The Euro and Panama

The following is a slightly modified excerpt from a broader analysis published elsewhere on the Internet. Panama's currency is the US dollar. Most of the past migration to Panama has come from the US. As a result of these two factors, analysis of the future of the Panama real estate market is always presented in terms of the US dollar. Our CEO, Bob Adams, takes issue with this approach. He suggests that a new "wave" of migrants from Europe have one more good reason to consider Panama precisely because they are not arriving with US dollars.

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I'm going to ignore the socio-economic and political problems of Europe in terms of its own immigration problems that could conceivably convince many "traditional" Europeans to move from Europe. That's an emotionally-charged and complex subject, and outside the scope of this essay in any case. I will only say this. I sincerely hope that will never be a factor in emigration from Europe to Panama.

Instead, I'm going to talk about money. Unlike most commentators on this subject, I'm going to talk about how much Panama real estate costs to people in Europe, not just to people in the US. With all due respect to my many British friends and their pound sterling, I will use the euro as my "currency of choice" instead of the dollar. However, a similar case could be made in pounds sterling.

Below is a chart showing the movement in the exchange rate between the euro and the US dollar (the currency in which Panama real estate is priced) over the last five years. When the line falls, the euro is strengthening and buys more US dollars.

As you can see, there has been a truly substantial strengthening of the euro in relation to the dollar. I ask my American readers to stop thinking in terms of an American spending dollars. Think in terms of a European spending euros. What is the effect of this shift in the euro-dollar exchange rate?

• A Panama house costing US$200,000 on January 6, 2002 would have cost €223,539 on the same day. A Panama house costing US$200,000 on January 6, 2007, as I write, would cost €153,109 today. That's a decrease of 31.5% if you paid in euros. Fine, you may say, but that 200K home in 2002 is worth more in 2007. What's the effect of that?
• Let's say that the annual increase in the house's price was 8.5%. That's a very good rate of increase, although not unheard of in Panama. If so, then the house is now worth US$300,000. In euros, a US$300,000 house is worth €229,663 at today's exchange rate. The cost in dollars has risen 50%. The cost in euros has risen 2.7%.
• Let's say the annual increase in price was 15%. That's a spectacular rate of increase over a five-year period. If so, then the house is now worth US$400,000. In euros, a US$400,000 house is worth €306,218 at today's exchange rate. The cost in dollars has risen 100%. The cost in euros has risen 37%.
• But Bob, you chose a five-year period when the dollar fell dramatically against the euro. What about the last year? Would that be different? Here we go. Let's assume that the US$200,000 house in 2002 has increased to US$270,000 by January 6, 2006, so that's our starting point. In the second case, let's also assume that its price has also increased to US$360,000 by January of 2006. Once again, let's assume January 2007 values of US$300,000 and US$400,000. In both cases, the increase in that one year has been 11.1%, not bad at all and very common in Panama over the last year. Using these examples, what happened in euro terms during this year? In euros, the price rose from €223,539 to €229,663 if it started at 270K dollars. If it started at 360K dollars, then it rose from €297,511 to €306,218. The US dollar price rose 11.11%, but the euro price only rose 2.9%.

As I have stated elsewhere, there are more "baby boomers" in Europe (over 100 million) than there are in North America. We don't need a million of them to move to Panama to impact our real estate market. A thousand a year would have impact, a few thousand would have great impact. I think we've just seen one reason for this to happen.

I'm not predicting that the dollar's weakening against the euro is going to continue. I'm not even forecasting it. There are many who make that argument quite convincingly, but there are those who firmly disagree. That's not my point. All I'm saying is that, once Europeans understand Panama's "package" of benefits in the context of a falling dollar, real estate in Panama may look a lot cheaper than the real estate they are currently buying in other nations, changing their euros into some other currency. Even if the dollar stabilizes at current levels, or increases in value modestly, Panama still looks better in the "far northeast" than in the "far north".