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Oct 03, 2012

Argentina’s housing market hit by unorthodox economics


 

Argentina house pricesThis year has been rough on Argentina’s property market, after a recovery from the global downturn during 2010 and 2011.  The number of real estate transactions in Buenos Aires fell 46% to 6,315 in July 2012, according to the Colegio de Escribanos de la Provincia de Buenos Aires (Buenos Aires Notary College).   For residential transactions, Reporte Inmobiliario’s Buenos Aires database shows a 15% drop in sales in Buenos Aires during the year to May 2012.

Why?  Newly imposed currency controls have frozen the market.  From October 31, 2011, President Cristina Fernandez de Kirchner restricted the acquisition of US dollars, the commonly used currency for property sales in Argentina.  The federal tax agency’s authorization is now required before making any foreign exchange purchase.  The implementation of these tight policy measures, as well as the slowing economy (expected GDP growth is 4.2% this year) has brought a general decline in real estate activity.

The economy is slowing

Argentina gdp growth

Argentina’s economy enjoyed massive growth after the disastrous crisis of 1999-2002, the final year of which saw 10.9% GDP contraction. The peg was abandoned, and the peso fell to US$1 = ARS$3.52 by the end of 2002. Despite inflation soaring to 26%, devaluation, drastic reforms, and the debt renegotiations by the then newly elected President Nestor Kichner in 2003 caused Argentina’s economy to bounce back strongly, with growth maintained at an average annual rate of 8.5% until 2008.

Growth declined again in 2009 as the financial meltdown hit the country. But it was a short-lived slowdown, and the economy expanded by 9.2% in 2010, and by 8.9% in 2011.

This year economic growth will be much lower, around 4% to 5%, squeezed by tighter government economic policy, high inflation, continued global uncertainties, and lower demand from Argentina’s main trading partner, Brazil.

President’s popularity plunging

Argentina exchange rate

President Cristina Fernández de Kirchner’s popularity dropped 30% in August 2012, according to pollsters Management & Fit. People are worried by the slowing economy, increased street crime and high inflation. Private economists say Argentina’s inflation is now over 20%, through the Indec figure is only 10%. Unemployment is unchanged on last year at 7.2% in Q2 2012. Kirchner is soon completing the first year of her second term in office.

House prices not yet suffering

Argentina average price old apartments

Despite all this, Buenos Aires’ residential market remains stable, yet sluggish, according to Roberto Guichon, a director of Buenos Aires-based real estate firm Guichon Propiedades.   The average price of used apartments in Buenos Aires rose by 4.6% in 2011, after a 4.7% rise in 2010, based on Reporte Inmobiliario’s data.

Over the last decade, the property market has enjoyed strong price rises. Land prices rose 518% between 2002 and 2011, from US$ 272 per sq. m. in March 2002, to US$ 1,680.2 per sq. m. in December 2011. Meanwhile from 2001 to 2011 average Buenos Aires apartment prices rose 143%, from US$ 891 to US$ 2,168 per sq. m.

Apartments in Palermo, the city’s most popular and biggest neighborhood, cost from US$ 2,500 to US$ 3,500 per sq. m. (or US$ 232 to US$ 325 per sq. ft). Puerto Madero and Recoleta’s apartments range from US$ 3,000 to US$ 6,000 per sq. m., and may even go higher in some cases, according to Guichon.

Rents and yields still OK

From 1980 to 2000, Argentinean landlords benefited from high yields of around 11%. However, in 2002 rents dramatically declined due to the devaluation of local wages against the US dollar. Yields fell as low as 3.8% in 2004.

According to the Reporte Inmobiliario, yields then rose to 5.3% in 2005, 5.5% in 2006, and to 5.3% in 2007, which was followed by an upward trend in house prices.  The Global Property Guide’s research suggests that gross rental yields in Buenos Aires’ higher-end districts  reached 9.4% by 2008.

Despite rents almost doubling from 2007 to 2011, capital values then rose even more than rents, causing yields to slightly decline. In 2011, gross rental yields in Buenos Aires prime areas were at an average of 7.5%, down from 8.4% in 2010, according to Global Property Guide research.   Rental yields for apartments in Buenos Aires ranged from 6.52% to 8.73% in October 2011, while yields for houses ranged from 6.54% to 8.25%.

“Pesification”?  No dollars, no sale!

Argentina house construction

The pesification of real estate operations is currently freezing the property market, discouraging investors in engaging in real estate projects.  Construction activity has slowed during recent months. Activity is expected to decline further, as restrictive policies continue.

"The government needs dollars and they want to avoid another flight of capital like last year,” according to Federico MacDougall, an economist at the University of Belgrano in Buenos Aires.  “So they are closing the doors with a pesification of the economy."

However, in a country where most real estate transactions are done in US dollars, the policy limits property purchases, since many sellers won’t accept Argentine Pesos. Buenos Aires City’s home sales fell 15% y-o-y to May 2012, based on the council of public notaries’ data.

In 2009, Indec’s Construction Activity Synthetic Index (ISAC) showed a growth rate of only 2.4%, largely due to the effects of the global financial meltdown and the A(H1N1) flu outbreak.  Housing construction was up 9.5% in 2010.  The construction sector was strong in 2011, as showed by the 50% increase in the number of new construction permits in Buenos Aires, and the 7.9% rise in Indec’s ISAC. Most permits were issued in Palermo (10%), following behind are Belgrano, Villa Urquiza, and Caballito.  But now pesification has hit property sales, causing real estate companies to shut in Buenos Aires, and hitting economic growth, given that construction contributed 15% of Argentina’s GDP.

  




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