They knocked down the palais in Cuzco

Alternate title 1: Invest in Cuzco real estate.
Alternate title 2: Please tell the friggin’ bankers in your part of the world to raise interest rates already!

They knocked down the palais. I didn’t cry, just took a picture:

the_day_they_knocked_down_the_palais

A new office building is going up where the palais used to stand :(

This building used to be restaurant / dance hall that catered to events like birthdays and quince años parties. We had Brianna’s first birthday party there. The place was always busy, at least 3 or 4 parties per week, we reserved something like a month in advance for Brianna’s party.

Real estate in Peru has been going gangbusters for years now and the building was on the corner of the Plaza Tupac Amaru, a prime location in Cuzco. I imagine the land where the building sat is worth between $500 to $1,000 per square meter. The building just recently got knocked down and a new office tower is going up where the local palais used to stand. Hundreds of Quinceañeras will cry :(

Real estate in many areas of Peru is very expensive. Here in Cuzco a nice 100 square meter (~1,000 sq. feet) apartment costs around $100,000 nowadays. I know a man who bought an apartment in Lima some years ago and after owning it for only a few years he sold his apartment at a profit that allowed him to pay off the mortgage and buy a nearly-new Cessna 182 with the money left over.

Cuzco isn’t Shanghai but everywhere you look new apartment or office buildings are going up. It’s hard to say if we’re in a bubble yet (and how close we are to the end of it). As much as real estate prices have gone up in Peru you would think it is a bubble, but the demographics disagree. Mortgage interest rates are high (9-11% last I checked) and banks require 10-20% downpayments for a mortgage in Peru. My guess is that the price appreciation will likely slow down in the future but I don’t see a big deflation like in real estate in the US. The prices here have been rising mostly due to high demand (demographics), limited availability of land (geography) and high interest rates.

This dumbass kept interest rates in the US so low for so long that investing in the industrialized countries made no sense any more. Hence there have been large capital inflows in so-called developing economies like Peru where returns on investment were higher (think large sovereign wealth funds and the like looking for fixed income investments or countries like China looking for hard assets like minerals). To prevent “overheating” of the economies the central banks in countries like Peru raise interest rates, which might help slow the domestic growth but only exacerbates the inflows of foreign capital.

Bottom line tell the friggin’ bankers to stop worrying about Greece (look at Argentina now) and raise interest rates instead. Of course the bankers are afraid to slow down so-called economic growth at home or hurt real estate values in the US/Europe in the near term but all that will sort itself out. The bigger problem is that by keeping interest rates effectively at zero the big bankers are destroying the entire concept of future value (meaning, a dollar today is supposed to be worth more than a dollar tomorrow, but now it isn’t, it’s the same). No one has a real clue where all this is going but by keeping interest rates so low the bankers may be causing the one problem that they are desperate to avoid: deflation. I’m not saying you can’t have a society where interest rates don’t exist (look at banks in the Muslim world) only that our society and our financial system is based on the idea of future value and you work with what you have.

Rant over. Here are the Kinks:


The day they knocked down the Palais
My sister stood and cried
The day they knocked down the Palais
Part of my childhood died, just died
birthday party at the palais

Brianna’s first birthday party was at the palais on Plaza Tupac Amaru, which is now no longer there

come dancing...

Come dancing…

Read ‘em and weep

The real-estate classifieds for Cusco, that is. Here’s a few examples:

We’ve started looking to buy a house or apartment in Cusco, because the apartment we’ve been renting is becoming too small, especially since baby got a new swing ;)

Brianna in her new swing

Brianna in her new swing

Real estate here in Cusco is very expensive compared to the rest of Peru, since the area is thriving with so much tourist money. Asking prices for some nice apartments we’ve looked at range from $60,000 to $120,000, and mortgage interest rates range between 9-14%. This in a country where the per capita GDP is $8,500. If I worked full-time at my teaching job, my entire income would be spent on the $500 mortgage payment if we bought a $60,000 apartment with 20% downpayment :(

I’m really on the fence about this… to get a nice place that we can afford we may have to look outside the city. I actually prefer the quiet areas outside the city, but then we’d be further away from family, friends, etc.

In terms of real-estate value, I’m worried that much of the increase in Cusco in the past years is speculative and that prices appear to be wildly out of line with personal incomes. On the other hand, I think long-term demographics, conservative lending standards and the mountainous terrain could put a floor under real-estate prices in Cusco, plus we’d be buying something to live in, not as an investment to “flip” in a few months or years.

So if any readers have a rich aunt or uncle… tell ‘em to help out a poor gringo in Cusco ;)

Unconventional

In the comments to this recent post I somewhat defended my ideas around business and geopolitics as unconventional. I happen to think it’s necessary to challenge the ways of the 20th century and the groupthink of the rich old men in suits who run the world.

Take for example this US government mortgage calculator, it won’t accept a negative value for home value increase. Hmm…

idiot mortgage calculator

idiot mortgage calculator

Chullo tip to the always excellent Rolfe Winkler.

BTW – I think home values in Peru are a bit safer than in the US, since banks in Peru have stuck to conservative loan values (typically requiring 20% down on mortgages) and the demographics in Peru bode well for economic growth in the long term. That said, in areas such as Cusco real estate prices have skyrocketed in recent years, and home prices are entirely out of line with personal incomes.

Walk through Cusco

We took a walk through some residential areas of Cusco on Sunday. Wanchaq, our neighborhood, is a fairly nice, middle-class part of Cusco. Some of the nicest residential areas of Cusco are Larapa, Magisterio and Huancaro Residencial. There are also poorer neighborhoods both near downtown as well as on the outskirts of the city. The residential areas of Cusco are growing fast, new buildings are going up everywhere. True to Peruvian form, some unfinished buildings linger around for years.

Cusco is an expensive city by Peruvian standards, thanks to the tourist industry. The cost of real estate is entirely out of line with personal incomes. Asking prices for nice apartments easily exceed $50,000. Consequently, as in all of Peru, it’s not uncommon for 2 or 3 generations of a family to share a home, which is also why you find lots of young couples making out in public places.

These are pictures of middle-class residential areas in Cusco. I’ll try to get some pictures of the other districts later.