sample was of 31,709.83 CUCs, a very high figure when compared to the flimsy purchasing power afforded by the average Cuban salary: 455 regular Cuban pesos (equal to under 20 CUCs) a month.
In some municipalities located in the province of La Habana, which reports the country’s highest purchasing power, the average real estate price exceeds that of 50,000 CUCs, as is the case in the municipalities of Playa and Plaza. The most expensive homes in the entire country, in fact, valued at 59,191 and 52,050 CUCs, respectively, are located in these two neighborhoods in Havana.
At the municipal level, the prices registered for the province of La Habana by the Havana Consulting Group study were the following:
Havana Municipalities Average Price Number surveyed
Playa 59,191 64
Plaza 52,050 171
10 de Octubre 29,218 66
Boyeros 36,985 149
Cerro 30,162 122
La Lisa 26,609 49
Old Havana 25,189 43
Habana del Este 37,845 89
Arroyo Naranjo 34,556 10
Total 763
Who, then, are the people currently selling and purchasing homes in Cuba?
The transfer of property titles for as many as 45,000 homes was reported a year after Cuba’s real estate sale and purchase law came into effect.
The study conducted was able to identify a number of groups of sellers with different economic needs and possibilities. The main ones are:
- People who are leaving the country and availing themselves of the opportunity to sell their homes, so as to emigrate with a sum of money that will afford them a financial base on which to start a new life elsewhere.
- People who have found an incipient niche in the real estate market, where they can purchase property, repair it and sell it.
- People who live in large homes and are looking to secure a sum money that will allow them to live more comfortably, by selling their current home, purchasing a smaller property, and pocketing the difference.
- People who own a large house in poor condition and do not have the money needed to repair it, who choose to sell it and secure a sum that will allow them to purchase a smaller house in better conditions and, perhaps, walk away with some money with which they can address material needs they’ve been unable to satisfy for many years.
- People in need of capital to open a private business, who have no other means of securing the money.
The following groups of buyers were identified by the study:
- People who have relatives living abroad, who have the money to invest in a business venture.
- Cubans living abroad who want to invest in real estate in Cuba, thinking about possibilities in the country over the next 10 to 15 years.
- People who have relatives abroad willing to help them with their housing situation.
- Cubans who participate in official government work programs abroad and return to Cuba with enough money to purchase a house (athletes, health professionals, actors, diplomats, etc.).
- Cubans residing abroad who want to invest in a business venture on the island, with a relative or friend.
- Foreigners who want to invest in a restaurant or a home rental business aimed at tourists, purchase a summer house they can use when they travel to Cuba, or simply invest in the real estate sector with a view to securing profits in a post-Castro Cuba.
The conditions that would allow Cuba’s real estate market to develop in a sustainable fashion, however, do not yet exist in Cuba.
Current limitations in this connection include the limited purchasing power of the population and the next to inexistent participation of the private sector in the construction of new real estate.
Building is Key
Building new houses and ensuring properties are available for rent or purchase is one of the conditions needed to develop Cuba’s real estate sector dynamically. Without this, the country is unlikely to experience a sales boom in the sector.
In other words, if Juan sells his home, Juan needs to buy or rent a house where he can live. In Cuba, there is no apartment or house rental market a person can resort to after selling their house. Everything is resolved through the by now well-known and messy house-swapping (permuta) market.
The construction of homes by the private sector is an indispensable step towards a dynamic real estate market in Cuba. Hundreds of thousands of people could be employed by such initiatives, including construction professionals such as architects, civil, hydraulic and electrical engineers, carpenters, bricklayers, plumbers and others.
The Crucial Link
The production of building materials by private sector industries is also a crucial step that can no longer be postponed. Without this link, the house production chain will not break out of its current stagnation.
A banking institution capable of financing mortgages in the real estate market is also of the utmost importance. In Cuba, there are no financing plans and the full value of the property is paid in one cash installment. No real estate market on the planet can hope to develop without a monetary support that allows buyers to finance their mortgages. There is no other market in the world where homes are purchased with a single cash payment.
If the Cuban government were able to introduce these changes in the short term, Cuba’s real estate market would experience a 180 degree turn and would become immensely attractive for potential buyers. If not, the speculative illusion experienced in this market today will soon become a boom in stagnant boredom.
(*) Cuban economist. Former head of strategic planning and marketing for Cuba’s CIMEX corporation and author of the books “Cuba: A Silent Transition to Capitalism?” (Cuba: ¿tránsito silencioso al capitalismo?) and “Marketing without Advertising, Brand Preference and Consumer Choice in Cuba.” He is the current president of the Havana Consulting Group, based in Miami.
Correction: In the example in the article, if the house is worth 30,000 and is listed at 60,000, its price is inflated by 100%, not the 50% stated in the article. A 50% inflation would equal 15,000, making the price 45,000.
Hi:
From the article:
if Juan sells his home, Juan needs to buy or rent a house where he can live. In Cuba, there is no apartment or house rental market a person can resort to after selling their house.
Also:
In Cuba, there are no financing plans and the full value of the property is paid in one cash installment.
&:
There is no other market in the world where homes are purchased with a single cash payment.
This sounds like the optimal system to me. It is needs based & any sales must be paid for in full by the sale of the old place. Nothing down speculators can take a hike. Jee. Give the system a try, if you think you’ve got an angle; come on! The only difference is that in Cuba, you need your “skin” in the game.
The only downside is the same as in any other country that warps personal housing into asset ownership: A fool & his assets are soon parted. It would be nice if there was an outcry for mortgage capitalization. Then Roul could flood the banks with fake credit & milk the population just like Bernanke & his cronies. Roul might as well do the ca$h grab if it is a publically supported one. Better than real estate profiteers. I think he’s learning from the enemy & their brainwashed lemmings.
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There was no one cause of the financial crisis. The deregulation you mention was one factor, the removal of oversight was another, the long term effect of very low interest rates on borrowing habits, and the laws requiring banks to issue high-risk mortgages to the poor was the fourth ingredient. These four factors created a perfect storm which produced the financial crisis. These factors were put in place over several years, with the help of Democrats and Republicans.
I have never found the assertion that “excessive greed on Wall Street” was an intellectually satisfying answer. For one thing, when did ordinary greed suddenly grow into “excessive greed”? Certainly, it is an excuse which carries emotional appeal and certain politicians have used it to get elected while diverting attention from their own culpability in the fiasco, but it’s class warfare masquerading as economic policy.
Thanks for providing me this type of information.
You are exactly right about the prevalence of human greed. However, the expansion of bad and/or underperforming loans was an symptom not a cause of the near banking system collapse. The repeal of the Depression-era Glass-Steagall Act which prevented banks from holding revenue bonds in their investment portfolios is widely-accepted as the primary cause of the market collapse. Consider this: if banks hand not been allowed to purchase mortgage revenue bonds in the first place, mortgage lenders would not have been encouraged to make these high-risk loans, and secondary market bundlers to package these loans into mortgage bonds and mortgage bond traders would not have had these low grade bonds to buy from and sell to banks. As the underlying mortgages began to falter, the bonds they supported became lost value and the bank portfolios which were over-invested in these securities fell in value accordingly. These portfolios had been used as collateral as reserves for the loans these big banks had themselves borrowed. Well, you see my point. Knowing the nature of man, in hindsight, it was unwise to assume that Wall Street could self-regulate. Likewise, Sen.Obama is guilty of doing what Democratic Senators do, make it easier for poor people to live as it they are not poor. Regulations are necessary to keep both extremes from putting short term self-interests above the long-term interests of the whole.
Don’t forget the Law pushed by the Democrats, and chip ones by Senator Obama, to force banks to provide mortgages to people who couldn’t afford to pay for them. You talk like greedy bankers were a new thing that never existed before. Well human greed has always been with us. If the people vote for a government that forces banks to give away loans to people with no collateral, they are incentivizing greed in high risk borrowers.
An interesting look at Cuban real estate laws:
“Cuban Real Estate Framework Laws” http://www.ascecuba.org/publications/proceedings/volume22/pdfs/anillo.pdf
“The need to attract external financing to the development of the real estate market in Cuba brought about the resurgence of the property registry and of the legal figure of the mortgage as additional guarantees to foreign investors in Cuba. However, the mortgage instrument has a very limited scope due to the restrictions of applying mortgage laws within a socialist property system. The impossibility of the Cuban nationals to use the mortgage as a mean of improving their housing and living conditions requires additional laws and modifications to existing laws, including the Cuban Constitution.”
I know what money is, Grady. Charging interest on loans is the basis of banking. You can dance around and call it something else, such as the case of Sharia banks charging lending fees instead of interest charges, but it amounts to the same thing, because that’s what it is.
Cuba could have plenty of capital, if the government legalized private ownership, and a free economy, including the right of workers to own their own labour. Instead, they chose to monopolize property and labour, treating the Cuban worker as a slave.
When negotiating joint ventures with foreign firms, the Cuban government sells the dirt cheap labour of the exploited Cuban workers. This is little different than slavery.
Addendum: When I say that it is questionable whether Cuba can implement a fractional-reserve money/credit system under socialist state power, I do not mean that this would be impossible. It most certainly is possible. Given the Marxian quasi-religion of state monopoly of the banking/credit/money system however, it is unlikely that the present leaders of the state will have the sense to make the necessary changes to the financial system.
Also, without the legal institution of private property rights as part of workable, authentic socialism, a people-owned, fractional-reserve monetary system seems out of the question.
As with what Moses has stated, your comment, Griffin, is well reasoned and well put. It provides much food for thought.
The only thing I’d like to point out is that you, like the Marxists, think of “capital” as “financial capital.” This is an error of substance.
“Capital”–which derives historically from the Latin word for the worker’s head–is in reality the citizenry who are ready and able to go to work and produce the means of life. It is only later that financial credit/money became referred to euphemistically as “capital.”
From this standpoint, Cuba has plenty of capital. What she needs is a non-usurious, fractional-reserve money/credit system, through which to mobilize and deploy this human capital. If she can achieve it under socialist state power–which is questionable–Cuba can become a very prosperous and democratic country.
Much of what you say, Moses, is well-reasoned and well-stated.
This is an excellent article, in terms of being informative. Thanks to the author.
The second-to-last paragraph zeroes in on a fundamental problem. Working people must have access to mortgage credit, or the housing market simply will not function dynamically. But, as the article points out, how can people get a mortgage for a home if their monthly income is so abysmally low?
Cuba needs a non-usurious, fractional-reserve banking system which can foment credit based on the future productive potential income of mortgagees. And so, such a fractional-reserve system might grow over time, and progressively infuse the national economy with fiat pesos as mortgage principal.
This principal, being pumped into the money supply by successful sellers, might then take the lead in increasing the incomes of working people.
The problem with creating a viable real estate market in Cuba, I believe, has more to do with the socialist leadership’s wrong idea of what constitutes functional bank credit. Unless this leadership can throw out the old, state-monopoly credit system, the real estate market may just limp along, and not play a leading role in restoration of the national economy.
As always, let’s hope for the best for brave, socialist Cuba.
Luis, the global mortgage market has functioned well for more than 200 years and then, largely owed to the deregulation of the US Glass-Steagall Act and a small group of greedy market speculators, the bottom ‘nearly’ falls out in 2008 but has since began a tepid but obvious recovery. If I were to ask you to abandon your socialist’s ideals based on the Soviet break-up in 1989 what would you say? At least capitalism is showing signs of recovery, even in Europe.(Insert Germany) Your hope for an authentic socialist revolution is a pipe dream with no real hope in our lifetime of coming to fruition. Especially in Cuba.
Jubilación Siempre!
Ok, leave everything to the ‘God Market’ and when countless Cubans start losing their homes by mortgage debts and immobiliary speculation then do the usual: blame ‘the Castros’.
For the ‘three stooges’ here: have you forgotten what happened in 2008?
Until the Castros leave power and the Cubans in the diaspora are allowed to buy property legally all these “changes” will yield no real fruit! Why would anyone jump the gun during this transition to Democracy? It’s happening! Slowly but surely!
In order to survive, Raul has initiated a series of half-baked reforms, including giving Cubans the common right to buy and sell homes. As part of the immigration reforms enacted in January, Raul has also made it a little easier for Cubans living abroad to complete the process of repatriation. The combination of the two reforms is obvious. Raul hopes to attract retirees who would like to spend their golden years in Cuba, bringing their capitalist wealth along with them. Raul realizes there is little he can or is willing to do the limit the outflow of the young, productive, and well-educated Cubans who are choosing to emigrate in droves to other countries. He is, therefore, reluctantly forced to accept retirees who would naturally prefer to live well in Cuba with the same amount resources that are barely sufficient in Miami or Madrid. These ‘re-pats’ once legalized are allowed to buy homes, cars and invest in businesses on an equal footing with Cuban nationals. Politically, this demographic is less active and less demanding and generally interested in maintaining the status quo. While they bring an additional burden to the already-strained health care system, this burden is more than offset by the resources (hard currency) they inject into the system. A retired Miami Cuban would simply maintain their bank accounts in the US and every month a relative would make a small withdrawal for them and send it to Cuba via Western Union or any number or money couriers. $500 a month in Coral Gables does not begin to cover living expenses but represents a King’s ransom in Camaguey. All told, given Cuba’s low crime, temperate climate and plodding lifestyle, this strategy, to attract retirees and turn Castro’s Cuba into a Caribbean retirement community is a good one.
A very interesting report on private home sales in Cuba. The discussion about prices and costs of repairs is a useful lead in to the two greatest challenges facing the growth of a Cuba real estate market.
The first challenge, the author mentioned: the lack of a mortgage market. Without access to loans and mortgages, very few Cubans will ever be able to buy a house. How many Cubans have CUC 40,000 sitting in a bank account in Cuba? Without a mortgage or line of credit, few homeowners can afford to repair or renovate their properties. As a consequence, the buildings tend to crumble over time. The net effect is a destruction of the capital investment made by previous generations of Cubans. This is one important way in which socialism has destroyed wealth in Cuba. The wealth locked in real estate sinks to the bottom of the economic swamp, never to be accessed or leveraged to fund growth.
The creation of a mortgage market requires access to private capital formation, something which has been effectively illegal in Cuba for 54 years. How will Cuba establish a mortgage market without access to capital? The country has very limited indigenous capital, and foreign capital will not be forth coming unless and until the Cuban government normalizes the country’s financial relationship with the world. Cuba’s poor credit rating doesn’t help and the US embargo remains a barrier to normalizing Cuba’s financial relationship to the world.
The second challenge, unmentioned above, is that of legal property title. Many Cubans are living in houses assigned to them by the Revolution, often these are properties left behind by the 2 million Cubans exiles. The question of who legally owns these properties has never been settled. It’s one thing for a bearded revolutionary to declare, “This house is now the property of the Revolution!”, but it’s another thing to then assign that house to a family to live in it, and another thing again for the decedents of that family to later sell it on to somebody else today. Would you risk your life savings on buying a property from somebody who you were unsure were the legal owners? What if the government reversed policies in the future and banned private property again? Are you willing to take that risk and buy a house anyway?
As the recent Cuban economic reforms, and the relaxation in US remittance & travel restrictions gradually opens up the Cuban economy, the need for clear title law, including the resolution of property claims will grow. Does Cuba have the laws and legal structures necessary to resolve those issues?
Until those two challenges are addressed, the hobbled Cuban property market will exist only for those fortunate few Cubans with access to hard currency.